Imagine a sick child with a parent who only feeds them a scrap of food as they get worse. Also, imagine that the parent's determination of getting worse is not consistent. As a consequence, the poor child remains anemic and never knows with certainty when he is going to get more food. Because the child's expectations of future meals is unclear there is intense mental distress that creates secondary health problems, further weakening the child.
We would all be appalled at such a parent. A far better parent would regularly feed the child and pay special attention until the child is healed. Such a child would find the food, predictability, and unconditional commitment comforting. Such parental love would strengthen the child's healing process, helping the child to heal faster on his own.
The bad parent has a name: the Federal Reserve. The child is the weak U.S. economy and the irregular food is the quantitative easing (QE) programs. The secondary health problems are structural ones like the loss of human capital that emerge in the absence of more systematic, sustained, and aggressive aggregate demand support from the Federal Reserve.
At the heart of the U.S. economy's sickness is an excess demand for money or, equivalently, a shortage of safe assets. The ad-hoc and uncertain nature of the QE programs vastly reduces their ability to meaningfully address this problem. Like the good parent who sets an explicit objective of feeding child until he is healed, the Federal Reserve should commit to buying as many assets as needed until the economy has fully healed. Fully healing would be a return to the pre-crisis trend of nominal GDP. Such conditional large scale asset purchases (LSAPs) would create more certainty about the future path of aggregate nominal spending and better anchor nominal income expectations. Like the love of a good parent causing the child's own healing process to strengthen, the increased certainty from such targeted Federal Reserve actions would cause the market to do much of its own healing.
For example, imagine that Ben Bernanke called a press conference tomorrow and announced that the Fed would start doing conditional LSAPs until the pre-crisis path of nominal GDP level target was hit. This announcement would send shock waves through the markets. Portfolios would automatically adjust toward riskier assets in anticipation of the Fed actually doing these conditional LSAPs. This would raise asset prices and raised expectations of future nominal income growth. Current aggregate nominal spending would quickly respond to these developments, helping push nominal GDP to its targeted path and thus reduce the onus on the Federal Reserve to do LSAPs in the first place. The resulting recovery would both increase the stock of safe assets and reduce the demand for them. In short, the Federal Reserve could provide much more effective (and cheaper) stimulus to the economy by better managing the expected growth path of nominal GDP.
Instead, the Federal Reserve chooses to be a bad parent.
P.S. See Evan Soltas post on Israel's implicit nominal GDP targeting to see the potential for healing the sick U.S. economy.
P.P.S. If the parenting analogy rubs your libertarian instinct the wrong way, then try the excellent Star Wars analogy provided by Matt O'Brien.