notes on romer and moneatry policy at the zero bound

an inspiration to class founded thinking



some points on romer:


she makes a big fuss
about quantitaive easing and the use of monetary policy at the zero bound
the so called liquidity trap
better and more explicitly called

the for profit credit trap

she suggest by implication
these important distinctions

the austerian expansionists 
fail to account for a stubborn reality resistent to their clavinist bromides
because they over look if not fail  to  consider
the impact of policy on the value of  existing debt loads

lowering  the expected nominal interest  rate by squeezing
down uncle's expected  borrow path
actually increases the real burden of existing debt
off setting  reduced expected  future costs  of carrying addition debt
ie new deb used to finance  spending on additional plant and equipment

 there is a negative wealth effect/credit constraint effect
 on all  debtors that use existing balance sheets to collateralize loans


chrsity wants to use a price level target
 to anchor higher inflation expectations
great ..if its effective
ie if the mentalism posited  exists
it oughta work she claims
much as going off gold did in the mid 30's
--more prperly devaluing after pledges never to devalue ---
a regime change
that would among other things lower the expected debt burden of existing debt
ie
a postive wealth effect on existing debtors
as their real assets ie produced assets have a higher expeted replacement value
thru higher expected price paths for output
i higher product  inflation and of course possibly higher wage  rates
that increases the households expected income and the credit worthiness of lending against that households human capitals'
 "expected lease rates"

i hate these sky high abstractions'
but you must get the gist


increased spending comes with a romer move

not so with a rubin  move
ie an austerian move

the key is to think about product price moves
in conjunction with interest rate moves ie  nominal rate moves

to determine the real rate on new debt
and the real and nominal value of existing debt
the real value is  itself  just the ration of two nominals

the numerator the interest  rate
the denominator is the nominal "product price level "

the direct approach is to do what will move the expected trend
in that denominator  price level
relative to the expected trend in the numerator
 nominal rates of interest

.........

where romer falls away into abstraction
where precisely
the increase in interest rate sensitive spending comes from

to get the kick up in spending requires more then just a reduced
market real borrowing rate
there must be an increase in  profits and or wages not just to increase income

and expected perminent firm or household income

but also  firm and household credit worthiness

in a credit basec economy

  margin spending is always credit based spending

-----------

obviously

the expected return on  spending out of income

 in future periods versus now

may or may not be borrowing versus lending rate sensitive

 but may also --in credit constrained cases --

be impacted by changes in an independent shock like change

  in  risk sensitive delinquency  and default noticing credit worthiness  

------------------------------------

human capital is the real wealth of job class folks

no the value of their house lot

lot value is of course collateral borrowing

but the credit constraint bites when lot values are lowered

by a convulsion in the credit markets

only pre existing or coincident expectations
of a heating up  in the  job market

can set off the lending to job households

that funds their increased  spending

most basically

RE EMPLOYMENT

the mentalism of decider expectations

needs a real out there  mechanism running along side

enter fiscal policy
or  in theory

a sudden loosening of credit constraints

a loosening
NOT based on a rise in expected rates of return
or reduced expected rates of delinquency and default

if you want to only use monetary ie credit policy
then you have to make  uncle do massive counter cyclical lending

ie use a crazy loan qualification mechanism

the fed can't  simply liquify and solventize
the existing "private"
credit institutions
ala gentle ben's way  

............

since firms that are credit constrained exist
firms ready to spend out of  new loans if they could qualify

as would ...of course... millions of credit constrained households

there is credit demand out there lots of it

but only uncle can sensibly take the risk involved in loaning to them


in fact uncle oughta be the ultimate risk taker at all times
the risk taker not just of last resort
nor the final holder of risk
but the initiator the originator  of risk itself
in certain social  improving sectors

nationalizing risk
was not the folly of the recent debacle

the folly was not clawing back  form private hands
what was looted and thrown away
mostly thru that sublest of frauds
care less negligent gambling