Economists debate whether the Federal Reserve has the tools to fix today’s unemployment problems.
They express frustration that, after four years of super-low interest rates and the Fed’s extraordinary money-pumping, we still suffer from low growth rates. The Labor Department reported Friday that the U.S. added just 96,000 jobs in August. This number is not enough to make headway in reducing the nation’s 12.5 million jobless workers.
Despite doubts about the Fed’s unprecedented monetary stimulus, its chairman, Ben Bernanke, laid the groundwork for another round of monetary intervention at the Federal Reserve’s annual symposium in Jackson Hole, Wyo.
He said the current weak job market “causes enormous suffering, wastes talent and can inflict lasting damage on the economy.”
To counter high unemployment, the Fed could extend low interest rates through 2015 and initiate a third round of bond purchases, known as quantitative easing. Bernanke argued that the Fed’s easy money policies helped push economic output 3 percent higher than it would have been otherwise and created two million jobs.
On PBS NewsHour, former Fed vice chairman Alan Blinder said Bernanke overstated the effectiveness of Fed policy. Bernanke’s conclusion was based on simulations run on the Fed’s computer models, Blinder said, but those same models seem to have overestimated how fast the economy would grow during the recovery.
Donald Kohn, another former vice chairman of the Fed and Bernanke’s right-hand man during the financial crisis, asked the following critical question: “Why is it that we’ve had such incredibly accommodative monetary policy for so long and we’ve had so little growth?”
Kohn questioned the rationale frequently used for more easing — Europe, household debt reduction, and the housing bust, saying they are unsatisfying answers.
University of Chicago professor Amir Sufi said: “The key problem is that households burdened by heavy debt loads are not responding to low interest rates by spending more. They need to reduce their debt first.”
Bernanke has implemented unorthodox programs such as Operation Twist, in which the Fed sold short-term Treasuries and used the proceeds to buy long-term Treasuries.
Bernanke’s tripling of the Fed’s balance sheet has spurred widespread criticism and undermined confidence in the nearly 100-year old institution. Romney’s running mate, Paul Ryan, has been very critical of Fed policies that he said have devalued the U.S. dollar. Ryan supports legislation that would authorize the Government Accounting Office to audit Fed decisions on interest rates and reveal its rationale for implementing monetary policy programs. Ryan also wants the Fed to focus solely on controlling inflation, rather than giving equal weight to unemployment.
In a Wall Street Journal article, “Bernanke’s dilemma over his legacy,” Jon Hilsenrath wrote, “Long after his term as chairman ends in 17 months, will he be remembered as the Fed chief who did too little to combat high unemployment or the one who did too much and unleashed inflation and financial instability with the actions he took?”
Where can we give Bernanke high marks? He showed remarkable courage and ingenuity during the 2007-2009 financial crises. He cut interest rates to effectively zero, bought some $2.3 trillion in government bonds and mortgage-backed securities and provided trillions of dollars worth of guarantees to the financial community. The financial liquidity provided by these measures prevented America from suffering a Great Depression.
What are my policy recommendations to Bernanke? I would recommend only one new measure: Cut the interest rate the Fed pays on bank reserves from .25 percent to zero in order to encourage more bank lending.
Without bi-partisan fiscal action to stimulate the economy, the Fed cannot reduce unemployment to its historical goals of between 5 percent and 6 percent.
Originally published in the Sarasota Herald-Tribune
