14 Sep 2012 The Fed Goes “Main Street”
Ben Bernanke, regarded as the most innovative Fed Chairman in history, broke new ground yesterday as he pledged that the Federal Reserve would buy mortgage bonds until the economy gets closer to their goals. He said, “This is a Main Street policy, because what we’re about here is trying to get jobs going. We’re trying to create more employment. We’re trying to meet our maximum employment mandate, so that’s the objective.”
The open-ended bond purchase is reinforced with a commitment to keep interest rates low for years to come. Dissenters of the policy, one of which is on Mr. Bernanke’s board, argue that the policy will lead to runaway inflation. Think using gasoline to prime an inefficient pump – one spark, and well, you get the picture.
Nevertheless, the Fed is charged by Congress with these two goals – maintaining full employment and price stability. The Fed’s statutory mandate for monetary policy was set in the Federal Reserve Reform Act of 1977, which reads:
“The Board of Governors of the Federal Reserve System and the Federal Open Market Committee shall maintain long run growth of the monetary and credit aggregates commensurate with the economy’s long run potential to increase production, so as to promote effectively the goals of maximum employment, stable prices, and moderate long-term interest rates.”
While the mandate refers to three goals in the last sentence, economists most often characterize it as a “dual mandate” of maximum employment and stable prices. Moderate interest rates are assumed a necessary condition for the other two.
For the first time, Mr. Bernanke is more explicitly committing Fed actions to improvement in the job market. He is setting economic goals in addition to monetary ones. Mr. Bernanke believes that the Fed’s programs have had more impact on improvement than some others, but he understands that much more has to happen. He said yesterday, “I personally don’t think [the bond-buying program] is a panacea. I personally don’t think it is going to solve the problem.” But the Fed could help to “nudge the economy in the right direction” with its program. “If we have tools that we think can provide some assistance and we’re not meeting our mandate, then we have an obligation to do what we can.”
Mr. Bernanke and Fed board members have to be extraordinarily frustrated with what is going on in Washington. That they would make such a major policy shift to boost the economy just two months before an election is major news in and of itself. That the policy move was almost unanimous among board members (except Lacker of the Richmond Fed) says that the board is both worried that the economy is not turning around and that they are the only ones doing anything about it.
But with only one oar in the policy boat, how much can they really accomplish? They know that the tremendous uncertainty created by the ‘fiscal cliff’ of tax hikes and dramatically reduced government spending, as well as soaring deficits and debt, are flooding the boat, all the purview of Congress, make economic propulsion all the more difficult. Not until after the elections will the two houses of Congress and the Administration put their oars back in the water, to pull with or against the Fed.
The mortgage buying program is meant to further drive down long-term interest rates and push investors into other assets such as stocks. In just two days the S&P 500 has spiked 2.23% and the 7-10 Year Treasury has fallen .68%. The program is also designed to stimulate the housing industry by driving down mortgage rates to increase more demand for homes and for refinancing. And, as the Fed is essentially printing money with this and its two previous quantitative easing programs, a third consequence, and perhaps the most likely to have long-term negative results is the driving down of the dollar. In the near future a cheaper dollar will spur exports and domestic capital investment, but likely at the expense of chronic inflation if the surplus dollars can’t be soaked up fast enough when the economy starts moving again.
Jon Hilsenrath and Kristina Peterson of the WSJ report that economists surveyed by the Journal have said that “a hypothetical $500 billion Fed bond-buying program would reduce the jobless rate by just 0.1 percentage point in a year’s time. In a survey of 887 chief financial officers by Duke University and CFO magazine, 91% of respondents said they wouldn’t change their investment plans even if interest rates dropped by a full percentage point.”
These are profound statements. They imply that many smart people believe that even free money is not enough to turn this economy around and stimulate hiring. Indeed the numbers bear them out. Last week’s unemployment reports showed that 8.1% of American seeking jobs cannot find them. But that number is literally only the tip of a very large and ugly icy mass. The ‘official’ number of unemployed fell from 8.3% to 8.1%, not because more are working, but because a larger number of unemployed simply gave up looking or were classified no longer part of the job market because of measurement criteria. Added these uncounted to those who are ‘underutilized’ and the employment rate in this country is closer to 19%. Of those officially counted as unemployed, 40.7% have been out of work for 27 weeks or more – that’s 5.2 million “long-term” unemployed Americans. That’s a lot closer to depression numbers than any recession we have experienced as a nation.
Mortimer Zuckerman, chairman and editor in chief of U.S. News & World Report, says “we are experiencing, in effect, a modern-day depression. Consider two indicators: First, food stamps: More than 45 million Americans are in the program! An almost incredible record. It’s 15% of the population compared with the 7.9% participation from 1970-2000. Food-stamp enrollment has been rising at a rate of 400,000 per month over the past four years.”
“Second, Social Security disability—another record. More than 11 million Americans are collecting federal disability checks. Half of these beneficiaries have signed on since President Obama took office more than three years ago. These dependent millions are the invisible counterparts of the soup kitchens and bread lines of the 1930s, invisible because they get their checks in the mail.”
Whether you are for it or against it, the Fed’s QE3 is at least a glimmer of hope that somebody in Washington is moving forward to help the unemployed. After November 7th when the new group, whoever they are, take over, getting this country back to work has to be the top priority among the nation’s problems. Debt, taxes, national defense and policy are all vital too, but the very foundation of our economy and country is a productive workforce.
Zuckerman suggests five actions which are critical for our new government to implement immediately:
- Find the money to spur an expansion of public and private training programs with proven track records.
- Increase access to financing for small businesses and thus expand entrepreneurial opportunities.
- Lower government hurdles to the formation of new businesses.
- Explore special subsidies for private employers who hire the long-term unemployed.
- Get serious about the long decay in public works and infrastructure, which poses a dramatic national threat. Infrastructure projects should be tolled so that the users ultimately pay for them.
The cause of the economic uncertainty that exists today lies squarely at the feet of today’s policymakers (with the exception of the Fed). The causes of unemployment in this country spring directly from that uncertainty. We have it in our power as voters to elect a government that will compromise, not ignore, ideological differences in order to produce long-term policies that will get America working again. Replacing the unknown with the known, even if not ideal, will go a long way toward getting us innovating and producing again.