if wages rise and people get to buy nicer houses, that's great. But if houses don't become cheaper and wages don't rise, what is actually achieved by making it easier for people to go into debt to buy them?
I think the answer to that question is that we're trying to juice the economy by incentivizing debt-financed purchases of cars and homes with the hope that the increased economic activity somehow finds its way into household income somewhere down the line. It seems like a pretty desperate plan.
Accordingly, getting out of a Liquidity Trap with monetary policy playing the lead role necessarily involves a Dornbuschian sequence of rational overshooting: The Fed must drive up Wall Street prices, which move quickly, so as to get to Main Street prices that move up slowly, most importantly, wages.
This sequencing implies that Wall Street's prices axiomatically will, in the short run, "overshoot" their long-term fair value, as the Fed appropriately and credibly commits to staying at the ZLB, until paper wealth creation endogenously deleverages private sector balance sheets sufficiently to restore animal-spirited risk taking on Main Street.
This sequencing implies that Wall Street prices must become very rich relative to Main Street prices in order to achieve so-called escape velocity from the Liquidity Trap. At the transition point, Wall Street prices will be rationally "overvalued" relative to their long-term "fair value."
It still sounds like a trickle-down policy to me. And in this formulation it seems like wealthy asset holders get to participate in both the Wall Street recovery and the Main Street recovery while people dependent on labor income participate primarily in the latter and with a substantial (and personally risky) lag. McCulley's point, of course, is that this is not ideal, it's just the nature of the system we have built. Better political functioning could potentially decrease Wall Street's relative early outperformance and decrease the lag in the Main Street recovery.
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