Barring the incorporation of a business and consumer loan GSE, and/or the Fed becoming willing to purchase private sector securitizations, the Fed needs to find other ways to get banks to lend more in times of crisis.

In countries with more structured economies, “getting banks to lend more” could take the form of loan quotas that banks must meet or face some sort of penalty, or some kind of state backed guarantee on business loans made during a certain period of time during the crisis.

Of course, these measures will sound extremely unpalatable to countries which hold strongly to free market ideology, and also come with risks that have to be studied, managed, and accepted.

But, at the very least they provide an alternative, if not a starting point, from which to redesign measures of monetary intervention, rather than continue to futilely pump the banking system with ever more bank reserves. 

The objective here is to meaningfully boost the real money supply, that is, new loans, not bank reserves.

However, simply increasing the money supply is not enough to get the economy growing in a robust and sustainable manner again. As noted previously, money velocity plays an important role, and can only be increased by making sure that as many people as possible have a secure source of income. 

This means bank lending must be at a level that is high enough to ensure businesses have access to enough credit to fund and expand their operations, increasing the demand for labor as they do so, and sparking a robust economic recovery.

“Robust” here means strong enough to bring back the millions of discouraged workers into the labor force, moving the labor force participation rate out of its downtrend of 20+ years. This will raise levels of employment, spending, and if economic growth is sustained, income.

Ultimately, we want all these different facets of growth to spark a recovery in money velocity, and move it out of its own 20 year funk. In this way, the expansion in money supply brought about by increased bank lending is actually spent, and not just hoarded.

However, it is important to note that while this optimistic view represents a possible outcome, it is by no means the only outcome.

Regardless of how effective domestic monetary and public policy is, economic growth is still dependent on broader structural factors, demographics, and especially global cycles of supply and demand.

We live in a complex and interdependent world, and will be affected by forces which are not only completely out of our control, but also completely outside of our ability to foresee. The best we can do is to learn what does and doesn’t work, and be open to changing our paradigms and ensuing courses of action.

What is truly valuable about being able to switch perspectives in this way is that it shifts the current paradigm away from central bank omnipotence.

In doing so, economic problems can be seen in a light that is independent of the Fed, and solutions thought of for them in a manner that is also independent of the Fed.

(Note: QE at this point in time, sits quite firmly in the orthodox category of monetary policy)