We’re caught in Washington today by the winter storm Saturn, planning for our roundtable in Washington tomorrow (March 7, 2013) and our lunch with Janet Yellen, vice chair at the Federal Reserve. I recently read her speech given February 11:
It shows a strong concern for the underemployed and their endurance, and it also shows a strong empathy, humility and resolve.
The Fed’s continued response is to provide more liquidity to make the economy jump start at some point in time, and we’re seeing signs it does. The Fed shares this strategy with Bank of Japan and Bank of England. This strategy requires that the money reaches those that will spend; the poor and underemployed and the small and medium sized businesses being cut back by lack of working and investment capital. This requires that the so called Transmission Effect works, which since 2008 comes more and more in doubt. So far the money has not reached down to those who would spend. It was rumored past week that the resourceful Bank of England might even consider a negative interest rate for banks depositing money with them thus making it costly for banks not to lend. On this blog we’ve repeatedly over a number of years have questioned if the major reason the transmission effect isn’t working is the way the financial regulation is designed.
A concern that the abundance of liquidity risks creating bubbles instead of inflation is another topic we’ll bring up tomorrow.