Cochrane on Fiscal Stimulus

A thought-provoking piece by University of Chicago economist John Cochrane. His bottom line:

there is a plausible diagnosis and a logically consistent argument under which fiscal stimulus could help: We are experiencing a strong portfolio and precautionary demand for government debt, along with a credit crunch. People want to hold less private debt and they want to save, and they want to hold Treasuries, money, or government-guaranteed debt. However, this demand can be satisfied in far greater quantity, much more quickly, much more reversibly, and without the danger of a fiscal collapse and inflation down the road, if the Fed and Treasury were simply to expand their operations of issuing treasury debt and money in exchange for high-quality private debt and especially new securitized debt.

Updates: Phill Swagel, who until recently was Assistant Secretary of the Treasury for Economic Policy, emails me this observation:

The bit you posted from John Cochrane is precisely what the TALF is about -- the joint Treasury-Fed facility aimed at securitized assets (consumer lending at first, but it could be scaled up to non-agency RMBS and CMBS).

Thanks, Phill.

Around the econoblogosphere, John's piece is proving controversial. Harvard's Dani Rodik calls it the "best argument against a conventional fiscal stimulus that I have seen" and notes "since it is also very well written every macroeconomics student should read it in full." Meanwhile, Berkeley's Brad DeLong accuses John of making "an elementary, freshman mistake."