By Philip Zelikow
As folks look hard at the evidence supporting the predicted benefits of the giant stimulus package, more experts are voicing the concern that this is a faith-based gamble. See the independent coincidence of views expressed just today by Benn Steil and Niall Ferguson.
Meanwhile, the interest rates on Treasuries are already up nearly a hundred basis points. And the avalanche of Treasury auctions has not really begun. One of the reasons that many experts keep stressing the link between fiscal sustainability and stimulus effectiveness is just this phenomenon: the danger of rising interest and mortgage rates offsetting the stimulus effects.
So here we are in early February 2009 and commentators are already wondering whether the Fed will start stepping in now to buy up the Treasuries and avoid this problem. When this happens, the federal government is lending money to itself -- "quantitative easing" by the Fed. This replaces the credit market/interest rate risk with an inflation risk.
The proper response is not a reflexive "no." But the pressures on the Fed to move soon toward large-scale quantitative easing, on top of the trillions of dollars in obligations recently added to the Fed's balance sheet, add up to another argument for holding off a wrap-up of the stimulus package. Wait until Treasury Secretary Geithner has announced the administration's new financial policy initiatives and folks have had a serious chance to assess its costs.
A few weeks one way or the other will not make or break the economic recovery. But, as these other proposals come into play, it may be worth taking the extra time to deliberate before undertaking hundreds of billions of dollars of new debt. And giving the administration a chance to explain how/whether it plans to coordinate its efforts with other countries.
To their credit, Republicans, led by Senator McCain, did put forward an alternative stimulus approach, a little more than half the size of the House bill and including what, in normal times, would be a very large amount of new spending and aid to state and local governments. It was defeated on a party line vote.
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