Tuesday, July 13, 2010

By law, the Fed is supposed to support full employment

You would never know it by their recent (last 35 years) actions.
Is the Fed Happy with the Crappy Economy?
Is the economics version of defining deviancy downward mean that the new normal of high unemployment and inadequate job growth is seen as acceptable by policymakers (at least those not up for re-election this November)?
It’s one thing to recognize that we are working through a painful hangover after a private sector borrowing binge that produced a global financial crisis. It’s quite another to be complacent about bad conditions and steer clear of possible remedies.
The Fed unfortunately has been widely lauded for its emergency responses during the crisis (a view I do not share, but we’ll put that aside for now) and its actions afterwards are given a free pass in too many circles. The Fed now plays a far more openly political role than before, yet insists on the fiction of its independence; it was far more concerned about shielding banks and their investors from pain, and stood with the Paulson/Geithner Treasuries in opposition to resolution of sick big banks; it supported no-strings-attached rescues, both covert and overt, of financial firms, rather than other economic actors. As many readers have said, “Where’s my bailout?”
So now that the Fed sees the banking industry as being on the mend, it has become complacent (and note I am not advocating quantitative easing; I think monetary measures are likely to have little impact when banks are reluctant to lend. But the Fed’s body language has a big influence on policy discussions, so its lack of a sense of urgency undermines initiatives on other fronts). more

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