Friday, July 30, 2010

FLG Thought Paul Ryan Was Supposed To Be Smart

He says:
We need to do things to free up credit. We need regulatory forbearance there. Right now, the policymakers and regulators are doing opposite things. So you’re right that there’s a lot of capital parked out there, and we need to coax it out into the markets. I think literally that if we raised the federal funds rate by a point, it would help push money into the economy, as right now, the safest play is to stay with the federal money and federal paper.

And a lot of this is psychological. The people who have capital are sitting on their hands: I just talked to a guy who builds nurseries and canceled three construction projects next year because he just doesn’t know what’s happening. People are just too nervous, they don’t know what the economy will be, what the regulations will be, what the taxes will be, and to the extent you can increase certainty, you can unlock some of that credit.

FLG actually agrees with Matt Yglesias writes:
The analysis of the “safest play” here is right, but raising interest rates would exacerbate that problem. He’s talking about paying banks a higher yield on the reserves they keep parked at the Fed. This is what central banks do when they want to suck money out of the system.

Perhaps he misspoke and meant to say something else, but my suspicion is that Ryan is really just outlining an underpants gnome theory of growth here.

BTW, federal paper is always the safest play.

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