Robert Pollin: Unless Fed forces banks to lend for productive activity, 0% interest rates to banks only helps banks


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PAUL JAY, SENIOR EDITOR, TRNN: Welcome to The Real News Network. I’m Paul Jay in Washington. And in Washington on Tuesday, the Federal Reserve Open Market Committee met in response to the crisis, and they announced that the cheap zero percent–virtually zero percent money they loan to banks is going to continue into 2013, and they said that growth is considerably slower than they thought it would be at this point. Some people may think that’s a little bit of an understatement. Now joining us to talk about all of this is Bob Pollin. Bob is the codirector of the PERI institute in Amherst, Massachusetts. Thanks for joining us again, Bob.

PROF. ROBERT POLLIN, PERI, UMASS AMHERST: Thank you for having me, Paul.

JAY: So what do you make of the Fed’s statement, to start with?

POLLIN: Well, I think there are some significant things in the statement, though, of course, all couched in the oblique way that the Federal Reserve has to speak to the rest of the world. But number one, they do acknowledge–as you just said, they acknowledge that we’re in serious trouble in terms of a recovery. They say, in their words, the downside risks remain very serious. That means risks of a double-dip recession or something equivalent–no growth, slow growth that we won’t get any employment gains out of. So they’re saying, first and foremost, that possibility is very, very real. Okay. So in addition they’re saying there is no inflationary pressure in the economy other than coming from oil and food, that is, commodity markets. And you and I have discussed the sources of commodity market speculation, commodity market inflation in the past. We’ve talked about the doubling of gasoline prices over the past two and a half years tied to speculation. The Fed is acknowledging that that is the only source of inflation in the economy. In fact, I just checked the most recent data on official inflation from the Bureau of Labor Statistics, for June, the last official data. We actually had deflation in the economy. That is, the overall prices went down, down 2.6 percent. So the real threat in the economy in terms of prices is twofold. Number one, the upward pressure from speculation on oil and food prices, and number two, that every other price is collapsing. That’s–and the Fed is acknowledging that.

JAY: Well, their prescription of what to do, to continue to give cheap money to the banks, seems like a zero-sum game, like that’s what they’ve been doing and the banks aren’t loaning money.

POLLIN: Right.

JAY: They’re sitting on cash. And, in fact, if anything, part of the problem in the world right now is how much cash is being sat on. And they don’t know what to do with it, so they’re shoving it, more and more of it, into T-bills, you know, which is ironic after T-bills get downgraded, which everyone’s ignoring.

POLLIN: Right.

JAY: But there’s no prescription for more jobs, even though the Fed statement claims that’s supposed to be one of their priorities.

POLLIN: That’s right. Well, again, at least, again, in the very, very oblique way that the Fed communicates, they are, number one, at least acknowledging this as a severe problem. Remember, it was just a few days ago that we ended this absurd debate about the debt ceiling, out of which both sides of the debate were saying the real problem is excessive government debt and the need is for austerity in the economy. So both sides, Democrats and Republicans, were on the same page on that fundamental point. They were debating around how best to address this, what they call overriding problem of government indebtedness. At least the Fed has come out today and said the overriding problem is fear of a double-dip recession, and that they, in their responsibility to maximize job opportunities, at least they’re thinking about it. Now–.

JAY: That’s today. I mean, as you said, like, a week ago, all the same people, all they would talk about is debt.

POLLIN: Yeah, it’s not the same people, ’cause the Fed is different than Congress and the president. Congress and the president were all talking about debt.

JAY: But you did. Bernanke, too, was at a hearing where he was talking about debt, too. I mean, the financial pages, you know, for weeks they’re all talking about debt, and now all of a sudden you read The Financial Times and money manager after money manager is talking about the problem of joblessness.

