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Robert Pollin: Janet Yellen distinguished herself in her first speech but it remains to be seen if she will change the policies of the Federal Reserve

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SHARMINI PERIES, EXEC. PRODUCER, STRATEGIC PLANNING, TRNN: Welcome to The Real News Network. I’m Sharmini Peries, coming to you from Baltimore.

Newly minted chairwoman of the Federal Reserve Janet Yellen Monday in a speech laid out her plan to deal with the considerable slack in the U.S. economy and the labor market, implying that the Federal Reserve would continue a highly stimulative monetary policy for the foreseeable future. In a carefully crafted speech that sets her apart from her predecessor, she appealed to those that supported her appointment.

To discuss all of this and more, we’re joined by Robert Pollin. Robert Pollin is a professor of economics at the University of Massachusetts Amherst. He is the founding codirector of the Political Economy Research Institute (PERI). He’s the author of many books, the latest among them Back to Full Employment.

Bob, thank you for joining us.

So, Bob, what is your take on Janet Yellen’s latest speech she made last week?

ROBERT POLLIN, CODIRECTOR, PERI: Well, it was her first speech as the new chair of the Federal Reserve, and she delivered it this past Monday, four days ago.

In some ways I think it’s truly extraordinary, this speech. Why? Well, number one, she gave the speech in Chicago, not in New York on Wall Street. She gave it to–it was at a conference of community organizers, not a bunch of Wall Street bankers. She explicitly said that the job of the Federal Reserve is to worry about Main Street, not Wall Street. She talked about the plight of unemployed people. She described three unemployed people by name, full names, and she told some of their stories and the difficulties, the struggles they’re facing. I think this is extraordinary, if not totally unprecedented, for a chair of the U.S. Federal Reserve, or, for that matter, any central banker ever, to have made this kind of statement as her opening inaugural statement.

And I think there’s two kinds of basic lessons and points to extract from this. Number one, we have to remember how Yellen got in this job. President Obama didn’t want to appoint her. He wanted to appoint Larry Summers, who is very much a dear friend of bankers on Wall Street. It was really only due to the pressure, extreme pressure from social movements, political people, unions, to fight to prevent Summers from getting appointed and to support Yellen–that’s the only reason why Yellen is in this job. So that’s an important lesson that we can–progressives can deliver victories if we’re well focused, well organized, and if we have someone of Yellen’s qualities that we can support.

PERIES: Bob, as you say, the Fed has been following these same policies for the last five years. Why is Yellen different? And why should we believe her, compared to her predecessor?

POLLIN: Right. So the speech was designed to support the policies that the Fed has been pursuing now for basically five years, which is to maintain the short-term interest rate that it controls, the so-called federal funds rate, to maintain that rate at zero. Now, at one level, that appears to be extremely accommodating, extremely expansionary, stimulative. Well, you can’t get an interest rate lower than zero. And that’s the way that they think, by providing credit at next to zero or at zero, that businesses are going to borrow and create jobs.

The problem is–and this is a fundamental problem. I love the speech, but we need some action, too. The problem is we’ve been running this policy for nearly five years, and as Yellen herself acknowledged, we still have a massive problem of unemployment. By the Fed’s own broader measure of unemployment, we’re at something still at around 13 percent, 20 million people. This is five years after the recession officially ended.

So the policy is not adequate. And no matter how wonderful Yellen’s speech was, the policy is still not adequate.

So what do we do? Number one, the reason why the policy isn’t adequate: banks are getting free money. Okay? They can borrow for free. We know that. That’s the policy. The problem is the money goes to the banks and it stays stuck in a bank. The banks are hoarding money. I just checked, right before I came on. As of the most recent data from the Fed itself, the commercial banks in the U.S. are holding $2.3 trillion in cash. Two-point-three trillion, that’s about 14 percent of U.S. GDP.

