Bernanke’s overly-complicated stimulus idea
On Wednesday, Jon Hilsenrath reported that the Federal Reserve was mulling another round of bond-buying to boost the economy — albeit with one kink. To stave off inflation fears, the Fed would then borrow back the money it had sent out into the economy. Mark Thoma explains how this would all work and says the Fed is making things way too complicated for itself:
The essence of all this complication is to avoid inflation risk, but it’s not at all clear that the Fed should be concerned about inflation at this time. In fact, Fed Chairman Ben Bernanke has stressed that he does not think there’s much of a risk at all. And a temporary increase in inflation — with an emphasis on the temporary part — could spur firms to increase consumption and investment, precisely what we need to spur the recovery...
The new policy under discussion at the Fed is an attempt to lean toward the dovish side — to do something to help the economy — without causing the inflation hawks to block the action.