A paper written by two staff members of the Federal Reserve Bank of Atlanta tried to quantify what all the Fed’s new money creation and related measures have accomplished. They conclude that unemployment today would be 0.13% higher without the radical measures and 1.0% higher if nothing at all had been done.
For some time, the Fed has been trying to demonstrate what its massive interventions have accomplished. This has not been easy. In the first place, the results have been poor, far below what the Fed hoped for. In the second place, the Fed does not even have a theory about it that can be modeled.
After many false starts, a few papers have emerged arguing that the Fed’s actions helped. But even these papers don’t argue that they helped much. And the story isn’t yet over.
Economist John Hussman has likened the Fed’s current financial policies to a Roach Motel, easy to get into, impossible to get out of. It will be interesting to see how the Fed tries to get out.
The Atlanta Journal-Constitution wrote about the new Fed paper: “Without the Fed and its low interest rates, the jobless rate would have been higher these past few years—pretty much all economists agree on that.” This will be news not only to Austrian economists, but to others as well.
If the Fed and federal government had not intervened in 2008 to arrest the crash which their own policies had created, unemployment would no doubt have been higher in 2008 or 2009. But by now, almost six years later, our economy might have long since recovered.
This is the difference between short term and long term thinking. Environmentalists are always reminding us that we need to consider long term results of how we treat our planet. We also try to teach our children to consider the long term, not just the short term, but the government always seems oblivious to anything but the next election.
The Fed’s chairman, Janet Yellen, will be testifying today in Congress. Perhaps some senator or representative will ask her how she plans to conduct monetary policy in the future, since the Fed Funds rate, the key tool of past Fed policy, has been rendered increasingly irrelevant by recent Fed policy excesses.
We know that the Fed plans to lean heavily on the interest it pays on bank reserves, a new tool that was slipped into the TARP bill in 2008 without most members of Congress knowing. It might also be useful to ask how much of this interest is now being paid to foreign banks, which we are in effect subsidizing.
Another, related issue is whether the federal home-loan banks, which are not supposed to be eligible to “earn” this money, are evading the rule by lending to foreign banks who then “earn” it for them.
What all this illustrates is that the Fed operates in secrecy, and not even Congress has much of a clue what is going on.