The Fed Targets Unemployment With More Money for Banks
Robert Pollin: The Fed breaks ground with unemployment target but pushing more money into banks without requiring more lending won't solve the problem - December 28, 2012
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Robert Pollin is professor of economics at the University of Massachusetts Amherst. He is the founding co-director of the Political Economy Research Institute (PERI). His research centers on macroeconomics, conditions for low-wage workers in the US and globally, the analysis of financial markets, and the economics of building a clean-energy economy in the US. His latest book is Back to Full Employment. Other books include A Measure of Fairness: The Economics of Living Wages and Minimum Wages in the United States and Contours of Descent: US Economic Fractures and the Landscape of Global Austerity.
PAUL JAY, SENIOR EDITOR, TRNN: Welcome to The Real News Network. I'm Paul Jay in Baltimore. And welcome to this week's edition of The PERI Report. Now joining us from Amherst, Massachusetts is Bob Pollin, cofounder and codirector of the PERI institute in Amherst, Massachusetts. Thanks for joining us, Bob.ROBERT POLLIN, CODIRECTOR, POLITICAL ECONOMY RESEARCH INSTITUTE: Very happy to be on. Thank you, Paul.JAY: So what's caught your attention this week?POLLIN: Well, there was a very important report statement from the Fed chairman, Ben Bernanke, last week, in which he said that the Fed is going to continue its essentially zero interest rate policies untilâand he set specific targetsâuntil unemployment falls below 6.5 percent or inflation rises above 2.5 percent.Now, there's a lot of extraordinary features to this statement. Number one, the fact that he's setting a target at all is significant, and the fact that he set an employment target, because for a generation now, central bank policy has been centered around the idea that their job is to set an inflation target, and unemployment can go wherever it needs to go, but unemployment must be kept under control, so the fact that inflation must be kept under control. So the fact that Bernanke even announced an official employment target is significant, and it is a step away from the neoliberal framework of conducting monetary policy that prevailed prior to the recession. Now, what about the target itself? Well, Bernanke also acknowledges, he says, getting us to 6.5 percent unemployment is almost certainly not going to happen until the end of 2015, if that. Their own target for the coming year, the Fed's own target for the coming year for unemployment, is between 7.3 and 7.7 percent, official unemployment. Today the unemployment rate is officially 7.7 percent. So the Fed itself is suggesting they don't really think that we are going to get any significant gains in unemployment over the full 12 months, even with a interest rate that they're setting at zero percent.Now, what does this all mean? Bernanke is essentially acknowledging that he doesn't have the tools. As he himself said in his statement, if I had a magic wand and could reduce unemployment to 5 percent, I would, I'd wave the wand. He's saying he doesn't have the tools.Now, why doesn't he have the tools? The Fed, as we've discussed in earlier shows, the Fed has set the interest rate that they target, the federal funds rate, at zero, at zero. Banks get money for free. They can get as much as they want for free. And that's supposed to go out into the economy, stimulate businesses to expand and hire workers.JAY: Except it ain't.POLLIN: Except that it ain't. And Bernanke, to his credit, without using my words, of course, he's acknowledging that this isn't working.Now, the point is the banks are taking up their side of the deal. They're taking the money for free, and they've hoarded it. We've discussed it before. As of a year ago, the commercial banks' cash hoard was $1.6 trillion, more than 10 percent of national GDP. I checked the most recent data that just came out about ten days ago. It is now way down, way, way down, all the way down to $1.4 trillion. It isâafter two years, the cash hoard, in other words, has shrunk by only $200 billion. The banks are not moving the money into the economy. Therefore, that means, as Berrnanke's own statement conveys, we need a much more aggressive set of policies at the Fed and elsewhere to fight to bring down unemployment.JAY: And, Bob, isn't he planning to shovel more money into the banks, in the sense that he's going to continue buying T-bills and such? But isn't a lot of that being bought from the banks, which is another way to hand cash to the banks?POLLIN: Yeah. Well, of course, that isâthe Fed is engaged at the end of their third round of so-called quantitative easingâwhich means buying Treasury bonds held by banks. That's what it is. So, yes, that is also putting more money into the coffers of the banks.We need to just confront the basic factâand Bernanke'll never say it out loudâthe banks are completely dysfunctional in any kind of social sense of being institutions that will