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:
July 26, 2016
Andrew Levine
Pillory Hillary Now
Kshama Sawant
A Call to Action: Walk Out from the Democratic National Convention!
Paul Street
An Update on the Hate…
Jeffrey St. Clair
Don’t Cry For Me, DNC: Notes From the Democratic Convention
Ellen Brown
Japan’s “Helicopter Money” Play: Road to Hyperinflation or Cure for Debt Deflation?
Angie Beeman
Why Doesn’t Middle America Trust Hillary? She Thinks She’s Better Than Us and We Know It.
Fran Shor
Beyond Trump vs Clinton
Richard W. Behan
The Banana Republic of America: Democracy Be Damned
Binoy Kampmark
Undermining Bernie Sanders: the DNC Campaign, WikiLeaks and Russia
Arun Gupta
Trickledown Revenge: the Racial Politics of Donald Trump
David Swanson
DNC Now Less Popular Than Atheism
Linn Washington Jr.
‘Clintonville’ Reflects True Horror of Poverty in US
Deepak Tripathi
Britain in the Doldrums After the Brexit Vote
Louisa Willcox
Grizzly Threats: Arbitrary Lines on Political Maps
Robert J. Gould
Proactive Philanthropy: Don’t Wait, Reach Out!
Victor Grossman
Horror and Sorrow in Germany
Nyla Ali Khan
Regionalism, Ethnicity, and Trifurcation: All in the Name of National Integration
Andrew Feinberg
The Good TPP
400 US Academics
Letter to US Government Officials Concerning Recent Events in Turkey
July 25, 2016
Sharmini Peries - Michael Hudson
As the Election Turns: Trump the Anti-Neocon, Hillary the New Darling of the Neocons
Ted Rall
Hillary’s Strategy: Snub Liberal Democrats, Move Right to Nab Anti-Trump Republicans
William K. Black
Doubling Down on Wall Street: Hillary and Tim Kaine
Russell Mokhiber
Bernie Delegates Take on Bernie Sanders
Quincy Saul
Resurgent Mexico
Andy Thayer
Letter to a Bernie Activist
Patrick Cockburn
Erdogan is Strengthened by the Failed Coup, But Turkey is the Loser
Robert Fisk
The Hypocrisies of Terror Talk
Lee Hall
Purloined Platitudes and Bipartisan Bunk: An Adjunct’s View
Binoy Kampmark
The Futility of Collective Punishment: Russia, Doping and WADA
Nozomi Hayase
Cryptography as Democratic Weapon Against Demagoguery
Cesar Chelala
The Real Donald Trump
Julian Vigo
The UK’s Propaganda Machinery and State Surveillance of Muslim Children
Denis Conroy
Australia: Election Time Blues for Clones
Marjorie Cohn
Killing With Robots Increases Militarization of Police
David Swanson
RNC War Party, DNC War Makers
Eugene Schulman
The US Role in the Israeli-Palestine Conflict
Nauman Sadiq
Imran Khan’s Faustian Bargain
Peter Breschard
Kaine the Weepy Executioner
Weekend Edition
July 22, 2016
Friday - Sunday
Jeffrey St. Clair
Good as Goldman: Hillary and Wall Street
Joseph E. Lowndes
From Silent Majority to White-Hot Rage: Observations from Cleveland
Paul Street
Political Correctness: Handle with Care
Richard Moser
Actions Express Priorities: 40 Years of Failed Lesser Evil Voting
Eric Draitser
Hillary and Tim Kaine: a Match Made on Wall Street
Conn Hallinan
The Big Boom: Nukes And NATO
Ron Jacobs
Exacerbate the Split in the Ruling Class
FacebookTwitterGoogle+RedditEmail