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Noting Bartlett

I've been trying to write a post about Bruce Bartlett's explanation of how we didn't use fiscal policy to make our monetary policy work for about a week now. But every time I try to write it, I end up with sentences like "how we didn't use fiscal policy to make our monetary policy work," and there's no way I'm going to get many of you to read it with a precis like that. Still, it's a great post, and you should read it. I promise it's not as boring as I make it sound. Also, I'd also like to hear more discussion of this idea:

One thing [the Fed] could do, which I advocated in my July 23 column, is for it to stop paying interest to banks on reserves. Even though the rate is low -- just 25 basis points -- it reduces the opportunity cost for banks not to lend. It also sends an important signal to banks that the Fed is okay with having them sit on more than a trillion dollars of excess reserves. Eliminating interest on reserves, therefore, would be a signal to banks to get the money moving. If this failed to lift lending, I suggest that the Fed follow the lead of the Swedish central bank and start imposing a penalty rate on bank reserves.

By Ezra Klein  |  August 2, 2010; 9:21 AM ET
 
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Comments

I don't know, what does policy wonk and genius Paul Ryan think about this idea?

Posted by: mschol17 | August 2, 2010 9:31 AM | Report abuse

Bruce Bartlett is now a Keynesian. The world has truly turned upside-down.

Posted by: scotbrad | August 2, 2010 10:01 AM | Report abuse

excess reserves, why?

http://www.newyorkfed.org/research/current_issues/ci15-8.pdf

Posted by: gagkk | August 2, 2010 10:23 AM | Report abuse

this makes sense to me for whatever that's worth. defenders of the fed and of the fed's and the government's extraordinary measures of 08 & 09 all seem to say pretty much the same thing: it wasn't a perfect play and if we could've done anything at all different we should've *required* lenders accepting money to lend once they got back on their feet.

for alternatives see j galbraith's essay last month in tnr http://www.tnr.com/blog/jonathan-chait/76155/recession-101?nocache=1

Posted by: jackjudge4000yahoocom | August 2, 2010 10:36 AM | Report abuse

Bartlett's an idiot. First, we should not be encouraging lending where it's not warranted, to overleveraged borrowers. Second, banks are already insolvent, and lending will only increase the strain on them to keep up their bank reserves.

What we really need is to let thousands of banks fail, then let the strong banks remaining lend on their own terms.

Posted by: Fazsha | August 2, 2010 10:51 AM | Report abuse

Ezra,
Would this action be roughly equivalent to the "loosen monetary policy to hit the inflation target" approach that Krugman promotes?

Posted by: mschol17 | August 2, 2010 10:53 AM | Report abuse

Yes, and when penalties fail, let's lock a few of these treasonous money-grubbers.

Posted by: mdfarmer | August 2, 2010 11:28 AM | Report abuse

David Altig offers gentle scepticism (including Bruce Bartlett's view): http://macroblog.typepad.com/macroblog/2010/07/some-observations-regarding-interest-on-reserves.html

Posted by: chrisgaun | August 2, 2010 11:33 AM | Report abuse

1T x .25% = $250M/year. I'm sure no one cares since it's only in the millions. Puny numbers like that are only significant if compared to unimportant things, like, say, foreign aid to Haiti.

Posted by: BHeffernan1 | August 2, 2010 12:13 PM | Report abuse

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