Nice call, Chairman Bernanke, to avoid unveiling a new quantitative-easing program last week. I’m sure it wasn’t just because the boat jokes were growing tiresome. Your last round of quantitative easing, dubbed QE2, had the Federal Reserve buy $600 billion in government bonds in an attempt to jump-start the economy. But I don’t think it even got the engine to turn over. You’ve clearly realized that more of the same isn’t going to get us anywhere, and you need some time to think about your next move, or maybe even whether you have a next move to make.
Well, I’m convinced you do, so let me break it down for you.
The economy has stalled again because nobody wants to spend money—not households, not businesses, not the government. So we either find a way to get people to spend more money, or we give up and let the prices of everything fall until we can afford to spend again. It’s that simple.
The Federal Reserve still has the power to get people to spend, but not if it sticks to its failed strategy of buying bonds. It needs to stop dumping money into the banks—where it simply piles up—and instead puts money right in the hands of households. This is the only way to get households to spend.
Households don’t want to spend for two reasons. First, they either don’t have jobs or they’re worried about losing the ones they have. And, second, they have too much debt. The Fed can’t do anything about the first reason, at least not directly. But it can make a big difference in the second one.
Since the bulk of household debt problems have to do with housing, the Fed should design a monetary stimulus that works by reducing households’ mortgage debt. That’s right—I’m talking about printing money and paying down people’s loans with it.
One simple way to do this would be to have a nationwide lottery open to anyone who had a mortgage in September 2008. A winning lottery ticket—there would be millions of winners—would entitle the household to have 20 percent of its outstanding mortgage principal as of September 2008 paid off by the Fed—up to $100,000. The catch is that the mortgage lender would have to agree to refinance the borrower into a new mortgage with an interest rate no higher than 5 percent.
If a winning household has already lost its home from foreclosure since September 2008, the Fed could give the household a cash payment equal to 5 percent of the outstanding principal on its mortgage as of September 2008.
Think this is absurd? Come on, Chairman Bernanke—you, better than anyone, know the storybook version of monetary policy, which goes back to Milton Friedman. The Fed loads up a fleet of helicopters with cash and sends them out to do random money drops all over the country. Holding a lottery for homeowners is just a more targeted version of this idea.
With a program like this, the Fed could help five million households for less than the amount of the money you created for QE2 (which was $600 billion), or 10 million households for less than the amount of money you created for of QE1 (about $1.2 trillion). And it would have a huge impact on household spending. Mortgage debt would drop, and hundreds of thousands of families would no longer be underwater on their homes. Home prices would firm up since millions of foreclosures or distress sales could be averted. This would convince investors to get back into the housing market instead of waiting for prices to keep falling.
In addition, millions would stop worrying that they can’t afford new clothes, new appliances, a new car and finally make the purchases they’ve been putting off. When households start spending again, businesses will start hiring and spending, too.
The other effect of this policy would be a huge morale boost to all Americans. It would finally show that the government does actually care about its citizens and can take effective steps to help them.
During the financial crisis, Wall Street got bailed out, big banks got bailed out and even car companies got bailed out. But what about homeowners? They got three halfhearted, underfunded, ultimately botched programs that weren’t even trying to help them reduce their debt in the first place. The not-very-subtle message that this sent to most Americans is probably responsible for half the drop in consumer sentiment.
And it’s the attitude of consumers these days, more than anything else, that’s holding the economy back. Unless people get some real hope, the economy will ebb along and most likely stumble into a grinding, painful recession. And after a wimpy fiscal stimulus and a bogus homeowner rescue program, they’re rightfully skeptical that the government can give them anything to cheer about.
It’s going to take something radically different—and big—to get people excited about the future again so they will get spending. Be a hero, Mr. Bernanke. Show us ordinary Americans the money.
Connel Fullenkamp is the director of undergraduate studies and professor of the practice of economics. His column runs every other Tuesday.
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