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.

 

 

 

 

 

More articles by:

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.

Weekend Edition
November 24, 2017
Friday - Sunday
Jonathan Cook
From an Open Internet, Back to the Dark Ages
Linda Pentz Gunter
A Radioactive Plume That’s Clouded in Secrecy
Jeffrey St. Clair
The Fires This Time
Nick Alexandrov
Birth of a Nation
Vijay Prashad
Puerto Rico: Ruined Infrastructure and a Refugee Crisis
Peter Montague
Men in Power Abusing Women – What a Surprise!
Kristine Mattis
Slaves and Bulldozers, Plutocrats and Widgets
Pete Dolack
Climate Summit’s Solution to Global Warming: More Talking
Mike Whitney
ISIS Last Stand; End Times for the Caliphate
Robert Hunziker
Fukushima Darkness, Part Two
James Munson
Does Censoring Undemocratic Voices Make For Better Democracy?
Brian Cloughley
The Influence of Israel on Britain
Jason Hickel
Averting the Apocalypse: Lessons From Costa Rica
Pepe Escobar
How Turkey, Iran, Russia and India are playing the New Silk Roads
Jan Oberg
Why is Google’s Eric Schmidt So Afraid?
Ezra Rosser
Pushing Back Against the Criminalization of Poverty
Kathy Kelly
The Quality of Mercy
Myles Hoenig
A Ray Moore Win Could be a Hidden Gift to Progressives
Gerry Brown
Myanmar Conflict: Geopolitical Food Chain
Matthew Stevenson
Into Africa: Robert Redford’s Big Game in Nairobi
Katrina Kozarek
Venezuela’s Communes: a Great Social Achievement
Zoltan Grossman
Olympia Train Blockade Again Hits the Achilles Heel of the Fracking Industry
Binoy Kampmark
History, Law and Ratko Mladić
Tommy Raskin
Why Must We Sanction Russia?
Bob Lord
Trump’s Tax Plan Will Cost a Lot More Than Advertised
Ralph Nader
National Democratic Party – Pole Vaulting Back into Place
Julian Vigo
If Sexual Harassment and Assault Were Treated Like Terrorism
Russell Mokhiber
Still Blowing Smoke for Big Tobacco: John Boehner and College Ethics
Louis Proyect
The Witchfinders
Ted Rall
Sexual Harassment and the End of Team Politics
Anna Meyer
Your Tax Dollars are Funding GMO Propaganda
Barbara Nimri Aziz
An Alleged Communist and Prostitute in Nepal’s Grade Ten Schoolbooks!
Myles Hoenig
A Ray Moore Win Could be a Hidden Gift to Progressives
Graham Peebles
What Price Humanity? Systemic Injustice, Human Suffering
Kim C. Domenico
To Not Walk Away: the Challenge of Compassion in the Neoliberal World
Kollibri terre Sonnenblume
Giving Thanks for Our Occupation of America?
Christy Rodgers
The First Thanksgiving
Charles R. Larson
Review: Ta-Nehisi Coates’ “We Were Eight Years in Power”
David Yearsley
On the Road to Rochester, By Bike
November 23, 2017
Kenneth Surin
Discussing Trump Abroad
Jay Moore
The Failure of Reconstruction and Its Consequences
Jeffrey St. Clair - Alexander Cockburn
Trout and Ethnic Cleansing
John W. Whitehead
Don’t Just Give Thanks, Pay It Forward One Act of Kindness at a Time
Chris Zinda
Zinke’s Reorganization of the BLM Will Continue Killing Babies
David Krieger
Progress Toward Nuclear Weapons Abolition
FacebookTwitterGoogle+RedditEmail