Ben Bernanke and Janet Yellen coauthored a piece in the FT on options for the Fed during this crisis. As you’d expect, there were lots of good ideas, including this one:

Finally, as Eric Rosengren, president of the Federal Reserve Bank of Boston recently suggested, the Fed could ask Congress for the authority to buy limited amounts of investment-grade corporate debt. Most central banks already have this power, and the European Central Bank and the Bank of England regularly use it. The Fed’s intervention could help restart that part of the corporate debt market, which is under significant stress. Such a programme would have to be carefully calibrated to minimise the credit risk taken by the Fed while still providing needed liquidity to an essential market.

Readers know that I’ve long recommended the Fed ask Congress for the ability to buy a wider range of assets during a crisis. Well, now we are in a crisis.

I look at this issue slightly differently from Bernanke and Yellen, however. They focus on actions to restore confidence in the credit markets (a valid concern), whereas my motivation is to insure that there are enough assets for the Fed to buy in order to achieve a price level or NGDP level target. QE won’t have the impact it should unless accompanied by level targeting and a “whatever it takes” commitment to asset purchases. Allowing for more asset purchases makes that commitment more credible.

In fact, I’d prefer the Fed avoid buying corporate bonds until they ran out of Treasuries and MBSs to buy. My motivation is money creation, not targeted assistance.

I’m a bit confused by this paragraph:

However, the underlying challenges today are quite different. Back then, the near-collapse of the financial system froze credit and spending; the goal of monetary policy was to restart both. Now, the problem is not originating from financial markets: they are only reflecting underlying concerns about the potential damage caused by the coronavirus pandemic, which of course monetary policy cannot influence.

If they mean that monetary policy cannot undo the medical harm caused by C19, then I clearly agree. But that’s not how I read the paragraph. They seem to be saying that monetary policy cannot undo the economic damage of the coronavirus. That’s not entirely true. Spending and debt are nominal problems, not real problems.

If monetary policy props up NGDP growth with a whatever it takes approach to money creation, then it can make it easier for borrowers to repay loans. It won’t magically allow cruise lines to service their debt, but faster NGDP growth has a big impact on a wide swath of firms across the American economy.  Debt defaults will be considerably lower if NGDP rises by 5% in 2021, than if it falls by 5%. Indeed “considerably” is an understatement.

That may be nitpicking on may part, and Bernanke and Yellen are correctly emphasizing the need for the Fed to be very aggressive in addressing this crisis. My only complaint is that they don’t put quite enough emphasis on the crucial importance of maintaining adequate NGDP growth, even at the cost of inflation. The health of our financial system depends on it. Our labor market will also do better with faster NGDP growth, although of course mass unemployment is inevitable in the short run due to social distancing.

There’s little that can be done regarding NGDP in the very short run. In the very long run we’ll be fine.  It’s the medium term that scares me—2021 and 2022. Even late 2020.  We need to do more to create positive NGDP growth expectations for 6 months to 3 years out. Deflation is not the optimal outcome for an adverse supply shock, as any EC101 textbook will tell you.