The FDR moment occurred in 1933 when FDR took the reigns of monetary policy from an ineffective Fed and sparked a robust recovery in aggregate demand. The Fed had allowed aggregate demand to collapse for three years when FDR responded. He signaled that he wanted the price level to return to its pre-crisis level (i.e. increased expectations of higher nominal spending) and acted upon it by having the Treasury Department devalue the gold content of the dollar. This dramatically increased the monetary base and spurred a sharp increase in aggregate demand.
So how could President Obama have his FDR moment? Like FDR, he should signal his intentions for higher level of nominal spending and follow through on it by having the Treasury Department take take the reigns of monetary policy from the Fed. President Obama could do this by announcing a NGDP level target that would be implemented by the Treasury Department creating large-denomination platinum coins that would be deposited at the Fed and used to fund checks to the public. The Treasury Department would keep making these coins until the the NGDP level target was hit. If NGDP went above the target the Treasury Department would issue bonds to withdraw the excess money.
Okay, that is a radical idea coming from me. It is a mongrel mix of Market Monetarism and Modern Monetary Realism. It is not my first choice of the Fed adopting a NGDP level target, but it should work. It makes use of expectations management which should minimize the number the actual number of platinum coins needed and if used as a threat it might even cause Bernanke to suddenly discover his Volcker moment.
One Response to “Obama Needs His FDR Moment”
The ideas are good, but the spell check is stupid. The word is rein, not reign, as the metaphor is about a restraint on a horse and has nothing to do with royalty. It helps to actually read things before publishing them, really, it does.