[Peace-discuss] Billions for bankers, nothing for jobs

[C. G. Estabrook]

Bernanke's Do-Nothing Plan

The Fed chairman's grand scheme not to do anything
about unemployment, GDP growth, and gas prices.

By Annie Lowrey
Posted Thursday, April 28, 2011

If you are a trader, a bond investor, or a
central banker, you probably think that
Federal Reserve Chairman Ben Bernanke's
first scheduled press conference went
great. The professorly Bernanke—seated
behind a piano-sized table a comfortable
distance from the soft-balling
journalists—seemed calm, if not
confident. He did not say anything
stupid, strange, or newsworthy. The
markets, as hoped, said, "Whatever."

If you are the average person on the
street, though, the conference should
have spooked you. Those who managed
to suffer through heard Bernanke
sympathize with the common problems
of common people—things like rising gas
prices and slow rates of job growth—but
say that the Federal Reserve's hands were
tied. Three years ago, when the banks
were in trouble, the Fed turned activist,
dashing far outside its traditional
purview to stabilize the economy and
shock it into growth. But now, amid
sluggish growth and a weak labor
market, the Fed has become a Fed of
limits.

Take gas prices. The average American is
paying $3.89 a gallon, up from $2.89 just
a year ago. Bernanke showed sympathy,
noting that "higher gas prices are
absolutely creating a great deal of
financial hardship." But he described the
problem as decidedly not his. "There's
not much the Federal Reserve can do
about gas prices, per se, at least not
without derailing growth entirely. …
After all, the Fed can't create more oil."

Well, what about GDP growth? Bernanke
mostly addressed the topic during his
opening remarks, an elaboration of a
Federal Open Market Committee
statement released just before the press
conference. He noted that the median
"longer run" projections for output
growth range from 2.5 to 2.8 percent.
Those figures do not sound particularly
good. The United States routinely saw 4-
percent annual growth in the 1990s—and
we weren't catching up from a savage
recession then. But growth, too, was
described as outside the Fed's
jurisdiction: "determined largely by non-
monetary factors, such as the rate of
growth of the labor force and the speed
of technological change."

What about joblessness? Surely the Fed
has something to say about that, given
that full employment makes up one-half
of the bank's dual mandate? Bernanke
said, "Progress toward more normal levels
of unemployment seems likely to be
slow." He continued with this not-so-
rousing call: "We're going to have to, you
know, continue to watch and hope that
we will get stronger and increasingly
strong job creation."

Binyamin Appelbaum of the New York
Times pressed him: What could the Fed
do to bring the unemployment rate down,
and why is it not doing it? Bernanke
declined to name what the Fed has in its
toolbox that might goose jobs growth. He
instead described the bank's current and
past efforts to bring down the rate—
dropping interest rates to zero, and
buying trillions of dollars in bonds to
further convince businesses to lend—as
"extraordinary." Moving onto the other,
unnamed options would risk much-
dreaded inflation: The "cost of that in
terms of employment loss in the future
…would be quite significant."

Another journalist asked about long-
term unemployment, a problem that
Bernanke has repeatedly expressed
concern about in speeches and testimony.
Again, the central banker sounded
worried. But he threw up his hands. "As
the situation drags on and as the long-
term unemployed lose skills and lose
contact with the labor market or perhaps
just become discouraged and stop
looking for work, then it becomes really
out of the scope of monetary policy," he
said. "At that point, job training,
education, and other types of
interventions would probably be more
effective." He continued: "We don't have
any tools for targeting long-term
unemployment specifically."

Only when discussing inflation did
Bernanke admit the Federal Reserve's
power—in this case, its near
omnipotence. "In contrast to economic
growth and unemployment, the longer-
run outlook for inflation is determined
almost entirely by monetary policy," he
said. He described the conditions that
would require interest-rate hikes and
promised, "That will be the time that we
need to begin to tighten"—probably in a
"couple of meetings."

Thus, on nearly every economic topic
journalists raised, Bernanke stressed the
Fed's limits, rather than its capabilities.
He argued that the Fed has little control
over issues affecting the average person
on the street at any given time. Sure, the
Fed performed some heroics during the
worst of the credit crisis. But those days
are over.

Here's the thing: Bernanke is right about
the Fed's specific limitations. The bank
wouldn't want to take on gas prices. Its
specific responsibility is not to maximize
growth, but to keep prices stable and
unemployment low. The Fed can try to
get businesses to borrow and expand,
and therefore to hire more workers. But it
cannot create 7 million jobs by any direct
mechanism. And there is nothing that
the Fed can do for the long-term
unemployed specifically. Congress and
the states have more and better resources
for creating or subsidizing work for the
99ers.

But there are plenty of things the bank
could do to goose the economy as a
whole, with an eye to helping the labor
market and the common man. The
Federal Reserve could undertake a third
round of quantitative easing, continuing
to goad banks to lend to businesses and
businesses to take the loans. It could
start declaring various "targets,"
promising the markets that it would
change policy to meet them, no matter
what. It could stop paying interest on
excess reserves—the extra dollars that
some banks keep parked at the Fed. It
could even charge banks for keeping the
dollars there, incentivizing them to
deploy them in the real economy. It could
say that it now considers 3 or 4 percent
inflation a safe amount, not 2 percent—
allowing its easy-money policies to
continue for longer.

Instead, the overwhelming message of the
conference was that Bernanke is worried
about and plans on stamping out
inflation when it picks up even a little.
On virtually every other front, he plans
to do little or nothing. On
unemployment, especially, that is
particularly worrisome. It's good that the
markets shrugged at the press
conference. But no regular citizen wants
to hear her central banker say,
"Whatever."

http://www.slate.com/id/2292453/