Bernanke's Clone: Sarah Raskin Says 'Trust Us'
by Gary North: Flying
Raskin is a member of the Board of Governors of the Federal Reserve
System. She is a lawyer. She is a
banking lawyer and has earned her living for her entire career
as a government banking regulator.
26, she gave a Bernanke-imitating speech on the rotten
job market: "Monetary Policy and Job Creation." Does
it come as a surprise that she promotes monetary inflation as the
solution to unemployment?
"Today I want to discuss how monetary policy can promote the
objective of maximum employment in a context of price stability."
She offered a footnote. Just what we need: speeches with footnotes!
set the stage by reviewing current labor market conditions, and
then I will talk about the tools that the Federal Reserve has been
deploying to foster job creation and promote a stronger economic
recovery." Just like Bernanke! Tell everyone what they already
know, and then defend the FED's policies that, so far, have not
do my best to make these points in plain English rather than economic
jargon, but feel free to correct me if I lapse back into it
my children certainly do." Clever! As if someone is going to
raise his hand and say, "That's obvious nonsense, and you know
So, I will
be raising my hand. Frequently.
begins as a typical Bernanke speech always does: telling us what
we already know.
economy began slowing in late 2007 and early 2008 and turned downward
sharply in the autumn of 2008 when the financial crisis intensified,
resulting in the worst recession in many decades. By the end of
2009, the unemployment rate reached a horrifying 10 percent, corresponding
to more than 15 million Americans being out of work, with all
of the attendant social consequences, including lost income and
wealth, mortgage foreclosures, family strains, health problems,
and so on.
The key words:
and so on. On and on and on: there have been no solutions.
the recovery from the recession began in the third quarter of
2009, but the pace of recovery has been modest. We have learned
from recent comprehensive revisions of government economic data
that the recession was deeper and the recovery weaker than had
previously been thought. Indeed, the most recent reading on real
gross domestic product (GDP) in the United States the one
for the second quarter of this year still has not returned
to the level that it had attained before the crisis, and the increases
in economic activity over the past two years have been at a rate
insufficient to achieve any sustained reduction in the unemployment
So, 45 months
of Federal Reserve policies have produced . . . nothing much. She's
got that right!
employment report issued by the Bureau of Labor Statistics was
bleak. Private-sector employers added only 17,000 nonfarm jobs
in August, far fewer than the already weak average monthly gain
of about 110,000 recorded over the previous three months. The
headline unemployment rate was 9.1 percent, representing about
14 million Americans who were out of work in August.
But it gets worse.
as many families know, the headline unemployment numbers don't
fully capture the weakness in labor market conditions. Beyond
the headline number, an additional 8.8 million workers were classified
as "part time for economic reasons" in August because
their hours had been cut back or they were unable to find a full-time
job. In addition, about 2-1/2 million Americans were classified
as "marginally attached" to the labor force because
even though they wanted to get a job, they had not searched for
one in the past four weeks. And almost half of that group
nearly 1 million individuals have given up searching for
employment altogether, because they do not believe any jobs are
available for them.
So it is
not just those who are currently classified as unemployed who
are excluded from work. The underemployed, the marginally attached,
and the discouraged all of whom are concerned about the
security of their livelihood, their housing, and the rising cost
of living can speak powerfully to the weaknesses of the
Here she actually
says something relevant:
data in this regard correspond to what I have seen firsthand over
the past several years. I have traveled to once-robust manufacturing
cities in the Midwest and have observed vacant lots, burnt-out
factories, metal scrap heaps, and foreclosed homes. I have visited
unemployment insurance offices and job training centers, and I
have met lots of people who have been out of work for more than
a year or two out of work for so long that some of them
are embarrassed to show their resumes to potential employers.
In short, the
statistics don't lie. There really is a disaster out there.
Now, what to
do about it? "These circumstances have called for forceful
policy measures." They certainly have. They still do.
I will now
talk about the conventional and unconventional actions that the
Federal Reserve, for its part, has taken to foster economic recovery
and job creation.
Here we come
to the sales pitch. But let us not forget: the recession began in
late 2007. The FED has made announcement after announcement about
its many "tools." Result: an ongoing disaster. This is
the FED's huge PR problem. Nothing it has done has worked.
to the FED's most recent actions. But she neglected to explain why
over three years of ad hoc measures have not worked.
tool of monetary policy is to modify the near-term path of interest
rates. To be more specific, a reduction in current short-term
rates and a corresponding downward shift in private-sector expectations
about the future path of such rates will tend to reduce borrowing
rates for households and businesses, including auto loan rates,
mortgage rates, and other longer-term interest rates. This policy
accommodation also tends to raise household wealth by boosting
the stock market and prices of other financial assets.
There is that
word: "accommodation." What does the new policy do to
accommodate anything? Mortgage rates are lower. The housing market
still declines. New houses are not being built: 300,000 a year,
down from over 1,000,000 in 2005.
household wealth and cheaper borrowing rates, consumers tend to
increase their purchases of houses, cars, and various other goods
Not if they
don't qualify for loans. Not if there is no equity in their homes.
Not if they don't want any more debt, which they don't.
But that does
not faze Mrs. Raskin. She has visions of sugar plumbs dancing in
her head. The economy should now take off.
businesses ramp up their production to meet the increased level
of sales. Moreover, with lower costs of financing new equipment
and structures, businesses may be inclined to increase their own
spending on investment projects that they might previously have
seen as only marginally profitable. In the near term, firms can
meet increased demand by resorting to temporary and part-time
workers, but over time they have strong incentives to increase
the number of regular full-time employees. Consequently, the monetary
accommodation leads to greater job creation, though sometimes
with substantial time lags.
