Lucas: Inflation is not the Biggest Worry

I thought maybe conservatives should hear from one of their own. Nobel prize winner Robert Lucas of the University of Chicago said the following in November:

The recession is the more immediate problem, Robert Lucas: In a financial crisis things happen fast... The responsibility of the Federal Reserve in this situation is to provide more cash reserves, and in that sense they are doing their job. ... This is good central banking.

Should we be concerned that people will just hold on to the new reserves and continue to reduce spending? Some of that is surely happening, but more reserves can always be added.

Should we be concerned about inflation? Of course, always.

But right now the recession is the more immediate problem. If inflation resumes, reserves can be taken out as quickly as they were added. This is a classic lender-of-last-resort situation and it is important to maintain focus.

In my view, these are the most important considerations for US policy today. I think if the current Federal Reserve lending policies are continued aggressively our chances of avoiding a recession larger than that of 1982 are very good. At this point, I think this is the best that can be hoped for and it is a lot better than a replay of the 1930s.

Importantly: "reserves can be taken out as quickly as they were added."