[obblekk]

These critiques of zirp never explain what should have been done differently.

It's very unlikely the Fed kept rates too low because inflation didn't exceed 2% for 12 years from 2008 to 2021. If the Fed had actually made money "too cheap" inflation would have kicked in much earlier.

More likely, we made it very hard to do new stuff in the country, which made the value of borrowed money low.

Congress spent decades adding regulations (often for good reason) that ultimately resulted in it being too expensive to do most things inside the US. If a business is banned from investing in most new things, it won't need to borrow more money.

The Fed just responded to the market's appraisal of money value. You can even see this in the long term charts - interest rates declined almost continuously from 1984 to 2022.

The entire time, inflation stayed at or below 2%. If the Fed had kept rates higher, theory would predict they would have caused a recession (and Scott Sumner has spent more than a decade arguing this is actually what caused the long deep recession of 2008 - money was too expensive, even at 0%).

Ultimately money is neutral in the long run. The things that truly matter for growth are laws, culture, natural resources and education. These are the causes of our present social dysfunction. These are the issues we should focus on fixing. Not fiddling with interest rates.

[altairprime]

The Fed could have instructed Congress to tax any growth in retained or dividended profits in excess of the annual Fed inflation target. ‘Pay more wages or charge less money’ is a direct lever over inflation, even after a partial reduction in overgrowth penalty tax is granted for research spending, and isn’t prone to causing deflation. Sadly, they don’t consider this lever in-scope for economic policy, and as far as I know they didn’t even try (and so Congress had no opportunity to consider, refuse, or ignore their request).

[yesfitz]

Do you have an example of other times the Federal Reserve has lobbied Congress to adopt a policy?

The closest I could find by searching "federal reserve asks congress" was Fed Chair Jerome Powell asking Congress to clarify the legality of marijuana[1].

I think the Fed's independence cuts both ways. They don't negotiate on fiscal policy, and the government doesn't negotiate on monetary policy (except they absolutely try to, obviously).

1: https://apnews.com/article/business-jerome-powell-congress-d...

[altairprime]

I’ll consider your question, but I’m unlikely to complete the necessary research in time to respond before the thirty-day comment window closes. I do generally recommend this article as a useful survey slash starting point for understanding the nature of the relationship between Congress and the Fed if you’d like to pursue it further yourself:

https://harvardlawreview.org/print/vol-138/the-federal-reser...

[bpt3]

Is anyone arguing that the Fed is responsible for "total price levels"?

The fed funds rate is used as the foundation for nearly all lending that occurs in the US, and setting it is a key tool for regulating credit (the only job they have per this paper).

The paper also lays out how credit/money creation and destruction impacts the overall economy, so I can see how the Fed's actions related to regulating credit impact overall prices, but it's a second order effect at best and there doesn't seem to be any reasonable alternative?

I guess the issue is that the paper keeps talking about inflation caused by "supply-side issues", as if the cause of inflation can be clearly discerned at any point in time or that whatever inflation is caused by supply-side issues isn't tightly linked to the amount of credit available and therefore would fall under the purview of the Fed?

[altairprime]

The Fed is responsible for controlling inflation; if taxation of excess business growth (relative to household spending power) beyond the inflation target serves that purpose, then how businesses choose to spend the excess growth (to avoid tax penalties) — either by lowering the price level and/or raising total wages paid — is entirely up to each business to determine in their specific circumstance and industry.

[bpt3]

I don't understand your point.

I agree tax rates are disinflationary in theory and I believe in practice to an extent, so it could be another tool in the Fed's toolbox but not one I think they want to have or one that Congress is willing (or arguably able on their own, though they wouldn't have to if the Fed's role were just advisory) to give up.

But what does that have to do with the paper you posted?

[AnimalMuppet]

In fact, the Fed did try a time or two to get off the 0% rate in the decade after 2008. The economy reacted badly, so they backed off.

[PhantomHour]

> These critiques of zirp never explain what should have been done differently.

Controversially: They don't have to. The point of this piece (and similar ones) isn't "how we should treat the next similar-to-2008 financial crisis", it's that the current desire to "RETRVN TO ZIRP" is dangerous.

Perhaps there truly was no better way to respond to the Great Recession. There's a pretty good case to be made that the recovery has been a wonderous success of modern central banking. That doesn't change the fact that ZIRP had downsides, big ones.

> If the Fed had actually made money "too cheap" inflation would have kicked in much earlier.

I'm not terribly sold on this economic theory, so do take that in mind for the rest of this comment.

One thing to consider: While there was shockingly little inflation in general goods and services, there has been pretty notable asset price inflation. P/E ratios have been steadily creeping up since 2010. The real estate market's supply-shortage has turbocharged it's inflation.

> Ultimately money is neutral in the long run.

This is true, but not particularly useful; It's a very "long" "long run". The conceit of modern central banking is to "smooth out" that long term trend, and we have many examples where (even non-modern) monetary policy can screw up a country.

The big problem with Trump's desire to hit the gas on the economy and slam interest rates into the floor is that this just very clearly does not work. At worst he'll quickly find himself in the situation Erdogan got himself, at best (that is, "best Trump seizes the fed" scenario) the US will find itself in an asset bubble economy like Japan.

And unlike Japan and Turkey, the US has a lot more to lose. Pension funds make up a sizable portion of the wealth and spending in the US. If the stock market were to take a hit similar to the Dotcom bubble crash or "Lost Decade(s)", pensions will need to be adjusted downwards, to disastrous and self-reinforcing economic consequences. (Another fun layer to this is that those pensions tend to be supplemented by real estate assets, which are not in a "true" bubble but will most certainly collapse in a steep recession.)

[stego-tech]

Then you add in the fact pensions are invested into Private Equity, and it’s glaringly obvious how fragile (and already broken) the US economy is.

Returning to ZIRP is bad, as is removing the Fed’s independence, as is allowing PE to continue operating unchecked, as is a whole bunch of other stuff (over regulation of small businesses, under regulation of corporate behemoths, over reliance on government assistance programs by workers of for-profit companies due to low wages, the precarity of gig work, the displacement of educated workers by automation while simultaneously dismantling social safety nets, the student debt crisis, the housing crisis, the auto crisis, infrastructure crisis, etc, etc).

As you pointed out (and the initial detractor ignores), it’s not that ZIRP itself was bad in theory, but rather that a return to it - knowing the harms it caused - is bad, and that there is no outcome of the Fed losing independence that doesn’t end with the wholesale demolition of the foundation of the global economy, that being the US Dollar and Economic engine lifting all boats through political independence.

[Eddy_Viscosity2]

There was inflation in asset prices during that period. Prices for health and education also went up far above 2% annually. The problem is that CPI is a deliberately incomplete measure.