Robert Pollin: Expected new Fed chair Janet Yellen will continue Bernanke’s policies of shoring up Wall Street banks with trillions, but the Fed could help Main Street with different policies.
JESSICA DESVARIEUX, TRNN PRODUCER: Welcome to The Real News Network. I’m Jessica Desvarieux in Baltimore.
During the height of the financial crisis in late 2008, the Federal Reserve launched quantitative easing. That basically means the Fed purchased bonds from Wall Street. The program was intended to provide credit to Main Street homes and businesses, but five years later later, many critics claim the principal beneficiaries have been Wall Street banks.
We asked some folks here in Baltimore to get their thoughts on this policy.
DESVARIEUX: Now joining us to get into the numbers and unpack all of this is Bob Pollin. Bob is the founder and codirector of the PERI institute at UMass Amherst, and he joins us now from Amherst, Massachusetts.
Good to see you again, Bob. Thanks for being with us.
PROF. ROBERT POLLIN, CODIRECTOR, POLITICAL ECONOMY RESEARCH INSTITUTE: Thank you very much for having me on, Jessica.
DESVARIEUX: So, Bob, can you just briefly explain the Fed’s bond-buying program known as quantitative easing?
POLLIN: Yeah. The quantitative easing is a variation on what the Fed always does. The Fed basically buys bonds in order to lower interest rates. And the typical way that they used to buy bonds was buying very short-term bonds to lower just the short-term interest rate. But under quantitative easing, the Fed also buys longer-term treasuries, like five years, ten years, instead of three-months, six-months bonds, in order to push down the long-term interest rates, as well as the short-term interest rates, because as you said at the top of the show, the interest rates that apply to businesses haven’t come down nearly as much as the interest rates that are available to the big banks. So even though we are five years into this very aggressive monetary policy, what we’ve still seen is that small businesses have been starved for credit since 2008.
DESVARIEUX: And, of course, you know that vice-chairman of the Fed right now Janet Yellin, it looks like she’s going to be confirmed and become the new Fed chair. She’s come out saying that she’ll basically keep the same stimulus program as the current chair, Ben Bernanke. What’s your response to claims that quantitative easing has mostly only benefited the banks?
POLLIN: Well, it hasn’t only benefited the banks. It has vastly, disproportionately benefited the banks. That’s unfortunate. So it’s really too bad.
As I think I’ve said on previous occasions on the show, given, you know, the state of conceivable people to take over at the Fed, Janet Yellen, in my view, is about as good as you’re going to get, that she is concerned with unemployment, she is concerned with well-being for low-income people and improving conditions.
All that said–and the Fed is operating by historic standards an extremely aggressive policy by keeping the interest rates for banks so low. But that policy is only a stimulus for the banks so far. The banks have piled up $2 trillion in cash reserves–nothing like that has ever happened, 12 percent of U.S. GDP, while the small business sector overall is still starved for credit. In fact, overall they have not gotten a dime of net new create credit since 2008–again, also unprecedented.
So the problem is not stimulus/no stimulus. The problem is Yellen and Bernanke are practicing a stimulus program that is not well designed to accomplish what needs to get accomplished, which is to deliver affordable credit to small businesses and to expand opportunities for working people, not just for the banks.
DESVARIEUX: [inaud.] a little bit, Bob, but I want to get into more of what the bank could be doing to help everyday people. The way you look at it, what could the Fed actually be doing policywise to make sure that banks are giving out loans to small businesses and homeowners and people like that?
POLLIN: Well, I think they could do two simple things. One, tax the banks for holding so much cash in reserve. The banks are getting this money for free. It’s a zero interest rate policy that the Fed is practicing, and the banks have piled up $2 trillion in cash reserves. So the banks are sitting on a cash hoard. That should be taxed–not all the way down so that it would owe nothing. They do need to have cash reserves to get through any future crises as a cushion, as a safety net, but $2 trillion is wildly excessive. I mean, we could pump in $1 trillion–that’s about 6 percent of GDP–and they would still have $1 trillion in reserve. So that’s number one.
Number two, the government does have a credit program for small businesses that is supposed to give out affordable loans and is supposed to give favorable conditions to small businesses. It’s too small, it needs to be expanded, and it needs to get into banks thinking about doing things for small businesses. Right now, the banks have just decided that’s not what they’re interested in. They’re interested in speculating on, you know, these very, very obtuse, obscure financial products that have the potential of very high returns without having to do research, without having to go into communities, without having to give breaks to small business people. That’s the business that they’re in now. We need to change that.
And the next thing is, if they’re not going to do it, then we have to have the Fed and the public sector start making loans to small businesses and creating those opportunities.
DESVARIEUX: Alright. Bob Pollin, always a pleasure having you on The Real News.
POLLIN: [Thank you] very much.
DESVARIEUX: And thank you for joining us on The Real News Network.
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