Comentá (7)

Me tomé el trabajo de escribir algo en inglés, ya que contiene nada menos que la solución a los problemas económicos del mundo, pero lo mandé aquí y recibí esto por toda respuesta:

Thanks for this, but we are normally looking for more research based columns. Maybe try RGE Monitor? Best, XX.

La idea es sencilla: que la Reserva Federal norteamericana establezca un un piso mínimo en el nivel de precios de las acciones, comprometiéndose a comprar de manera ilimitada a cierto nivel la canasta de acciones del Dow Jones o –mejor– otro índice más amplio.

Aprovecho para agregar un argumento. La revaluación del oro en Estados Unidos en los 1930s fue considerda clave para la recuperación. La manera habitual de pensarlo es: sube el oro, se importa inflación, se acaba la deflación, y todas las cosas buenas que trae el fin de la deflación. A propósito de mi artículo, pienso si no hubo también algo de “efecto riqueza”: medida en dólares, la riqueza de los tenedores de oro aumentó. Y el oro en ese entonces era una proporción mucho mayor de los activos mundiales que lo que es ahora. Quizás fue un efecto relevante.

Comentarios de sustancia bienvenidos, de redacción mal venidos. Ahí va:

The majority view holds something like the following: America could slip into another recession, setting the scene for a Japanese-like lost decade; there aren’t many policy options to deal with it, as fiscal policy is dominated by a conservative-leaning political compromise and conventional monetary policy has run out of ammunition with short rates at zero; unconventional monetary policy (QE n) can be tried but it isn’t clear whether it can be effective, as long rates are nothing but the combined expectation of short rates, and those expectations can’t be managed at will. Real interest rates -in the classical model, the variable that supposedly adjusts so that current demand equals full-employment GDP- could go negative with inflationary expectations, but no inflation beyond inertia will occur if money has no impact in the first place. Apart from far fetched Gessellite schemes of negative interest bearing monies, then, there just aren’t any conceptually clear macro policies to deal with a prospective slump. We’re left with ambiguous declarations of intent with ambiguous likely results (“fiscal consolidation”, “productivity growth”, “monetary support”, and so on).

What, then, shall we do?

During the housing and stock markets booms predating the recession, some economists and commentators (including, with insistence, The Economist) called for a restricted monetary policy to curtail assets prices, in spite of subdued headline inflation. Wouldn’t the same reasoning call now, in opposite circumstances, for monetary policy to pump up asset prices? Let us think first whether that can be done during a full fledged liquidity trap; and, second, whether that policy might have any desirable effects.

Imagine the Fed Committee announced a minimum threshold level for the Dow Jones or other, broader stock market indexes, such and S&P or -even better- Willshire 5000. The policy would take the form of a commitment, along the following lines: “As long as unemployment remains over 6%, the Federal Reserve will buy a predefined bundle of stocks [say, those that form the DJIA and in that precise linear combination] at a fixed, specified price [say, 12,000] to every willing seller”.

The mechanism would immediately impose a minimum to the general level of asset prices. If the DJIA went below 12,000 -in the example above- it would be profitable to buy the individual stocks that comprise the average and sell them to the Fed. Competition between arbitragers would guarantee, then, that the index wouldn’t fall below the threshold, without any discretionary decision by the Fed other than keeping open its Stocks Window. There would be no friction whatsoever in the relative price of different stocks, their individual behaviour being affected as it is today with firm-specific news.

Moreover, the index would actually stand above the minimum threshold: stocks today are worth the expected price of stocks tomorrow after discounting interest and adjusting for risk. The distribution of expected prices would have a minimum at the threshold as long as the Fed’s commitment is credible (more on this below) so the mean expected price would be higher than the threshold. If the reasoning is correct, then the Fed wouldn’t actually need to buy any single stock. A scenario in which everybody is selling stocks’ bundles to the Fed at the threshold of -say- 12,000 is not a rational expectations equilibrium if we all believe that stocks can’t fall below 12,000 and the interest rate is close to zero: we could always wait and see, with no downside risks.

What, if any, would the effects be on the economy? There are several channels relating financial asset prices to demand. A wealth effect would lead to a recovery in consumption. A balance sheet effect would help to prop up lending to both consumption and investment.

Is there an inflationary risk? With unemployment not far from 10% and core inflation again below 2%, we’re clearly on the recessionary side of the short run Phillips curve. Inflation expectations (as measured through bond differentials) since Lehman have correlated quite neatly with expectations of a recovery. Inflation would only rise if the economic outlook improved. By the way: a potential increase in inflation and inflation expectations associated to a better economic outlook would lower real interest rates to a level that would help close the gap between potential and actual output. At some point, we would be back in a normal world, closer to full employment and with positive interest rates which could then resume their role in short-run macro management.

Would the policy create a new stock bubble? The new price level of stocks could fall in real terms due to inflation, but as argued above that could only happen if a recovery took place, and in that case inflation could be controlled through more traditional means. Could there be a bubble in the more traditional sense of an unsustainably high nominal price level of stocks? As long as the commitment to buy stocks at a certain threshold remains in place, stocks won’t fall below some line north of that threshold.

But wouldn’t such a commitment suffer from credibility problems? No, or at least not the type of time consistency problems stressed by Krugman (1998) in his solution to the liquidity trap. Committing to a future level of product prices rather than to an inflation target may not be time consistent because at some point the price target could imply a period of inflation higher than the politically optimal, as Krugman acknowledges. There’s no comparable argument with stock prices. It is extremely unlikely that a pre-Lehman threshold of stock prices would turn out to be, at some point in the future, incompatible with tolerable inflation, ie., with a level of product prices much higher -due to accumulated inflation- than before Lehman. Also, the fact that the commitment to buy stocks could be tested any day at the markets’ will and readily confirmed by the Fed would add credibility to the whole scheme. As argued above, though, it is unlikely that any test of the threshold would actually take place.

The proposed policy can be compared to the effects of other monetary policies in that it also tends to dampen the price of current production relative to something else. Lowering nominal rates makes today’s goods cheaper compared to those in the future, thus prompting to consume more of them. Devaluing the currency makes current, home produced goods cheaper compared to those abroad, which also stimulates demand. The policy proposed here would cheapen current consumption relative to current wealth (and maybe, if inflation expectations increase, to future consumption): a wealth effect and a possible substitution effect would induce a recovery of aggregate demand.

Any ideological/philosophical qualms? Won’t the Feds be messing too much by intervening directly in the stock market? Worrieth not: they already do. Each FOMC decision on interest rates is a decision, albeit an implicit one, on the general price level of stocks. The Fed has already bought private securities, in a way much more microeconomic and discretionary; setting a minimum to the general level of stock prices would be a natural next step from actual practice. It wouldn’t be as defying to common sense as the weapons used against the previous liquidity trap, ie., Roosevelt’s departure from the gold standard. Finally, to be honest: why should we have qualms about a policy that pumps up stock prices but not about one that “lets the steam off” potential bubbles? Why be strictly patrolling with the bulls but convert to free-marketers when the bears come?

In any case: the point of this note is less to make the economic and philosophical case for an expansionary policy than to suggest that such a policy may exist in spite of fiscal retrenchment and a liquidity trap.

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