Last week, the Fed announced that it would use the proceeds from retired mortgage-backed securities to buy up more government bonds. This may have a very modest effect in keeping long-term interest rates low, thereby giving a small boost to the economy.
Such a measure would be reasonable if the economy was basically fine and just in need of a modest lift. But this is not the case.
The unemployment rate is 9.5% and virtually certain to rise in the second half of the year. Job growth has basically stopped and GDP is likely to be in the range of 1-2% in the next four quarters, as state and local governments cut back spending, the stimulus phases down and the housing market resumes its slide.
In this scenario, the Fed should be taking aggressive steps to bring the economy back to full employment. After all, this is part of its job description. Its responsibility is to promote price stability and full employment. There is no concern about price stability in the sense of the rate of inflation being too high right now. Therefore, the Fed's responsibility should be to do everything within its power to reach full employment; obviously, we are nowhere close now.
Its chairman, Ben Bernanke, even knows exactly what needs to be done, as the Wall Street Journal recently reminded us. He wrote a paper back in 1999 about Japan's stagnant economy and mild deflation. Following a recommendation by Paul Krugman, he urged Japan's central bank to target an inflation rate in the range of 3-4%.
A rate of inflation in this range would substantially reduce real interest rates, giving firms a powerful incentive to invest. It would mean, for example, that if they built a factory this year, the goods it produces would be selling for 15-20% more in five years. This modest level of inflation would also go far in reducing the debt burdens of households. The burden of their mortgages and other debt would be eroded as wages rise roughly in step with inflation, while the size of the debt remains fixed.
In spite of knowing exactly what needs to be done, Bernanke and the Fed show no inclination of moving in this direction. Instead, the Fed seems prepared to ignore its legal mandate to promote full employment.
The explanation for this incredible policy failure is straightforward. The people that Bernanke must answer to are the Wall Street bankers, not Congress and the public. The Wall Street bankers are not troubled by 9.5% unemployment. Their profits are back to pre-recession levels and bonuses are again hitting record levels.
For the Wall Street bankers, everything is just fine now. If Bernanke were to pursue a policy of targeting 3-4% inflation, it could erode the real value of many of their assets. These banks own mortgage debt and other assets whose value would be reduced by even modest rates of inflation. While targeting a slightly higher rate of inflation may be a no-brainer from the standpoint of workers and most of the country, it is not good for Wall Street -- and this is who our supposedly independent Fed is answering to.
This is not the first time that Bernanke has done Wall Street's bidding. When Goldman, Citigroup and the rest were on the edge of bankruptcy, Bernanke deliberately misled Congress to help pass the Troubled Asset Relief Program (TARP). He told them that the commercial paper market was shutting down, raising the prospect that most of corporate America would be unable to get the short-term credit needed to meet its payroll and pay other bills.
Bernanke neglected to mention that he could singlehandedly keep the commercial paper market operating by setting up a special Fed lending facility for this purpose. He announced the establishment of a lending facility to buy commercial paper the weekend after Congress approved TARP.
Of course, the whole crisis stems directly from the Fed and Bernanke's fealty to Wall Street. It was easy for any competent economist to recognize the housing bubble and the danger it posed to the economy as early as 2002. Yet, the Fed and Bernanke (then working as Greenspan's sidekick as a Fed governor) insisted that everything was just fine with the housing market. After all, the Wall Street banks were making tons of money, what could be the problem?
The country badly needs a central bank that is independent of Wall Street, where its governors can do what they believe is best for the economy and the country. Unfortunately, we do not have such a Fed. Until Congress and the public start putting heat on Bernanke for his policy failures, we can expect to get kicked in the face again and again.
(This post originally appeared on The Guardian)
You're so right, and to me, this is the progressive view and policy. The Fed has always been a scam - a facility for Wall St. and big, concentrated corporate interests. You join Ellen Brown - see www.webofdebt.com and many others in rightly calling for this. I would like a movement - we could probably add Ron Paul libertarians on this one issue.
I am assuming that upward wage pressure and high employment go together. Recognize that inflation has not gone negative even though real wages have been declining for years now, which means that wage deflation has been offsetting goods inflation. With goods inflation pressures building, even holding real wages steady might give us greater inflation than the economy can tolerate.
That's it. That is what it is supposed to do.
