Felix Salmon rightly notices that the mild monetary easing offered by the Fed yesterday won’t really change much, because the bigger tools that the central bank can use have already been deployed:
This is tantamount to a very modest rate cut — not a full quarter-point, perhaps, but maybe half of that. Of course, when rates are at zero, basis points loom larger than they normally do, so these moves on the side of quantitative easing become very important. And more important still is the signal that the Fed is sending: we thought we were OK to tighten things up a little bit, but now we’ve changed our mind, and we’re getting a little bit looser instead. The recovery, in other words, still needs Fed support in order to maintain any semblance of sustainability or momentum.
The bigger picture, however, is one of the Fed largely having run out of ammunition. Most of what it’s doing now is symbolic: the real national response, as Mohamed El-Erian says, needs to come from the government rather than the central bank, and needs to be structural rather than monetary in nature. Given today’s decision, though, we can at least assume that any moves from the White House to try to bolster the national economy will be met with the strong support of Ben Bernanke.
There’s no question that the Fed is engaging in largely symbolic actions, although even on that point they could be doing more. The truth is that those actions are really all we’re going to get for the near future. Fiscal policy is stuck, the product of a deficit-obsessed political class. They managed to get $26.1 billion through the Congress yesterday in state fiscal aid, but it’s offset (at least some of it is offset correctly, a few years down the road, so that the immediate effect is stimulative), and anything beyond that would be near impossible, at least for the rest of the year. The White House has a few options – they’re still sitting on close to $50 billion from the HAMP program – but given the political environment, they aren’t likely to do much at this time.
That’s politically stupid, actually – only a positive economic trend will yield better results in November. But that’s the reality of the situation. The economics profession has woken up to the real dangers to the economy; the political class has not. And so with fiscal policy stuck, monetary policy is all we’ve got left.
UPDATE: None of this is to say that the Fed’s action yesterday made any sense at all. They recognized the scope of the problem and then took the least non-contractionary action possible.




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Pretty active campaign going on, on all fronts, to lower expectations of people who are out of work or who might become unemployed. Only one of the many fronts that U.S. PTBs are using to suppress U.S. labor.
It’s the old “credit is readily available, so jobs should start showing up any minute now!” baloney. Until something BIG is done to jump-start demand, we are screwed, because business simply does NOT respond to any stimulus except demand for its product.
Everything I’ve read over the past couple of years from the current crop of “economists” that are in vogue in DC suggests that they are supply-siders that just can’t figure out why business isn’t adding jobs. After all, business has been given everything they claimed to need to create jobs, so what’s the hold-up?
I also keep hearing that there is simply no demand for credit (business or consumer), because banks aren’t lending (e.g. – the supply-siders claim is that there are no credit-worthy businesses or people looking for money). The fact is that businesses have excess capacity right now, so availability of funding isn’t the problem (unless you are a start-up with no business plan), because they don’t need to expand or make capital investments.
The simple fact is that supply-siders don’t recognize that businesses are only in it for the money, and there is simply no money in putting people to work if there is no demand for the product. Until something is done to increase demand from the current levels, unemployment will be right where it is now and the economy will stay the same or get worse as businesses fail for lack of demand.
The ONLY fix I can see is government spending on domestic projects that will put people to work and get the money moving again. Businesses can’t simply start hiring and hope for economic improvement because they have a fiduciary duty to their shareholders that prevents this. When the economy is growing, the constraints that they gripe about can cause slow-downs, but that isn’t the case right now. Our economy is static or contracting, and the only thing that will change that is to get people working, and the only people that can do that right now is the Federal Government (state/local govs have too many limitations on their ability to spend without tax revenue or Federal money coming in).
Don’t fret over “mild” monetary easing. “Major” monetary easing won’t make any difference either (c.f. liquidity trap, pushing on a string, lack of credit worthy borrowers, etc.).
This recession is a return to, not a deviation from, sustainable aggregate demand (= demand supported by real incomes). Get used to it.
Jon Walker has a fresh cross-post available: CO Gov: John Hickenlooper May Be the Luckiest Man in Politics
& with this return will be a possible major contraction of the way over hyped and inflated consumer market. We all have to realize the market couldn’t just keep expanding endlessly without a rise in wages @ the same moment that Medical and many other expenses have soared. The sad truth for most of us out here is were hard pressed to even pay our bills let alone shop or go to restaurants anymore. Middle class consumption is over in Amerika. Were going to see masses of “new” poor people as many of the urban suburbs descend into poverty. The rich are already leaving these areas and gathering slowly into select walled communities where when they look around all they see is wealthy people with manicured lawns etc. Mexico is a good example of where the wealthy want us to go, as a society.
The Gov’t doesn’t seem to have much interest in job creation from what I can see. I don’t believe Larry and the boyz over @ Treasury much believe in Gov’t having any role in this Enterprise do they? They’re waiting for the private sector to do for them what it did for Clinton after the BV$H 1 recession of the early 90′s. Not going to happen this time, sorry to say. This is the BIG one.
I agree with Salmon. The Fed is essentially out of bullets. The question is if the ZIRP will be sufficient to keep the bubble in stocks going. I have my doubts. Stocks have been going over the same ground the whole year. Even high corporate earnings and a lot of cash on hand are unable to propel prices. The fact that this is due to cannibalizing of operations and corporate looting, and is unsustainable may be percolating through in a general way. Yesterday in commenting on this at Naked Capitalism I noted that this looks like an end stage process. What policies were there have run their course and there is nothing there to replace them. The question is how long can companies chew on their own entrails before they start going belly up?
The FED doesn’t have the tools to fix the economy. If the public is uncreditworthy and consumers aren’t buying(or can’t because they are also broke) then FED policy isn’t going to fix anything because there’s no one to lend to.
People need to remember that Ben’s Helicopter doesn’t go door to door across mainstreet USA, rather, it hovers over the banks.
Our politicians leaving the problem in the FED’s hands is like saying “let it burn”.
NPR/AP brought up this point the other day: Productivity Falls, Possible Signal Of Need To Hire
Granted, thier analysis is lacking. But the basic point regarding the lack of a future in productivity based on employment cuts.. is correct.
As if the paralysis of the political system in the face of the crisis in the real economy isn’t enough, let’s remember that we aren’t out of the woods yet by any means on the financial bubbles that the big bank holding companies are continuing to pump up. If these go pop hold your hats. Check out this explosive piece by Chris Whelan which has gotten absolutely no notice in the media, with the noble exception of Yves Smith.
“Systemic Regulator Risk: Does the Fed of New York Need a Haircut?”
http://us1.irabankratings.com/pub/IRAMain.asp
The Fed could cut the prime rate in half (roughly one and half points). The federal funds rate (FFR) is the interest rate that banks charge each other for loans in the overnight market, the Fed can peg this rate either by the purchase and sale of Treasuries or by paying banks interest on reserves. For going on two years now, the FFR has been 0.025% and the prime rate has been 3.25%. The FFR can’t be cut any further, that’s not so with the prime rate. As Steve Randy Waldman pointed out in an interesting post, Is the Prime Rate a Scam:
The average spread between the Federal Funds Rate and the Prime Rate from August 1955 through August 1989 was 1.33%. From 1991 onward, that spread has been nearly constant at 3%. In the earlier period, the Prime Rate spread was what one would expect it to be, a variable, market-determined quantity reflecting the availability of capital and perceptions of risk even among “creditworthy” borrowers. Now it is a fixed quantity, more than double its average prior to 1989.
Waldman argues persuasively that Greenspan doubled the prime rate as an invisible subsidy to banks, so of course its unlikely the Fed would ever cut the prime rate in half to its old average markup, but it could.