FacebookTwitterGoogle+RedditEmail

Will the Fed Broaden Its Focus?

by PETER MORICI

The Federal Reserve will almost certainly cut the target federal funds rate a quarter point to two percent on Wednesday. Fed watchers will be looking at the policy statement for clues as to whether the Fed will pause after cutting rates 3.25 percentage points since June.

The Fed may like to stop cutting rates. So far, rate cuts have aided homeowners with adjustable-rate mortgages and other borrowers with loans indexed to domestic interest rates; however, those cuts have not substantially increased bank lending.

Simply, no matter the prevailing interest rate environment, banks are frozen out of the bond market, where they have increasingly raised funds, over the last two decades, by bundling loans into securities. Having been sold loan-backed securities that were more risky and worth less than the banks represented during the subprime boom, the insurance companies, pension funds and other fixed income investors don’t trust the banks.

Despite changes in the leadership at some major financial houses, banks have done little to win back trust. Similarly, the bond rating agencies seem wedded to cozy relationships with banks, accepting payments from banks to rate securities the banks create.

The trade deficit—in particular, the rising oil import bill and stubborn deficit with China on consumer goods—is a drag on domestic demand equal to 5 percent of GDP. The falling dollar against the euro and other market-determined currencies has helped; however, oil is priced in dollars, and the dollar continues 40 percent, or more, overvalued against the yuan and several other Asian currencies.

Until Bernanke addresses structural problems in bank participation in securities markets—something Treasury and G7 proposals for financial market reform little address– adequate bank credit to power an economic recovery will not be forthcoming, and unemployment will rise.

Until Bernanke challenges Treasury on trade and exchange rate policies, the trade deficit will pose a similar constraint on the economy. In this decade, as the trade deficit grew, consumers cut savings and borrowed more through the banks to shore up domestic demand. Essentially, Americans spent 105 percent of what they earned to keep the economy growing but that house of cards has now collapsed.

Bernanke must take on genuine banking reform and currency and trade policies, or his job is impossible. The latter are outside his portfolio, but past Federal Reserve Chairman have voiced concerns about federal budgets, entitlements and other policies that made their stewardship more difficult.

For now, Bernanke seems more comfortable courting Congressional Democrats by focusing on consumer lending practices—abuses by mortgage brokers, appraisers and credit card companies. This enhances the likelihood of reappointment by a Democratic President. However, if he continues this tack, he will ultimately find his name inscribed in history, not along side Paul Volcker and Alan Greenspan who conquered inflation and facilitated great prosperity, but rather along side the likes of Arthur Burns and G. William Miller, who, though politically adroit, gave us The Great Inflation and economic malaise.

PETER MORICI is a professor at the University of Maryland School of Business and former Chief Economist at the U.S. International Trade Commission.

 

 

 

 

 

PETER MORICI is a professor at the Smith School of Business, University of Maryland School, and the former Chief Economist at the U.S. International Trade Commission.

More articles by:

CounterPunch Magazine

minimag-edit

August 25, 2016
Mike Whitney
The Broken Chessboard: Brzezinski Gives Up on Empire
Paul Cox – Stan Cox
The Louisiana Catastrophe Proves the Need for Universal, Single-Payer Disaster Insurance
John W. Whitehead
Another Brick in the Wall: Children of the American Police State
Lewis Evans
Genocide in Plain Sight: Shooting Bushmen From Helicopters in Botswana
Daniel Kovalik
Colombia: Peace in the Shadow of the Death Squads
Sam Husseini
How the Washington Post Sells the Politics of Fear
Ramzy Baroud
Punishing the Messenger: Israel’s War on NGOs Takes a Worrying Turn
Norman Pollack
Troglodyte Vs. Goebbelean Fascism: The 2016 Presidential Race
Simon Wood
Where are the Child Victims of the West?
Roseangela Hartford
The Hidden Homeless Population
Mark Weisbrot
Obama’s Campaign for TPP Could Drag Down the Democrats
Rick Sterling
Clintonites Prepare for War on Syria
Yves Engler
The Anti-Semitism Smear Against Canadian Greens
August 24, 2016
John Pilger
Provoking Nuclear War by Media
Jonathan Cook
The Birth of Agro-Resistance in Palestine
Eric Draitser
Ajamu Baraka, “Uncle Tom,” and the Pathology of White Liberal Racism
Jack Rasmus
Greek Debt and the New Financial Imperialism
Robert Fisk
The Sultan’s Hit List Grows, as Turkey Prepares to Enter Syria
Abubakar N. Kasim
What Did the Olympics Really Do for Humanity?
Renee Parsons
Obamacare Supporters Oppose ColoradoCare
Alycee Lane
The Trump Campaign: a White Revolt Against ‘Neoliberal Multiculturalism’
Edward Hunt
Maintaining U.S. Dominance in the Pacific
George Wuerthner
The Big Fish Kill on the Yellowstone
Jesse Jackson
Democrats Shouldn’t Get a Blank Check From Black Voters
Kent Paterson
Saving Southern New Mexico from the Next Big Flood
Arnold August
RIP Jean-Guy Allard: A Model for Progressive Journalists Working in the Capitalist System
August 23, 2016
Diana Johnstone
Hillary and the Glass Ceilings Illusion
Bill Quigley
Race and Class Gap Widening: Katrina Pain Index 2016 by the Numbers
Ted Rall
Trump vs. Clinton: It’s All About the Debates
Eoin Higgins
Will Progressive Democrats Ever Support a Third Party Candidate?
Kenneth J. Saltman
Wall Street’s Latest Public Sector Rip-Off: Five Myths About Pay for Success
Binoy Kampmark
Labouring Hours: Sweden’s Six-Hour Working Day
John Feffer
The Globalization of Trump
Gwendolyn Mink – Felicia Kornbluh
Time to End “Welfare as We Know It”
Medea Benjamin
Congress Must Take Action to Block Weapon Sales to Saudi Arabia
Halyna Mokrushyna
Political Writer, Daughter of Ukrainian Dissident, Detained and Charged in Ukraine
Manuel E. Yepe
Tourism and Religion Go Hand-in-Hand in the Caribbean
ED ADELMAN
Belted by Trump
Thomas Knapp
War: The Islamic State and Western Politicians Against the Rest of Us
Nauman Sadiq
Shifting Alliances: Turkey, Russia and the Kurds
Rivera Sun
Active Peace: Restoring Relationships While Making Change
August 22, 2016
Eric Draitser
Hillary Clinton: The Anti-Woman ‘Feminist’
Robert Hunziker
Arctic Death Rattle
Norman Solomon
Clinton’s Transition Team: a Corporate Presidency Foretold
Ralph Nader
Hillary’s Hubris: Only Tell the Rich for $5000 a Minute!
FacebookTwitterGoogle+RedditEmail