In an earlier post I pointed to an article written by James Tobin endorsing the Clinton era fiscal/monetary mix that came with on trend, stable NGDP growth at ~ 5.5% and a disciplined government budget. He goes on to talk about how it may not always be feasible to have such a mix, such as the instance where interest rates have fallen to zero, what is referred to as a liquidity trap.
But we have new information about the concept of liquidity traps that suggests that they are really only psychological barriers after being in the habit of adjusting the stance of monetary policy via overnight Fed lending rates, or the FF and discount rates. We know monetary policy can still be highly effective at the zero lower bound. There has never been a fiat central bank that couldn’t inflate if it wanted to; and it would be highly preferable to get away from the ZLB because it is a very dangerous place to be without a plan B policy rule such as NGDP level targeting.
In addition, I posted the text of Title 12 USC Section 242 that states the President (Obama) can remove members of the Federal Reserve Board of Governors for cause. This is important because what we have going on right now, as well as for the last few years, is the tail wagging the dog that is causing harm to our political institutions, our economy and average citizens as no one seems to realize that monetary conditions are the number one culprit in the majority of the problems.
We have central bankers intent on forcing a policy choice that is not appropriate to the needs of the economy. It has caused the short fall in government revenue by causing unnecessarily elevated and persistent unemployment and market damage, and added to the deficit by necessitating an explosion in social welfare spending as a result. These unelected central bankers then, instead of adjusting policy to fit our needs, refuse to admit blame and lay the entirety of the calamity at the feet of the politicians, who, as elected representatives of We, the People, should be holding these bankers to account instead of wrangling about a phantom “Fiscal Cliff”. There would be no fiscal cliff if the Federal Reserve Board of Governors did their damned jobs and dealt accordingly with the implications to monetary policy of fiscal choices according to the law. It is not the place of the Federal Reserve to be forcing changes to fiscal policy when the Full Employment and Balanced Growth Act suggests an obligation to cooperate with the political system instead.
Obama needs to tell these central bankers to just shut up and restore NGDP to its historical trend and keep it that way or look for another job. And I don’t care how many people he has to fire to get it done.