Four ways to ensure the Fed’s stimulus will work

November 12, 2010

By John Wasik
The opinions expressed are the author’s own.

The Federal Reserve can buy all the US Treasury bonds it wants, but it won’t do much other than make corporate treasurers waggily over being able to borrow at incredibly low rates.

As a last-ditch effort to stimulate the US economy, the Fed’s $600 billion initial purchase of US debt, also known as “QE2,” could be better spent directly helping Americans and easing the housing crisis.

Part of the problem is not that interest rates aren’t low enough — short-term rates are practically zero — it’s that there’s little demand because nobody is getting financially ahead through employment, homeownership or 401(k)s. There’s no sense in the middle class of a “wealth effect.” Fear is ruling now. So here are some proven approaches that might help:

A Payroll Tax Holiday. The Fed could boost employment by redirecting its QE2 purchases to offset a payroll tax holiday. This would directly put money in both employers’ and employees’ pockets. It might even stimulate some hiring.

A Really Potent Housing Credit. What would happen if the Fed intervened in the housing market in a meaningful way instead of buying distressed mortgage securities and Treasury debt? It could redirect money (with Congressional blessing and IRS oversight) into paying for homebuyer tax credits.

The last round of $12.6 billion in buyer’s credits ($8,000 for newbies and $6,500 for others) proved to be somewhat successful; 1.8 million people bought homes. Why not even add a sweetener of an additional $1,000 rebate to those who buy vacant, short sale, bank-owned or foreclosed homes? And instead of offering it for a few months, offer it for two years, or at least until the inventory of some 19 million empty homes is whittle down to about 1 million homes or less.

A Retirement Funding Boost. Let’s overhaul the fabled 401(k), the retirement plan that was never meant to be a mainstay of long-term savings. Some 40% of Americans don’t even have access to them at work, with minorities, young people and low-income workers showing the lowest participation rates, according to Demos, a New York-based policy center. Why not make a tax-free contribution to all Americans in a no-fee, universal savings account? Savers would face a tax penalty if they withdrew the money before retirement age, but could still use the assets to borrow against in a pinch.

Since the Fed is now a super-regulator in the wake of financial reform, why doesn’t it impose limits on 401(k) fees, which costs workers an average 20 percent of their retirement kitty over a working life? They could mandate that program expenses can’t exceed those of the federal government’s Thrift Savings Plan. This is probably more of a mission for Congress, though, which has avoided addressing this massive rip-off for years.

Direct Help to States. It’s no secret that a combination of the Great Recession and housing crisis have knocked the stuffing out of state, local and school board revenues. Inflation-adjusted state tax revenue fell nearly 15 percent during the downturn, which was the biggest decline in 50 years, according to the Lincoln Institute of Land Policy. Teachers are being laid off or furloughed and the overall quality of education in the US is suffering.

If the Fed wants to create — or at least preserve employment — it can direct money to the states. I know this is not what the Fed normally does as baron of the banking system, but at least it can make funds available for borrowing to state treasuries through member banks at zero interest. That’s the minimum it can do. Look at the myriad toxic securities-buying programs it set up for Wall Street in 2008!

I realize that many of these suggestions are beyond the Fed’s purview as it’s not in the fiscal stimulus business per se. Yet as a divided Congress begins to organize and study ways of reviving the economy, further enabling the federal government’s debt addiction will do little to find buyers for vacant homes or convince businesses to start hiring.

Without consumers flush with money and gainfully employed, the private sector won’t budge. Lowering long-term interest rates won’t hurt, but it won’t compel banks to lend money in a low-demand environment. It’s like a crazed dog chasing its tail. The Fed still has an awful lot of sticks to throw — if it can only send them in the right direction.

John F. Wasik is author of “The Cul-de-Sac Syndrome: Turning Around the Unsustainable American Dream.”


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Way to go John…. At least someone in the US is using their head for something other than a hat rack. Maybe this will move people to have not only an ‘adult discussion’ but also an intelligent one as well….

Posted by edgyinchina | Report as abusive

I certainly agree that all of the above measures will be more targeted than trying to push down yields on treasuries. The QE2 move has several risks that are playing out. Main amonst those are higher cost push inflation exisiting side by side with low or negative core inlfation acting as a tax and pushing down demand even further. Also high inflation in China risking tighter monetary policies.
In the end however a sustainable solution cannot come unless consumer and govt debt is reduced and companies start investing again in wealth creating activities

Posted by shivers1 | Report as abusive

Study Japan and their money printing over 20 years ago. They still haven’t recovered from it. We shouldn’t be printing any money, we need to shrink govt by 1/2 and get rid of these life long, retire at 55 pensions. If you want to really fix America, get rid of the fed reserve who is sucking the wealth of the middle class into their own pockets. Wake up people.

Posted by mgilbo1 | Report as abusive

Good ideas but we have a Republican Congress who will fight all of them. It is now an ideological war. Reason is the enemy.

Posted by Thgolding | Report as abusive

taking money from the rich giving that same money to those in need is a good practice in times of crisis, however some ignorant person, would like to put a heavier burden on the shoulders of those who can’t bear this right now. So the politicians ought to be very thoughtful. The money system has collapsed, but what will that mean ? An other system? To ask is easier then to answer!

Posted by takepartsocius | Report as abusive

Very good! First time I have seen someone come up with ideas outside the old shop-worn ones.

For that very reason, none of these ideas will gain any traction with Congress. Not-invented-here is alive and well in our government.

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