A Pervasive Timidity
Acknowledging its concern with the obvious sluggishness of the economy, the Federal Reserve Board has responded by actually doing something, instead of just talking about maybe doing something. But the something they decided to do was kind of the bare minimum in the context of massive unemployment, dis-inflation and depressed demand.
At its Open Market Committee meeting Tuesday, the Fed announced it would begin purchasing long-term Treasury securities with the proceeds from maturing assets it has held, including mortgage-backed securities. By maintaining its current level of assets it will also maintain current liquidity levels in the economy.
That’s something, but it isn’t much. And it certainly is nowhere near what the Fed could and should be doing, as I explained in an earlier post.
On the heels of the latest scary jobs report, it’s clear that the economy actually needs a large-scale coordinated policy response from the administration, Congress and the Federal Reserve. The administration and Congress should be crafting the kind of large public jobs stimulus that the private sector needs to generate hiring. And the Fed should be expanding, not just maintaining, its balance sheet by purchasing more long-term Treasury securities to help boost demand.
Instead, we get partial measures. The best of them recently was the good and necessary $26 billion bill just passed and signed by the President to help keep more teachers in our classrooms and help states maintain more needed services. That same bill also addresses an urgent need by beginning to close the tax loopholes that allow corporations to ship jobs overseas. But the bill wound up being cut back to half of its original funding for education and the states. So it will help maintain jobs and services — but not all of them.
Similarly, then, the Fed has taken a kind of baby step, but it is symptomatic of a pervasive timidity on jobs and economic policy.
From the Economist blog:
Previously, the Fed had planned to allow its balance sheet to contract slowly as those securities matured. Now, it has decided to maintain a large balance sheet, given economic weakness. Finally, it is adjusting the composition of its balance sheet away from MBS and toward long-term Treasuries.
The long and short of it is that the Fed has taken the minimum possible non-contractionary action. I am struggling to understand it. Perhaps the Fed is wary of doing too much at once. Perhaps it is interested in demonstrating that it is aware of the economic risks but not yet convinced that further action is warranted. For now, though, it seems as though the Fed has acknowledged risks but refused to do anything substantive about them.
From Paul Krugman:
What’s my reaction? The Fed’s current policy is grossly inadequate, logically bizarre, and slightly — but only slightly — encouraging.
Not long ago gradual Fed tightening was the default strategy; but as I said, at this point the Fed realized that continuing on that path would have unleashed both a firestorm of criticism and a severe negative reaction in the markets.
What we need to do now is keep up the pressure, so that at the next FOMC meeting the members are once again confronted by the reality that not changing course would be seen as dereliction of duty.
In a better world, the Fed would look at the state of the economy and do what was right, not the minimum necessary.
The author is the winner of the 2010 CREDO Mobile/Netroots Nation award for Blog Activist of the Year
Tags: Federal Reserve, Jobs, stimulus, unemployment
I am not sure what is meant by “public jobs stimulus that the private sector needs.” A stimulus is not going to work, for the same reason the last stimulus didn’t work – it didn’t address the hiring process. A New Deal jobs program is needed so that anyone who wants to work can sign up and work. I have recently heard about an interview process in my line of work where a company is making candidates undergo two days of interviews, one on each coast, with a total of 12-16 people each giving the candidate a technical exam. It is getting ridiculous. People should not have to go through so much just to get a job. Long term unemployment will persist as long as it is considered as a supply and demand issue.
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olderworker -
A New Deal-style jobs program is exactly what I mean by a public jobs stimulus. Not only is it needed to directly re-employ unemployed workers; it’s also needed to help boost demand in the economy to generate an impetus for private sector hiring.
Your story about the ridiculous interviewing process makes me want to tear what’s left of my hair out.
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The immediate issue is that people need aid — right now! Call it stimulus, welfare, whatever you wish, and stuff your comments about “a culture of dependency.” Years of massive corp. tax relief drained the budget and left us with fewer — NOT more — jobs. End it, and move those funds into relief for We the People. By necessity (and like the stimulus, but more comprehensive), this money will go directly into consumer purchases, thereby increasing the need for production, increasing the need for more workers. It must start with getting money to the people.
We hear that government “doesn’t create jobs.” When the private sector fails, gov does, indeed, create jobs that meet the country’s needs, whether the WPA or any other measures. Handing money to corporations doesn’t create jobs, and we have seen this for ourselves, over the past quarter-century. It is precisely the role of government to take measures necessary to preserve and protect the US, using OUR collective resources (tax dollars) to do so.
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You are so so right, DHFabian. A 21st century WPA — a major public investment in supporting millions of productive workers in many urgently useful endeavors. And it could be paid for by restoring fair taxation for corporations, financial and trading firms, and the fortunate wealthy — along with a new national bank for reinvestment and development, which could issue bonds to be purchased by the Fed as well as private market participants. A bank to build the future and relieve the nation’s long-term debt. All of this is possible, and it isn’t rocket science.
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The nore I look at this “economy” the more depressed I get. The military is cutting, AGAIN, needed forces & programs because they can’t get funding. The Republicans want to give still more tax breaks, & every other kind of give back they can think of, to the rich & big business because this will “stimulate” the economy. BULLSHIT! The middle, & lower, class make up 99% of America, & WE are the ones who need work to put money back into the economy because we spend the most money, Wehn we have some, that is. Big business takes what the Fed gives it, & immediately ships still more jobs overseas to the cheapest labor available because it makes the “bottom line” look better, be damned to the fact that the “bottom line” keeps looking more like the bottom of the barrel. If the people, & I mean those of us who work for a living, Don’t wake up & shake up the politicos there won’t be an economy anymore. Just the rich, living high on the hog, & everybody else slowly starving.
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A big part of the problem is the Federal Reserve system itself – not just its “unresponsiveness”. We have to recognize that loose monetary policy in a depression such as this one is a double-edged sword, and that it got us into the mess in the first place. Inflation and deflation are at war with each other, as production teeters while at the same time many resources are peaking. Expanding the monetary base for stimulus now, when it has already gone way up, is treading on loose ground because if the stimulus doesn’t create immediate and lasting improvements in efficiency, energy and food security, the massive inflation that will come (and will in some fashion come regardless) will trash the wealth base of the bottom 60 percent. Jobs stimulus or no, this is, of course, the plan. Trash the dollar, inflate our way out of debt and replace it on the global level with IMF Special Drawing Rights (SDRs). We must recognize that fiat money and the Federal Reserve are NOT our friends. That said, a surgical stimulus done right is necessary. A laizze faire approach would have us piss away what’s left of our monetary base and resources like the band playing while the ship goes down.
Two more cents: Want a fair but simple and progressive tax system? Replace corporate and personal income taxes with a flat tax on CO2.
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ps – …or maybe the bottom 70 or 80 percent; I just picked a number :-p
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