Move that money out into the economy, you end the unemployment crisis. Keep the economy–keep the money stuck at the Fed and the banks, hoarded by banks–that’s why the Fed’s policy isn’t working. So you must move that money out into the economy. And the first step in doing so is to tax the banks. If the banks are going to take the money from the Fed, which they can take for free, then they have to be responsible for moving it into the economy, and if they’re not, the money has to be taxed until the banks start feeling it and feel the incentive to find loans to make, especially to small businesses. At the same time that banks are hoarding cash, small businesses continue to be starved for credit. The net lending to small businesses is effectively zero, has been for five years.

PERIES: Bob, are there any indications that Janet Yellen’s going to be doing business unusually, in terms of forcing banks to spend the money and having different rules of engagement in terms of receiving this free money and what they do with it?

POLLIN: I don’t think–you know, there are no clearer indications that she’s going to take extraordinary measures beyond the–. I mean, yet, holding the interest rate at zero is itself extraordinary. I mean, it’s never happened in human history, to my knowledge, that the Central Bank is giving out free money–not for two months; for five years. So that in itself is extraordinary. But we’ve tried that and it isn’t enough to get the job situation to improve dramatically. That’s the evidence.

So now they have to move beyond that. And is there evidence that Yellen is about to do anything? No, not yet. But that’s why–she has proven that she at least hears–she at least is aware that there continues to be mass unemployment, that her job is to deal with that. I mean, that is a major improvement relative to her predecessors. And the job of people who care about these things is to keep pushing on Yellen.

So far, the signs are quite good that she did make this speech, she directly said that she cares about people who are unemployed. She even said, you know, we can keep training people and training people, but if there aren’t the jobs, then there’s no point. You know, training doesn’t do it. We have to–the job of the Fed is to stimulate jobs.

PERIES: So is this a preface, Bob, in terms of continuing to give free money and not holding them accountable to spending it? I mean, we know that and you’ve been saying that. But more importantly, what is it that she can actually do in order to ensure that this money gets spent in a way that creates jobs?

POLLIN: Well, like I said, the first thing the Fed could do (they don’t have to ask Congress): they can tax the banks’ hoards. You don’t call it a tax. If you call it a tax, then you have to get approval from Congress.

By the way, Congress should pass this in one second. The Republicans should be out fighting for it, because it helps small businesses and they, Republicans, purport to be the champions of small business.

Okay. They’re not going to do it, because it’s a tax, and we don’t want, especially, a tax on banks.

So Yellen and her cogovernors of the Fed, all they have to do is do–they say, well, we have a maximum reserve requirement for the banks, which means, we’re going to establish a maximum amount of money that the banks can hold for free relative to their lending. And if they’re not lending, then we are going to charge them for not lending. The Fed has the power to do that tomorrow, and they could do that tomorrow. They have never done such a thing, but they could do that tomorrow.

Quite the contrary, today, actually, the Fed is still paying the banks to hold the cash. They pay them one-quarter of 1 percent just to hold the cash and do nothing with it.

PERIES: How can the Fed implement this policy tomorrow, in terms of taxing the reserve they’re holding?

POLLIN: Well, the authority within the Federal Reserve lies within the so-called Board of Governors and the so-called Open Market Committee. That’s 12 people. Yellen is the chair. Yellen has the most power. All they have to do is vote it in and then tomorrow it becomes policy, these 12 people.

PERIES: And is there impediment on the board itself in terms of her being able to pass such regulation?

POLLIN: Well, you know, of course, they’ve never passed anything like it. They have passed the opposite: they are paying banks today to hold their cash. At the very, very, very least, they could stop paying one-quarter of one percent, and that could then signal to the banks that things are going to start moving in the other direction, that is, you have to start making loans. The banks don’t want to make loans to small businesses because they forgot how to do it. They’d rather be out speculating. And they hold their cash as their collateral, enabling them to speculate. That’s why they’re holding.

And, again, the number is 14 percent of GDP. You could take even 10 percent of that–that would be $230 billion–just 10 percent, let them keep 90 percent, 10 percent would have a major impact on job creation in the United States.

PERIES: Bob, I hope you keep an eye on what’s going on and report back to The Real News.

POLLIN: I’ll be very happy. Thank you for having me on.

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


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Robert Pollin is Professor of Economics at the University of Massachusetts in 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.