Right now the US is starved for money supply. The arthor contends this is because the Fed is favoring the Wall Street preference to keep inflation low in order to preserve the value of its monetary assets. Another theory is that Bernanke is trying to destroy the Obama admin and the Democratic party by creating such high unemployment that people are in a state of outrage, panic and financial hardship and blame the current gov't for it.
Bernanke KNOWS how to stimulate employment---he is just not doing it---likely for one of these reasons. THAT IS THE POINT. ALL OF THE OTHER NONSENSE IS USELESS AND MISSES THE POINT OF THE DISCUSSION.
I thank the writer for this article because, People need to know what is going on---not listen to a bunch of pseudo intellectual crap--so please don't let other posts create confusion. PLEASE demand solutions from your legislators. Tell them the Fed needs to do its job or be impeached.
The FED is now and has been in violation of it's directives on employment and interest rates and the collusion between Wall Street, the Banksters and the FED is a clear and open fraud against America but our Justice Department is more concerned with Blago or Rangle's ethics than their own.
We all know, we all see this manipulation of the economy with the Banksters shutting down credit, the Corporate Fascists throwing people out of work to bump their bottom lines and that will all come back to bite them in the butt.
End the FED is a great call. I'm all for it. How?
You are fun to banter with, almost as much fun as the Tundra Tart but what have you presented in real solution?
What will you have to hear to be a happy gurl?
My proposals: 0% Fed loans to underwater homeowners on the underwater portion of loans (would take too much $ to refi whole loans and all significantly underwater homeowners should benefit, not just some). Resetting this part of loans to 0% creates a savings that reverses negative equity. 0% loans to credit-worthy job creators tied to payroll increases that represent new jobs: 1/2 of the amt of new job payroll increases available at 0% interest for 10 years, if you eliminate a job or reduce your payroll, the related loan portion reverts to current market. The work week should be reduced to 35hrs. no exceptions to promote hiring; time and a half pay is due for anything over 35hrs. These can be done quickly. Longer term: the US should use gov't contractors to reap its oil reserves and STOP leasing lands to oil companies. No more exploratory drilling (too risky). Use profits from existing wells to fund a transition to renewables, pay down the deficit and fund national rail, also fund extended unemployment benefits with retraining for in-demand jobs. Renewable companies can be offered as IPOs to transition back to private ownership. Fannie and Freddie need better underwriting oversight to ensure sound loans.
The president does have the power to remove a member of the Board of Governors, but only for cause.
http://www.slate.com/id/1007348
I'd say not fulfilling the lawful duty to maintain decent levels of employment is grounds for cause.
This most recent fraud from the FED with Greenspan, Paulson, Ruben, Bernanke and their trigger men Geithner, Blankenfein and Diamon pulled off the $4.6 trillion heist of history and they're still raping us through Fannie and Freddie.
If we had a Department of Justice we would be going after the liars loans, the fraud committed by the Banksters, Countrywide, the Purchased Politicians and the mortgage lenders who wrote the trash.
It's time to roll Fannie and Freddie into the American Home Mortgage Bank and end the FED.
What will it take to convert Fannie & Freddie from what we (the government) owns now to a Central (if you feel you must have one) Bank.
This Central Banking System of the FED feeds their private banking cartel's greed and they are not a government agency. There is the root of the corruption of the US Government in three little letters: FED.
Make no mistake that I understand the full mechanics of the Heist of History by the FED, Wall Street and Banksters with the Corporate Fascists right in there getting their grubby mitts full of stacks-o-government (read the citizen's) cash.
So sorry, so sad that you think making Fannie & Freddie into the American Home Bank is half-baked because a couple of hundred economists (William Black for me) are screaming to take this mortgage business out of the banksters' control after the games they've played.
There are always those who can see lots of reasons not to do a thing while just doing it makes the most sense.
It's rage and frustration alright; rage at being raped and frustration that there is no justice with Blankenfein and Diamon paying off half-billion dollar fines and walking free while the kid with a joint on the street does 5 years hard time.
Thank you for your article. I do not read WSJ (though I have begun to recognize the value and the importance of becoming knowledgeable concerning our economic policies and players.) And I have only begun to feel the drive to learn about our economic history and history of our monetary policy and financial regulation. But as a neophyte, it appears to me that part of the conflict that you point to in this article is the clash between the macro-economic policy of which the Fed, Wall Street and Treasury officials manipulate and toy with and benefit from and the micro-economic policies which effect the lives of every day Main Street, the clashes are being won by the titans each and every time.
