The good, the bad, and the ugly
By Scott Sumner
The Good: Do aggressive monetary stimulus to keep 2021 NGDP expectations on track. This involves level targeting combined with a “whatever it takes” approach to asset purchases. Buy only safe assets unless there are not enough safe assets to hit your target.
The Bad: Buy risky assets with newly created money in order to help the credit markets. Do enough to keep the credit markets flowing, but not enough to maintain adequate NGDP in 2021.
The Ugly: Bail out failing firms with fiscal policy. Let NGDP expectations collapse.
It looks like we’ve avoided the ugliest outcome, so give thanks for that:
Less than two months ago Boeing Co. went to Washington, hat in hand, asking for a $60 billion bailout for itself and its suppliers. The company, which had spent heavily on stock buybacks and was still reeling from the 737 Max disaster, was an unlikely candidate for government support.
Yet by urging the Federal Reserve to take unprecedented steps to bolster credit markets, the Trump administration ended up helping the plane maker more than any government handout could.
The Fed’s decision to use its near limitless balance sheet to purchase corporate bonds improved liquidity so much that it was a game changer for the company, according to people with knowledge of the matter who asked not to be identified because they weren’t authorized to speak publicly.
Notice how you do not need to directly bail out the corporate sector in order to save most big companies. For that same reason, a massive Fed purchase of T-bonds (and Treasury-backed MBSs) would have (indirectly) helped to provide liquidity in the corporate bond market. The key is maintaining expectations of adequate growth in NGDP. As long as NGDP expectations are on track and lenders know that nominal national income in 2021 will be sufficient to repay nominal debts, then the credit will flow.
Conventional monetary stimulus is the best option. Fed purchases of risky assets is second best. Fiscal stimulus is the worst.