The Death of Monetary Policy.

The Fed is finding out that you can lead a maxed out credit card shopper to the mall, but you can't make him put more money on that credit card.

WASHINGTON — Policy makers at the Federal Reserve appeared almost stunned by an economy that was sinking faster than they had expected on almost every front in December, so much so that they even toyed with the idea of not announcing an official target for overnight interest rates, according to minutes of the meeting released on Tuesday.

At the meeting on Dec. 15 and 16, Fed policy makers jumped through the looking glass and slashed the benchmark federal funds rate on overnight loans between banks virtually to zero. Vowing to use “all available tools” for stimulating the economy, the Fed then outlined a radical new approach of pumping money into the economy through its own lending programs and through heavy purchases of mortgage-backed securities and possibly longer-term Treasury bonds.

Despite having already created a raft of new lending programs to financial institutions and even corporate borrowers, Fed policy makers as well as the Fed’s staff forecasters began the meeting with sharply reduced forecasts. They all expected a severe economic contraction that was likely to last through at least the first half of 2009.

“All meeting participants agreed that the economic downturn had intensified over all,” according to the minutes. The housing market was still weakening, credit conditions were tighter than ever, consumer spending had fallen for five months in a row. Even exports, which had been the one bright spot, were being hurt by a global economic slowdown.

I've been explaining this to friends since the last rate cut. Monetary policy as a tool to deal with this recession will be about as effective as prayer in solving this problem.

The cure for this economy is fiscal policy. Specifically spending. Targeted spending that creates working and middle class jobs, and puts money into the hands of those people. The more the better.

Tax cuts for the rich and tax cuts for big business won't do it. Neither will the half measures being proposed by the Obama Administration. After his first stimulus package, which appears to be a lot of business tax cuts aimed at companies that don't need them, and get too many already anyway isn't going to work, Obama will have to try something more aggressive. One only hopes the real economy hasn't cliff-dived before he realizes that this is no time for half measures. From what I've seen, I'm not optimistic.

(h/t Atrios).