In its Economics by Invitation series, The Economist asks economists to weigh in on vital contemporary issues.  Last Friday, the question was "What actions should the Fed be taking?", and compelling answers keep rolling in from top academics.  Rutgers economist Michael Bordo calls for a "credible" commitment to a price level target. The University of Oregon's Mark Thoma puts forward ways in which the Fed can continue to lower interest rates.   Columbia's Guillermo Calvo thinks the first order of business is to "address Main Street's credit crunch."  And Boston University's Lawrence Kotlikoff argues that "if the Fed is ultimately going to need to print money to pay the government's bills, this is the time to do it or, at least more of it."...

The danger, though, is that when the economy returns to normal, there will be so much money sloshing around that prices will rise dramatically.

The Fed is very worried about this outcome having printed $1.152 trillion since August 2007 and jacked up the monetary base by a factor of 2.4. Indeed, the Fed is so worried about this extra money getting into the economy's bloodstream that it's been bribing banks to horde this money as excess reserves. The bribe is coming in the form of paying interest on the excess reserves. This bribe has also been used to pass money under the table to the banks so they could "earn" money in a completely safe manner and, thereby, remain solvent.  

In worrying about inflation and in keeping the banks afloat via payment of interest on excess reserves, the Fed has undermined its other objective, namely getting the banks to make more loans to the private sector. I think it's time to focus on that objective. Hence, I'd also recommend that the Fed stop paying interest on deposits and take the risk on inflation. Jobs, at this point, are more important than prices.

Read Kotlikoff's full post here.