Goldman calls for QE2

This will be music to the ears of Paul Krugman – Goldman Sachs calling for Quantitative Easing v2.0 and additional deficit-financed fiscal stimulus.

The bank’s chief US economist Jan Hatzius reckons there are enough “disturbing signs” — Friday’s payroll report and recent CPI releases for example — to justify further policy easing via a return to unconventional monetary policy, and/or fiscal stimulus.

And don’t worry about the consequences — such as asset bubbles or a higher public debt burden — because financial markets are nowhere close to bubble territory and federal interest payments stand at just 1.5 per cent of GDP, says Hatzius.

Here’s what he says must be done to counter the possibility of a double-dip:

On the monetary side, the possibilities include additional purchases of Treasuries and mortgage-backed securities, as well as TALF-like structures—i.e., special purpose vehicles that lend to nonbanks using equity provided by the Treasury and debt provided by the Fed. Whether these will happen anytime soon is another matter. Additional purchases of Treasuries and/or MBS mortgages do not yet seem to command a sufficient majority on the FOMC. This might change if growth and/or inflation ease further. But even then it is unclear just how effective they would be. After all, Treasury purchases did not seem to have much impact in 2009, and MBS spreads are already quite compressed, limiting the potential for further narrowing. A TALF-like structure could be more powerful, but it would need the Treasury’s cooperation and the Fed’s authorization under article 13.3 of the Federal Reserve Act, i.e. the Fed would need to invoke “unusual and exigent circumstances.” This is a very high hurdle.

On the fiscal side, we hope that Congress passes the extension of emergency unemployment insurance, continued aid to state and local governments, and at least a temporary extension of the bulk of the 2001/2003 tax cuts beyond the end of 2010. If some of the tax cuts are left to expire, then this should be offset by temporary fiscal easing elsewhere. The point is that a tightening of the overall fiscal stance at a time when the economy is already struggling to maintain the current, unacceptably low level of resource utilization is a bad idea. In fact, we favor additional deficit-financed stimulus, coupled with a commitment to cut the longer-term deficit more aggressively than currently envisaged in the administration’s 10-year plan. The consolidation could include cuts in discretionary expenditures, slower growth in entitlement spending, and gradual hikes in both direct and indirect taxes. The precise mix is a matter of political preferences, and reasonable people can disagree about the pros and cons of different measures. But the need for long-term budget restraint should not stand in the way of a near-term boost when the economy clearly needs it.

Krugman does have his supporters.

http://ftalphaville.ft.com/blog/2010/07/07/280396/goldman-calls-for-qe2/?updatedcontent=1

Uncle Ben and uncle Krugman seem to have uncle Goldman as supporter...

 

Krugman is a fucking idiot.

There, I said it.