Has Greg Mankiw Jumped the Shark?

You be the judge. From his "Economic View" column in the New York Times yesterday, "It May Be Time for the Fed to Go Negative":

Imagine that the Fed were to announce that, a year from today, it would pick a digit from zero to 9 out of a hat. All currency with a serial number ending in that digit would no longer be legal tender. Suddenly, the expected return to holding currency would become negative 10 percent.

That move would free the Fed to cut interest rates below zero. People would be delighted to lend money at negative 3 percent, since losing 3 percent is better than losing 10.

Of course, some people might decide that at those rates, they would rather spend the money — for example, by buying a new car. But because expanding aggregate demand is precisely the goal of the interest rate cut, such an incentive isn’t a flaw — it’s a benefit.

Would your first response to this scenario be to buy a new car? I bet a lot of people would decide instead to buy gold, or to exchange their U.S. dollars for the currency of a country less likely to pick a number out of a hat and invalidate a tenth of its currency.

Later in his column, Mankiw offers a more reasonable way that the Fed could create negative real interest rates, by committing to a certain level of inflation (presumably one higher than the Fed's current 2% target). Is this the best way to spur aggregate demand though? If this is a balance sheet driven recession, as some observers have termed it, and the problem is that many consumers can't service their debts, why not deal with that more directly?

For those whose mortgages are underwater, restructuring them using John Hussman's idea of property appreciation rights might make make sense. That would lower monthly borrowing costs for those mortgagers and enable them to increase their discretionary spending. For mortgagers who aren't currently underwater, the idea of Glenn Hubbard and Christopher Mayer, to use the GSEs to lower mortgage rates down to their historic spread of about 1.6% above 10-year Treasuries might make sense. According to Yahoo! Finance, the average rate on 30-year fixed rate, conforming mortgages today is 4.88%; since 10-year Treasuries currently yield 2.75%, under the Mayer and Hubbard plan mortgage rates might average 4.35%. Refinancing higher-rate mortgages at 4.35% would also lower borrowing costs and enable tens of millions of Americans to increase their discretionary spending.

The image above, of the Happy Days character Fonzie (played by Henry Winkler) jumping the shark¹ comes from Media Bistro.

¹For those unfamiliar with the phrase, see the Urban Dictionary's definition of "jumping the shark".

The Fed Writes Back

Before writing the post "Reg T and Social Security" a couple of weeks ago, I wrote the Federal Reserve to confirm that it had the power to change margin requirements. Yesterday, the Fed wrote back:

The margin requirements for broker-dealers and other lenders found in Federal Reserve Regulations T and U can be raised or lowered by the Board of Governors of the Federal Reserve System. The last change, a decrease from 65 to 50 percent, occurred in 1974.

Seven Questions for William Poole

The former St. Louis Fed president speaks with Foreign Policy about the GSEs, the credit crisis, and the economy, "Seven Questions: How Bad Will it Get?". Intro:

When William Poole warned in 2003 that Fannie Mae and Freddie Mac lacked the capital to weather a financial storm, his advice went unheeded. Five years later, the outspoken former president of the Federal Reserve Bank of St. Louis is far too polite to say “I told you so,” but he does have a message for the Fed: Wait too long to tackle inflation, and you’ll face an even worse recession in the years to come.

It's worth reading this brief interview in its entirety.

Something to Munch On: "Recession is not the worst possible outcome"

In his recent column in the Financial Times ("Recession is not the worst possible outcome"), Wolfgang Münchau writes,

If this had been a mere financial crisis, it would be over by now. The fact that we are suffering its fourth wave tells us there might be something at work other than merely financial euphoria and bad regulation.

Münchau goes on to say that the prime cause of our current situation was 15 years of bad economic policies, particularly keeping real interest rates too low for too long. Given that he wonders, "whether the recipes that got us into this mess are also most suited to get us out again."

Worth reading in its entirety, though some of Münchau's prescriptions would seem unlikely to be implemented in the U.S. for political reasons, e.g., gearing monetary policy primarily toward price stability (instead of the Fed's current dual mandate: price stability and full employment), or imposing maximum loan-to-value ratios on mortgages (recall the resistance a few months ago to proposals to raise the down payments on FHA loans to 3.5% from 3%).