POLLIN: Yeah. Well, at least we’ve made progress. There is progress in human affairs, and we’ve seen progress from last week. This statement is a marker there. Now, they do also make a couple of other oblique statements that almost nobody can decipher, but I will try to decipher it a little bit. That is, they say in their statement that they are prepared to purchase securities with the revenues they receive from the interests payments on the debt that they hold. Now, what does that mean? It probably means nothing. It could mean that the Fed is thinking about buying securities in the market other than the ones that they have bought. Generally, the Fed just buys US treasuries. Generally, they buy short-term. Quantitative easing that they had been doing for the past year, they were buying long-term treasuries. Now, it could be interpreted by their statement that they want to intervene in the market to buy commercial paper, corporate bonds, and if they do that, that could help drive down the interest rate on corporate bonds, which in turn could actually have some positive effect on businesses increasing their borrowing and investing, and that would be a major step forward.

JAY: So they’re still all playing within a field which seems to be thimble-thin, in the sense that no one’s talking about it in Congress, the Fed, or anywhere else, about what a lot of people are saying is some kind of direct jobs program. I mean, I know we’ve talked about this before, but is anything short of some massive direct jobs program actually going to have any effect at all, in your opinion?

POLLIN: Well, the Fed doesn’t do a direct jobs program. The Fed does have other tools. And as we’ve talked about, the tool that the Fed has right now–and I think it is a very, very big and potentially powerful tool–is the fact that they have shoveled out all this money, which now amounts to $1.4 trillion in cash reserves being held by commercial banks. That was in the news today. Bernanke himself, coming up to this statement and meeting, acknowledged that they have to try to figure out how to get this $1.4 trillion out into the economy creating jobs. Now, that’s 10 percent of GDP. This is no small change. Now, there was speculation before the meeting that the Fed might consider reducing or even eliminating the interest rate that the Fed pays the banks for the privilege of holding this free money. So the bank is giving away–the Fed is giving away free money to the banks, and on top of that they pay interest rate of 0.25 percent to the banks to hold the money. Now, if we want to think about starting to tax that excess cash of the banks, at least start by eliminating the interest that the Fed is now paying. That would at least kind of focus the minds of the commercial banks around the idea that not only are they getting free money, but they’re getting paid to have free money. And if the Fed were to signal that that’s going to–not going to happen, then the banks might start thinking about making loans, especially to small businesses, because small businesses are the ones that are credit-starved right now.

JAY: Okay, but there wasn’t a word of this in the statement.

POLLIN: Not one word, Paul.

JAY: Which, I guess, those that see a problem with the way the Fed is controlled by big banks won’t be surprised, ’cause there’s not a single bit of pressure on them. So then what is the point, then? How does keeping zero percent money going, if you don’t have some way to pressure the banks to use it in the domestic economy–and they haven’t even talked about the extent to which we’ve talked about before, the carry trade, where the banks are taking this zero percent money and actually loaning it overseas and picking up interest spreads. Then this policy amounts to nothing, doesn’t it?

POLLIN: Yes. It’s–the only advantage of it relative to the world before the statement was made is at least the Fed did say that we face a serious downside risk, i.e., a risk of moving into recession again. Again, relative to last week’s debate and the debate leading up to that for the past two months about this debt ceiling, at least it’s an acknowledgment that the real problem in the economy is unemployment and threat of recession. So, yes, beyond that, nothing has changed, but at least maybe we can start working from at least this interjection of some semblance of rationality and move forward with a pro-jobs type of agenda. And at this point, let’s face it: if it’s going to come from anywhere, is going to have to come from the Fed. It is not coming from Congress. We already saw how Congress thinks about macroeconomic policy with the debt ceiling debate. So the Fed has the tools. Again, the Fed could play with that $1.4 trillion that they’ve got sitting there, and at least inject, I don’t know, a third of it into the economy. That itself would generate a reasonably strong recovery with job creation.

JAY: Thanks very much for joining us, Bob.

POLLIN: Okay. Thank you.

JAY: And thank you for joining us on The Real News Network.

End of Transcript

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