Another way the Fed could have handled the recession

Fiscal Times - The Federal Reserve has been conducting a grand experiment since the U.S. economy tumbled into the Great Recession. After the housing market collapsed in 2008, the Federal Reserve lowered interest rates to rock bottom levels in hopes of boosting borrowing and spending. It also went a step further, buying trillions of dollars in Treasury bonds and mortgage-backed securities with the hope of boosting the housing market and therefore the economy.

The Fed acknowledged Wednesday that, as the economic recovery slowly builds, the grand experiment is now coming to an end. The Fed’s program of monthly bond purchases is now set to end next month and policymakers are looking ahead to raising interest rates for the first time since 2006.

But in an intriguing piece just published in Foreign Affairs, Brown University political economist Mark Blyth and London-based hedge fund manager Eric Lonergan argue the Fed could have done better by pursuing a far different type of grand policy experiment.

"Instead of trying to drag down the top, governments should boost the bottom," they write in an article titled: "Print Less But Transfer More: Why Central Banks Should Give Money Directly to the People."

The housing market can contribute nearly 20 percent to gross domestic product when it's humming along, but excessive home borrowing and the subsequent overheating of the housing market got the American economy into such trouble in the first place. So instead of policies meant to boost home buying, Blyth and Lonergan contend the Federal Reserve should instead give money directly to people. For the trillions already doled out to the financial sector via those “quantitative easing” asset purchases, every tax-paying family in America could have been on the receiving end of $56,000, based on back-of-the-envelope calculations by Blyth. Even if the actual number was lower, the result, the authors contend, would be an economic boost fueled not by re-inflating the housing market but by consumer spending, which accounts for nearly 70 percent of America's GDP.