First, the Fed could eliminate interest paid on reserves. Banks would hate this, but it would go a long way toward encouraging lending.
Banks right now are borrowing at extremely low rates, building up huge cash stockpiles and investing the spread. By doing this, the banks are earning more than they would from even their best customers at a fraction of the risk.
Customers have become almost irrelevant as a result, which is something our leaders cannot seem to grasp. So while they’re ostensibly all about helping Main Street, they’re really just selling out to Wall Street.
We have to get the money to the consumer where it can be used to create wealth.
The second solution is to sell short-term securities while buying longer-term debt. You might recall that the Fed did this in 1961 as part of something they called “Operation Twist.”
The goal at the time was twofold:
- To flatten out the yield curve, or “twist” it so companies would have little choice but to begin investing the capital they were hoarding.
- And to raise short-term rates as a means of attracting foreign investment to the United States.
That program met with some success, so we could be in for a reprise of sorts.
The third option is to target inflation — and I don’t mean the “cooked” version, the core consumer price index that excludes food and energy prices. I mean the very real, everyday inflation the average person sees in the grocery store and at the gas station.
The Fed is acutely aware that its data doesn’t reflect the pain most consumers feel in their wallets. Yet it continues to assert that inflation is “transitory,” despite an overwhelming mountain of evidence. And that’s detrimental to our financial markets.
The fourth option would be for the Fed to buy more assets outright in a program similar to the $600 billion worth of Treasuries it bought as part of QE2.
At some point, reality is going to set in and the Fed is going to have to ask how much is enough. We’ve spent $600 billion and gotten squat in return. At the same time, this option creates another issue — it would put downward pressure on medium- and long-term rates for some period of time, depending on how much money is thrown at the problem. I’m not sure we could go lower than zero.
Naturally, this “solution” would be predicated on the assumption that growth eventually will return to bail us out. And its primary side effect would be further evisceration of our dollar.