I see. Businesses
will borrow more, especially small businesses that create most new
jobs. Problem: so far, they haven't, despite three years of falling
interest rates. The National Federation of Independent Business
keeps saying that small businesses are not hiring, have not been
hiring, and do not intend to hire.
Then she attempts
a bait-and-switch move. She began talking about long-term rates,
which have been falling steadily for a year. She then switches to
the federal funds rate, which is at zero, and has been, because
banks are not borrowing to cover reserve deficiencies. Why not?
Because they have $1.7 trillion in excess reserves. Bankers are
in panic mode.
Reserve has used this policy tool aggressively since the onset
of the financial crisis. In particular, the federal funds rate
target, which stood at 5-1/4 percent in mid-2007, was subsequently
reduced to a range of 0 to 1/4 percentage point by the end of
2008, and that target range has been maintained since then.
passive voice: "was subsequently reduced" and "has
been maintained." This hints that something reduced it and
has maintained it. Something has: terrified bankers. She
never mentions this possibility.
because currency has an implicit interest rate of exactly zero,
economists generally agree that a zero interest rate is the effective
lower bound for the federal funds rate because investors could
simply choose to hold cash if a central bank tried to drive short-term
interest rates significantly below zero. In effect, therefore,
the FOMC has been deploying its conventional policy tool to the
maximum extent possible since late 2008.
The FED's policy
tool has been the equivalent of pushing on a string. The banks are
If we attribute
falling rates to FED policy, then there why hasn't it worked? The
first section of her speech offers evidence that it has not worked.
She knows this. So, she invokes the traditional excuse of every
apologist for every failed policy. "What if the policy had
not been used? Think of how bad things would be."
reviewing the vast academic literature regarding the effect of
conventional monetary policy, I will simply pose the counterfactual
question: What would have happened to U.S. employment if monetary
policy had failed to respond forcefully to the financial crisis
and economic downturn?
How do we answer
this? Why, by using economic models. What models are these? She
did not say. Tested for how long? She did not say. Tested by whom?
The FED, presumably. How verified? She did not say.
models the Fed's and others suggest that if the
federal funds rate target had been held at a fixed level of 5
percent from the fourth quarter of 2007 until now, rather than
being reduced to its actual target range of 0 to 1/4 percent,
then the unemployment rate would be several percentage points
higher than it is today. In other words, by following our actual
policy of keeping the target funds rate at its effective lower
bound since late 2008, the Federal Reserve saved millions of jobs
that would otherwise have been lost. Of course, substantial uncertainty
surrounds various specific estimates, but there should be no doubt
that the FOMC's forceful actions helped mitigate the consequences
of the crisis and thereby spared American families and businesses
from even greater pain.
What does she
mean, "if the federal funds target rate had been held at a
fixed level"? Short-term interest rates always fall as a
recession escalates. They were close to zero in 1933. She wants
us to believe that FED monetary policy forced down rates. The recession
forced down rates. It is keeping them low.
magnitude of the global financial crisis and its aftermath, the
Federal Reserve clearly needed to provide additional monetary
accommodation beyond simply keeping short-term interest rates
close to zero. Consequently, like a number of other major central
banks around the world, the FOMC has been deploying unconventional
policy tools to promote the economic recovery.
Wait a minute!
What evidence is there that FED's monetary policies forced down
the FedFunds rate? The FED shrank the monetary base in 2010, and
the FedFunds rate stayed at zero. It had already been at zero for
over a year at the beginning of 2010.
The FED has had no effect on the FedFunds rate.
we have provided conditional forward guidance about the likely
future path of the federal funds rate, and we have engaged in
balance sheet operations that involve changes in the size and
composition of our securities holdings. Broadly speaking, these
policy tools affect the economy through channels that are similar
though not identical to those of conventional monetary
policy. I'll now spend a few minutes describing how each form
of unconventional policy can be helpful in promoting a stronger
She is a true
Bernanke clone. Having failed to show that the FED's previous policies
did what they were intended to do, and having admitted that the
economy is still in the tank, she now spends lots of time telling
people what existing policies will do.
. . . transparency! Does this mean accepting an audit of the FED
by the General Accounting Office? Of course not. But transparency
element of good monetary policy is effective communication. In
a democratic society, central banks have the responsibility to
clearly and fully explain their policy decisions. Good communication
is also essential for strengthening the effectiveness of monetary
policy. Expectations about the future play a key role in the decisionmaking
of households and firms: how much to spend, save, work, invest,
or hire. Moreover, when financial market participants understand
how the central bank is likely to react to incoming information,
asset prices can adjust in ways that reinforce the central bank's
expected policy actions and thereby support the central bank's
objectives. Finally, clear communication can help anchor the public's
long-term inflation expectations and hence improve the extent
to which the central bank can take forceful actions to promote
job creation in a context of price stability.
I ask: (1)
Why wasn't the FED transparent before? (2) What has changed? (3)
When? (4) Why?
the rest of the article
North [send him mail]
is the author of Mises
on Money. Visit http://www.garynorth.com.
He is also the author of a free 20-volume series, An
Economic Commentary on the Bible.
2011 Gary North
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