I suspect that the best policies would be beneficial to both but we are so indoctrinated by Keynsian zero-sum policy that preclude implementation of policy that would be a win-win for the
small" people AND the tycoons as well.
Bernanke, in his folksy, downhome NC vernacular expresses his concern for Everyman while his policies show his true hand. Thank you for shining your light on the real Bernanke.
It is not just the federal reserve, but entities like Fannie Mae and Freddie Mac, that purport to do one thing but in the end are agencies that funnel wealth upward, while appearing to help those less financially able.However when one wants big government this is what one is going to get, a monster more capable of imposing it's will on the people, and that will is determined by monied interests.
BTW, the federal reserve is an unconstitutional creation. The federal government was charged with coining money, which is actually something of value, such as specie, which is put in circulation and barring a meteor shower of valuable metals makes for a much more stable economic environment, not one constantly tweaked by who are seeking to help the wealthy and powerful. Printing more money does nothing but enable those who first have access to it to use it at that value, until inflation hits and wages "may" follow, but only after the regular guy is already taking a hit.
A much better solution would be for the government to create the fiat money, all by itself. The Federal Reserve is a private bank, neither federal nor a reserve; and thus should not be creating money. You are entirely correct that the constitution grants the government the power to "coin" money; but it must be remembered that in the late eighteenth century, "coining money" was THE method for creating any money, be it coin, paper, or wooden tally. What must be done is straightforward in principle: WE NEED TO GET BANKS OUT OF THE BUSINESS OF GOVERNING.
Money should never be elastic,that is government and bank propaganda to cover their manipulations.
I do agree with your last sentence wholeheartedly, but the only way to do that is shrink government to it's proper limits of a legal system and police/military force.
manufacturing base lost -- jobs all in China
much real cash wasted on expensive wars
health system taxes us all for bogus therapies
We have to spend money creatively and with great impact. This would involve stepping on the toes of most vested interests but it would bring our country back. It's not going to happen but here is a list. It would employ people. It would continue to give benefits long-term. It is all green and reflects the Club of Rome and Limits to Growth ideas that go back to early 1970s.
convert from carbon to solar
develop mass transit
improve efficiency of residences
restructure agriculture to be local and diversified
We have to learn from our current experience, not repeat the old patterns.
http://en.wikipedia.org/wiki/Boll_Weevil_Monument
As far as agriculture goes, local is not in their plans. This is in the Senate now.
http://www.youtube.com/watch?v=gOups0dfdwM
Witness: 'Death And Joblessness': Suicide Rates Spike For The Unemployed
Why does Obama and the Democrats continue to support these jerks??? These losers!
Are we Americans supposed to just quietly die off in the streets for you?
I think not!!!
I personally do not like the idea of purposely pursuing a "modest" inflation rate expecting that wages and prices will rise in sync. I think that is extremely naive and there is no proof that has ever worked.
Many of the jobs lost were fluff jobs. I mean they got created when there was enough leverage to sustain them.
Years ago I worked for a pharma executive. The problem was his new appointment didn't come with much of a staff. So he proceeded to build an empire in order to justify his job. Every year he added lots of staff to frankly just fill of cubes and push a lot of paperwork. True many got hired, but they also got fired quickly when the company hit a rough patch which it did. Eventually they realized the entire department was not necessary and my boss was let go.
A lot of the jobs lost were filled by unskilled labor, or college grads will light skills that the economy could not justify. There are millions of unskilled that we need to figure out as a nation how to get them back to work doing jobs that actually contribute.
What should that tell us?
THERE ARE OTHER COMPONENTS IN BUSINESS ENTERPRISE INCLUDING PRODUCTION OF GOODS AND SERVICES AND THE MARKETING THEREOF.
BERNANKE AS A PhD IN ECONOMICS KNOWS A LOT ABOUT MONEY, BANKING AND FINANCE. AND PAPER WEALTH.
BY VIRTUE OF HIS TRAINING AND EXPERIENCE, HE KNOWS RELATIVELY LITTLE ABOUT THE PRODUCTION OF REAL CONCRETE WEALTH. HE THEREFORE IS STARTING OUT WITH TUNNEL VISION.
WALL STREET HAS BECOME A PLACE WHERE OUR BEST AND BRIGHTEST CAN SIPHON OFF MONEY AND BECOME VERY RICH.
THE MOST THAT CAN BE EXPECTED FROM BERNANKE IS THAT HE HELP WALL STREET CONTINUE TO DO WHAT HAS BEEN DOING.