Jamie Dimon is testifying before the House Financial Services Committee this morning, but after last week’s display, I don’t think I can physically stomach having to deal with it. If anything of interest happens outside of members of Congress groveling at the feet of the JPMorgan Chase CEO, I’ll let you know.
Meanwhile, the more important meeting takes place down the road a piece, at the Federal Reserve. Dimon only advises the New York Fed, but the concerns of his class have sadly been put well above the concerns of the ordinary worker, with the Fed unwilling to tolerate higher inflation to allow for more employment. Today, with the economy at stall speed, the Fed’s policymaking board meets for the next two days to decide whether or not to change course. But the aforementioned inflation targeting issue is probably not even on the menu of options.
The Fed’s chairman, Ben S. Bernanke, and other committee members suggested in public appearances this month that they were not yet convinced the rate of growth was slowing, nor that another round of aid was warranted. More time and more data might well have provided greater clarity.
But the Fed is scheduled to complete this month its most recent effort to reduce interest rates, known as Operation Twist, and financial analysts warn that the central bank, if it does not announce a new program, could disappoint investors who have come to expect intermittent injections of monetary policy.
“While the Fed hates being held hostage by market expectations, we doubt it will be prepared to disappoint global investors this week,” Lou Crandall, chief economist at Wrightson ICAP, wrote in a note to clients on Monday.
Note who doesn’t factor in that discussion: 300 million-odd workers, their families, retirees, and the unemployed. Only global investors make the cut of who matters.
And the major problem here concerns the type of policies the Fed goes after in the name of spurring economic growth. Ideas like Operation Twist only matter if the lower interest rates they foster translate into people getting lower rates on their loans. But we know that millions of Americans, including pretty much all the ones struggling, will never see that benefit, because they don’t qualify for those loans. This brings us to one of the more out-of-touch statements in one of the more out-of-touch newspapers in America:
The credit divide factors into their thinking. Fed officials have been frustrated in the past year that low interest rate policies haven’t reached enough Americans to spur stronger growth, the way economics textbooks say low rates should.
By reducing interest rates—the cost of credit—the Fed encourages household spending, business investment and hiring, in addition to reducing the burden of past debts.
But the economy hasn’t been working according to script.
Do the textbooks assume a job in the hands of those Americans applying for loans? Do they assume money to spend?
Mitt Romney was sadly correct when he said on Face the Nation that continued asset purchases “did not put Americans back to work, did not raise our home values, did not bring jobs back to this country or encourage small businesses to open their doors.” They may be worth doing in an abstract sense, but they aren’t getting at the problem. And it’s not as if the Fed couldn’t influence events in major ways that have nothing to do with global markets. Mike Konczal brought up a great example yesterday: [cont’d]
One question that Gagnon doesn’t deal with directly: under Section 14 b 1 the Fed has the authority to purchase any obligation of a state or local government of 6 months maturity or less. This provision seems clearly to permit a mass refinancing of state and local government debt at the current 6 month interest rate (very close to 0), which would save state and local gov’ts approximately $75 billion a year (going by the flow of funds #s for state and local interest payments). Moreover, since state and local govts do the bulk of infrastructure investing, the fed could create a program to fully fund such investment through purchases of newly issued 6 month bonds, for projects that meet criteria the Fed sets out (such as being approved by a small committee of civil engineers appointed by the regional fed branches for that purpose). Finally, under section 24 of the Act, the fed can buy from national banks loans to finance residential construction, which in effect would give the fed the ability to spur new multi-family construction (sorely needed, as evinced by rising rents) by enabling lending banks to effectively sell the loans off their books.
I’m not sure I agree with new multi-family construction; that could generate another bubble. Physical stock of homes is not the problem, it’s shadow inventory. But the muni market idea is fantastic. That would flow directly into state and local treasuries, financing new projects and preventing hundreds of thousands of layoffs. It would go a long way to reversing the leading form of austerity from this crisis.
When you think about this a bit more, you recognize that there are options for the Fed, if they aim them slightly to the left of Wall Street and at the rest of the country.