Seven Faces of The Peril”

This is the Federal Reserve Bank of St. Louis piece by James Bullard that everyone is talking about.

Here’s the money quote:

Under current policy in the U.S., the reaction to a negative shock is perceived to be a promise to stay low for longer, which may be counterproductive because it may encourage a permanent, low nominal interest rate outcome. A better policy response to a negative shock is to expand the quantitative easing program through the purchase of Treasury securities.

Translation: The helicopters are at the ready – very much in line with what I said I anticipate earlier today.

My view is that central banks and governments will always act to maintain the asset-based economic model of asset price growth and excess consumption. But they will be constrained during periods of growth, withdrawing stimulus at the behest of deficit and inflation hawks. When they do withdraw stimulus, the economy will lapse back into depression before they can act. At which point, they will respond aggressively.

Full text below (hat tip Scott).

Seven Faces of Peril Final Jul 28 Bullard 2010

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