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Illustration: Aïda Amer/Axios

The trillion-dollar gap between actual GDP and potential GDP is a gap made up of misery, unemployment, and unfulfilled promise. It's also a gap that can be eradicated — if central banks embrace unconventional monetary policy.

  • That's the message from Eric Lonergan and Megan Greene, two economists who reject the idea that central banks have hit a "lower bound" on interest rates. In fact, they reject the idea that "interest rates" are a singular thing at all, and they fullthroatedly reject the idea — most recently put forward by New York Fed president Bill Dudley — that the Fed is "out of firepower."

Why it matters: If Lonergan and Greene are right, then central banks have effectively unlimited ammunition in their fight to increase inflation and employment. They are limited only by political will.

How it works: Historically, central banks have borrowed and lent at pretty much the same interest rate. But that doesn't have to be the case.

  • In Europe, the central bank, the ECB, is now lending money to banks at a -1% interest rate. That's significantly lower than the rate it pays on those banks' reserves.
  • European banks can't just borrow the money and put it on deposit at the central bank. They only get the loans if they turn around and re-lend them into the real economy — and their regulator, the European Banking Authority, makes sure that they do exactly that.

In the U.S., the Fed could do something similar. It could reduce the discount rate — the rate at which banks borrow money from the central bank — to, say, -3%, while still keeping the Fed Funds rate in positive territory.

  • Savers would still be able to get positive returns on their deposits, but borrowers could effectively be paid to borrow money.
  • The deeply discounted loans to the banks would be contingent on the banks taking that money and re-lending it into targeted areas of the economy, rather than speculating with it or using it to fund things like mortgages.

Be smart: By targeting the loans, a dual interest rate policy could turbocharge government efforts to, say, build a carbon-neutral economy.

My thought bubble: Such a policy looks — and is — very close to fiscal policy, rather than monetary policy. It violates the principle that central banks are politically independent. But the Fed is already working hand-in-glove with Treasury. And given political constraints on extra spending from Congress, it makes sense to find that money at the Fed instead.

Go deeper: Lonergan and Greene explain their proposal in detail in a fantastic episode of the "Macro Musings" podcast.

Go deeper

Big bank bond trading soared in 2020

Data: Analysis of company filings; Chart: Axios Visuals

The pandemic helped to pull big banks’ bond trading revenue out of a multi-year slump.

Why it matters: Revenue within the so-called fixed income, currency and commodity (FICC) divisions has been slowing for years.

Tina Reed, author of Vitals
2 hours ago - Health

Gottlieb: CDC hampered U.S. response to COVID

Illustration: Shoshana Gordon/Axios

The CDC moved too slowly at several points in the coronavirus pandemic, ultimately hindering the U.S. response, former FDA Commissioner Scott Gottlieb writes in a new book, Uncontrolled Spread.

The big picture: The book argues that American intelligence agencies should have a much bigger role in pandemic preparedness, even if that's sometimes at the expense of public health agencies like the CDC.

911's digital makeover

Illustration: Annelise Capossela/Axios

A next-generation 911 would allow the nation's 6,000 911 centers to accept texts, videos and photos.

The big picture: U.S. emergency communications have remained stubbornly analog, but Congress is about to take another run at dragging 911 into the digital age.