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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.

2 hours ago - World

U.S: Nord Stream 2 "will not move forward" if Russia invades Ukraine

U.S. State Department spokesperson Ned Price during a press briefing at the State Department in Washington, D.C., on Tuesday. Photo: Kevin Lamarque/POOL/AFP via Getty Images

The U.S. will make sure the Nord Stream 2 gas pipeline project between Russia and Germany won't go ahead if Russian troops invade Ukraine, State Department spokesperson Ned Price told NPR on Wednesday.

Why it matters: Germany's ambassador to the U.S. appeared to support Price's strong rhetoric on the strategically significant pipeline that would circumvent Ukrainian transit infrastructure and deliver Russian gas directly to Germany, eliminating one of the last deterrents Ukraine has against an invasion, per Axios' Zachary Basu.

Scoop: Stephanie Ruhle to replace Brian Williams on MSNBC

Photo: Nathan Congleton/NBCU Photo Bank/NBCUniversal via Getty Images via Getty Images

MSNBC will soon announce plans to move morning anchor Stephanie Ruhle to the 11 pm ET hour that Brian Williams turned into an elite destination, two sources familiar with the move tell Axios.

Details: The 9 am ET hour, currently hosted by Ruhle, will become part of MSNBC's flagship morning show, "Morning Joe," which currently runs from 6 am to 9 am ET.