Has Main Street, U.S.A. finally turned the corner?
Last week’s Labor Department report that the unemployment rate dipped below 8 percent in September-- the first time since the Crash of ’08 – was welcome news to the Democratic presidential candidate and jobseekers alike. Wall Street recovered more than a year ago, but employment has stubbornly lagged, despite the Herculean efforts of the Federal Reserve to keep priming the monetary pump.
But no one is pretending that a 7.9% unemployment rate is anything to break out the bubbly over, just yet. Can the Fed really rescue Main Street? In this post, we’ll look at what the Fed has done, what it could do, and what the differences are, if any, between the two presidential candidates.
What’s The Fed For?
The Federal Reserve was given a so-called “dual mandate” by Congress in 1977:
“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.”
Reining in unemployment at the same time as keeping inflation in check can be a difficult balancing act. As William Greider pointed out in his terrific study of the Federal Reserve during the Reagan era, Secrets of the Temple, and elsewhere, the Federal Reserve has often concentrated more on keeping inflation in check through tight monetary policy than on boosting employment.
In fact, exerting downward pressure on wages by keeping unemployment comfortably raised (comfortably for employers, that is) has been a priority of corporate America, some have argued, one that the Fed successfully served, according to Greider. According to mainstream economists, “full employment” allows 4 percent to 5 percent of the workforce to be unemployed – and some argue that the definition of “full employment” should be revised upward to somewhere in the 6.5 percent - 7.5 percent range.
That’s a rate that would continue to depress wages (which have been stagnant or declining since the 1970’s) -- and leave many on Main Street struggling.
QE1 & QE2
The Federal Reserve in the Obama era has been faced with a very different compulsion than that of the Volcker or Greenspan era. The threat of deflation and a liquidity trap, not inflation, has been the dragon Ben Bernanke has been trying to slay. With QE1 and QE2, he’s thrown trillions of dollars into stabilizing the financial markets.
And it’s worked. At least, for now. The structural risk of another financial crisis has not been adequately addressed, but that's the job of Congress, not the Fed.
But increasing “production to promote effectively the goals of maximum employment” was not appreciably evident as a result of quantitative easing. As I’ve written before, Obama’s fiscal stimulus, not monetary policy had a far greater effect on creating jobs.
The Dead Weight of Mortgage Debt
Many say the persistence of the mortgage debt crisis is at fault, dragging down the economy with its dead weight. It must be solved before a real recovery is possible.
Despite historic lows in mortgage rates, the housing market remains largely depressed, (although there are recent signs that some regional markets may have touched bottom.) Nevertheless, millions of mortgages remain under water; foreclosures are high, with plenty more still in the pipeline.
Quantitative easing pushed mortgage rates down to historic lows.
But economist Michael Hudson says it did nothing to help Main Street or the housing market. Instead, he says, once QE1 backstopped the bank failures, QE2 was used by them to speculate on foreign currencies and interest rate arbitrage,
Trickle-Down Monetary Policy or Direct Help for Underwater Homeowners?
But can this kind of trickle-down monetary policy really work?
Like trickle-down tax policy (cut corporate taxes on the so-called “job creators”), it depends on pushing a remote lever and hoping it will move the marble down the right chute. The banks aren’t compelled to refinance distressed mortgages – or lend to homebuyers or small businesses, for that matter. Credit remains tight and mortgage costs are being pushed up by new fees, keeping many homeowners unable to refinance and buyers out of the market.
Housing advocates have long been calling for forcing banks to allow distressed homeowners to refinance at today’s historic low rates and to reduce the principal on home mortgages that are underwater. They wanted the federal government to take the housing crisis bull by the horns and directly help homeowners, not the banks.
The Fed finally began to listen. Without relieving mortgage debt the economic recovery would be much longer and more anemic.
The Obama Administration, which has been widely criticized for an anemic response to the housing crisis, agreed. It tried to get Fannie Mae and Freddie Mac –which are the biggest holders of distressed mortgages by far -- to reduce the principal on those loans. But FHFA’s Ed DeMarco refused, citing “moral hazard.” He complained that forgiving debt might lead investors to expect that debtors might not repay other loans.
Somehow, it’s not a moral hazard when corporations declare bankruptcy to liquidate pension, benefit and wage agreements with labor, but helping homeowners stay in their devalued homes so neighborhoods remain intact and economic activity in communities can continue is a “moral hazard”?
Romney and The Republicans: No Love Lost for the Fed
The Fed’s move toward the left (i.e. supporting relief for the beleaguered housing market and homeowners) has enraged Republicans. Romney understands that the debt overhang is suppressing recovery, but, in a call resonant of “let Detroit go bankrupt,” he would rather the banks just clear the toxic assets off the books by pushing foreclosures through.
He’s vowed to replace Bernanke as Fed Chairman if he becomes President. He’s also adopted the call by Ron Paul and the Tea Party to audit the Federal Reserve. In July, Paul’s bill passed the House to do just that, with 89 Democrats joining every Republican member in voting yea.
Romney’s running mate Paul Ryan has taken an even harder line on the central bank. In addition to supporting the audit, he sponsored a 2008 bill to force the Fed into a single mandate – fighting inflation. In other words, he doesn’t want the Fed to help increase production, but only to restrict the money supply, thereby exerting a downward pressure on wages. (For the record, Bernanke has said he supports greater transparency at the Fed, but decries attempts by Congress to control the Fed’s monetary policy, saying it would politicize the process.)
The Republican Party’s 2012 platform also calls for an annual Fed audit. But it goes even further, proposing a commission to investigate possible ways to set a fixed value for the dollar.” That begs the question: if the Republicans retain control of the House, and gain control of the Senate and Presidency, could a return to the gold standard be in the works?
But the key question to keep your eye on is this: how can the central bank best support Main Street and the American Dream with monetary policy? Greider addresses this issue, calling for a reinterpretation of the “vaguely defined ‘dual mandate,’ which has always been heavily biased in favor of Wall Street finance over the real economy.” He recommends a blending of monetary policy with fiscal policy, rather than allowing the two to go in opposite directions.
But he also poses a more fundamental issue: that society begin to treat the money the money created by government as really belonging to the people. It could then be used to do the kind of long-term investment – in clean energy, in efficiency, in infrastructure and education – that politicians like to talk about but often fall short of carrying out.
That would return the power of the Fed where it really belongs – to the American people.