supply credit to the private sectorâwe're talking about to small business, the so-called job creators. They are not doing their job. The money is not going out to small businesses so that small businesses can expand and sustain a decent recovery to push down the unemployment rate. That is the essence of Bernanke's own statement.JAY: Now, the fact that he probably can't even get to 6.5 is something. But even if in theory he could get to 6.5, does that mean that the Fed thinks 6.5 is the new norm for what they would call, quote-unquote, "full employment"? In other words, is thatâ.POLLIN: I don't thinkâhe doesn't say that. But, you know, what he is saying, that even getting there is going toâhe's saying thatâthe Fed is saying they don't think they can get there in 2013. He's saying they can'tâhe doesn't think he can get there until the endâmaybe till the end of 2015. So I guess in that sense it sounds like the new normal is going to be 6.5 percent or better. So we need to completely transform the debate on this question, because when we say 6, even 6.5 percent official unemployment, that does not take account of all the people who are underemployed or who have dropped out of the labor force because they were discouraged, for example, the last data on unemployment, where we saw the official rate for last month did go down from 7.9 percent to 7.7 percent. But the only reason it went down was because people dropped out of the labor force. There are actually fewer jobs. There's 115,000 fewer jobs in November relative to October. The only way we got an improvement in the unemployment rate was that 350,000 people dropped out of the labor force. So we need to think through a completely different set of policies beyond what even Bernanke is talking about. And I give Bernanke credit for being the only major policy figure in Washington who keeps pounding on the point that we have to have something serious going on to fight unemployment. He just isn't willing to make the effort or to utilize, to create new tools to push out the money that is sitting in the banks, getting it into the hands of business to create jobs.JAY: Now, you've talked before about some kind of mechanism of a clawback, where someâmake use of some kind of tax mechanism to force the banks to lend money. But doesn't there has to also be something done, you know, people on the demand side, that if there isn'tâwages don't go up and people don't want to buy more stuff, there's just no reason for banks to want to loan to small business?POLLIN: It's both things going on at the same time. You're right, Paul. So this ties back into the debate around the fiscal cliff and fiscal policy. The federal government needs to inject more money into the economy through deficit spending. Yes, deficit spending. That means we need to defend spending at the state and local government levels, we need to rehire the teachers, the nurses, the police, the firefighters, and get them back to work. We need to expand spending at that level. We need to expand unemployment insurance for the long-term unemployed so that people don't face, you know, devastating financial crises. And those measures will in turn inject demand back into the economy. We need to expand investments in infrastructure and the green economy. There was some of that in the 2009 stimulus, but that money is gone. So we need to put that money back in. We need another stimulus program. It needs to be better-designed. And then we need to force the banks to put the money that they are hoarding that they got for free into the economy, 'cause that's the only way.JAY: And isn't there another piece of this, too, which is, many, if not the majority, of the biggest corporations in the country are also sitting on mountains of cash they don't want to invest, more or less for the same reasonsâthey don't think there's enough business opportunity?POLLIN: The corporations are sitting on somewhere on the order of $2 trillion in cash and other liquid assets because they don't want to invest. There is an issue here which also gets back to another question of financial regulation, which is, people who are hoarding cash who don't see any opportunities also think that around the corner there may be another financial bubble, and they want to be primed to take part in the bubble, that is, when asset prices go up very, very quickly, for example, prices of oil or prices of food, or a stock market bubble. That's where they think they're going to make their big killing. They don't want to put money into these investments that mean small expansions of business, you know, normal returns. And so they think that the financial system is still capable of generating another bubble. That's because we haven't established strong enough regulations to prevent bubbles from happening that then lead to another round of crashes.JAY: Alright. Thanks very much for joining us, Bob.POLLIN: Thank you very much for having me, Paul.JAY: And thank you for joining us on The Real News Network.
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