The Lender of First Resort

Macroeconomists called Keynesians advocate using monetary and fiscal policy to correct weaknesses in the economy. That is standard macro. 

But their Lord and master, John Maynard Keynes, made very clear that there were times when monetary policy would be essentially useless. He called it “pushing on a string”. Standard macro courses cover a topic called the liquidity trap. 

A country will fall into a liquidity trap when investors are so uncertain about the future that they seek only money. They don’t trust bonds and stocks and just want to hold money (or gold).

During a liquidity trap, the Fed can pump enough money to fill the Columbia River, but since there is such a high demand for it, the money gets held and is not spent. Like pushing on a string, you get no impact. Just money sitting around in banks.  

Despite this standard theory and an amazingly good fit for the liquidity trap today, the Fed is whistling Dixie as it pretends to save the day with yet another boatload of money.

Hey Sweetie, I lost my job at the tomato factory in Leamington. That’s okay, Honey, the Fed is going to lower the interest rate.

Hey Sweetie, we can’t make our mortgage payment this month. That’s okay, Honey, the Fed is going to lower the interest rate.

Hey Sweetie, I just ran out of gas on Highway 5. That’s okay, Honey, the Fed is going to lower the interest rate.

Hey Sweetie, my Viagra isn’t working. That’s okay, Honey, the Fed is going to lower the interest rate.

Hey Sweetie, we have way too much debt now. That’s okay, Honey, the Fed is going to lower the interest rate.

Hey Sweetie, little Johnny got caught stealing cigarettes at the Piggly Wiggly. That's okay, Honey, the Fed is going to lower the interest rate.

Hey Sweetie, I think the economy is going to fall apart. That’s okay, Honey, the Fed is going to lower the interest rate.

Hey Sweetie, it's much too cloudy and cold here in Seattle. That’s okay, Honey, the Fed is going to lower the interest rate.

You might ask, what does the Fed and the interest rate have to do with all our problems?

Answer: very little. Worse yet, when the Fed decides to save the day, does that make us more or less optimistic? How does that affect the economy?

After market forces pushed some interest rates below 1% recently, did we really need the Fed to try to push it even lower? 

How do all those folks living on the returns on their bonds feel about the Fed lowering the interest rate closer to zero?

Will that little additional change in interest rates really solve the globe’s economic problems after the onset of a medical alert?

The Fed is the lender of last resort. When all else fails, then maybe we need the Fed to step in. But have we really tried to attack our current problems with sensible solutions? 

Is this using the Fed as the first resort?

Is this admitting that when we panic and don’t have any real solutions, we don’t mind throwing the baby out with the bath water?

I think I am out of questions. 

By the way, Keynes advocated using fiscal policies for times like these. But sadly we have gotten our country into such a debt mess that we have no more dry ammo. 

Liquidity trap, no ammo, and a sinking economy. Our leaders need to find a different job. They really suck. Yes, they did this to us for their own personal greed and corruption.