The Fed Targets Unemployment With More Money for Banks

[Patient readers: My Internet coverage got knocked out this evening and early morning by the storm. We are now returning you to your regular service. –lambert]

Paul Jay of the Real News Network interviews Robert Pollin, Professor of Economics at the University of Massachusetts in Amherst and founding co-Director of the Political Economy Research Institute (PERI).

More at The Real News

This paragraph caught my eye:

POLLIN: The corporations are sitting on somewhere on the order of $2 trillion in cash and other liquid assets because they don’t want to invest. There is an issue here which also gets back to another question of financial regulation, which is, people who are hoarding cash who don’t see any opportunities also think that around the corner there may be another financial bubble, and they want to be primed to take part in the bubble, that is, when asset prices go up very, very quickly, for example, prices of oil or prices of food, or a stock market bubble. That’s where they think they’re going to make their big killing. They don’t want to put money into these investments that mean small expansions of business, you know, normal returns. And so they think that the financial system is still capable of generating another bubble. That’s because we haven’t established strong enough regulations to prevent bubbles from happening that then lead to another round of crashes.

Interesting theory.

And then there’s 6.5% unemployment being the “new normal”…

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About Lambert Strether

Readers, I have had a correspondent characterize my views as realistic cynical. Let me briefly explain them. I believe in universal programs that provide concrete material benefits, especially to the working class. Medicare for All is the prime example, but tuition-free college and a Post Office Bank also fall under this heading. So do a Jobs Guarantee and a Debt Jubilee. Clearly, neither liberal Democrats nor conservative Republicans can deliver on such programs, because the two are different flavors of neoliberalism (“Because markets”). I don’t much care about the “ism” that delivers the benefits, although whichever one does have to put common humanity first, as opposed to markets. Could be a second FDR saving capitalism, democratic socialism leashing and collaring it, or communism razing it. I don’t much care, as long as the benefits are delivered. To me, the key issue — and this is why Medicare for All is always first with me — is the tens of thousands of excess “deaths from despair,” as described by the Case-Deaton study, and other recent studies. That enormous body count makes Medicare for All, at the very least, a moral and strategic imperative. And that level of suffering and organic damage makes the concerns of identity politics — even the worthy fight to help the refugees Bush, Obama, and Clinton’s wars created — bright shiny objects by comparison. Hence my frustration with the news flow — currently in my view the swirling intersection of two, separate Shock Doctrine campaigns, one by the Administration, and the other by out-of-power liberals and their allies in the State and in the press — a news flow that constantly forces me to focus on matters that I regard as of secondary importance to the excess deaths. What kind of political economy is it that halts or even reverses the increases in life expectancy that civilized societies have achieved? I am also very hopeful that the continuing destruction of both party establishments will open the space for voices supporting programs similar to those I have listed; let’s call such voices “the left.” Volatility creates opportunity, especially if the Democrat establishment, which puts markets first and opposes all such programs, isn’t allowed to get back into the saddle. Eyes on the prize! I love the tactical level, and secretly love even the horse race, since I’ve been blogging about it daily for fourteen years, but everything I write has this perspective at the back of it.


  1. fresno dan

    I wonder if the FED officials ever read the graphs other FED officials make:

    I would be interested, in light of the FED data, exactly how giving money to banks helps workers…
    (Maybe the wealth effect – as the rich buy more polo ponies, or olympic dancing horses, the oats fed to the horses get scattered, and the poor can collect and eat the oats, therefore freeing income to increase consumer demand…)

      1. from Mexico

        That’s capitalism’s Waterloo.

        It’s where capital’s quest for ever greater profits and returns kills off aggregate demand.

        Adam Smith realized that capital had an inherent negotiating advantage over labor, but he didn’t realize this rendered his entire theory unworkable.

        1. Max424

          Yup. That’s it in a nutshell.

          By definition, the more successful Capitalism is, the closer it moves toward termination by self-starvation.

          On an infinite planet, with infinite resources (especially infinite cheap –slash slave– labor), there wouldn’t be a problem. Big Cap could keep on moving. Exhaust and/or desolate, then relocate. Do the perpetual, Capitalism Stomp and Shuffle.

          But on this tiny blue orb? No can do. Already, all the easy pickins have been consumed, and all the good stomping grounds have been hitherto stomped.

          Basically, Capitalism picked the wrong planet. And so Big Cap will die. Which leaves the Big Q: Are we so inexorably intertwined, that the Suicidal One is going to take us with It?

      2. Max424

        Interesting. Peak oil and peak wages struck the United States at a simultaneous moment in history (occurring almost on the exact same day!).

        Incredible coincidence!

        1. from Mexico

          I don’t think it’s a coincidence.

          As physical nature becomes more difficult to exploit, those “other” human beings become a lot more convenient targets.

          1. Max424

            I don’t think it was a coincidence either. In fact, I have calculated the odds –that the two peak events coincided randomly– using a chalkboard and advanced math. Here’s the two possibilities I came up with.

            Zero, and ∞ to 1 against

    1. Ben Johannson

      I suspect Bernanke knows that stuffing banks with reserves does not stimulate demand, but it’s the only card he has to play and because most people think the Fed CAN stimulate, he may be following the playbook in small hope that it will be a psychological stimulus to confidence.

      1. from Mexico

        Yep. Those were my thoughts exactly.

        And this is all very interesting in light of what is currently going on in Japan. Notice that besides setting an employment target, Bernanke also set a minium inflation target of 2-1/2 percent. And he expresses little confidence he can achieve either one.

        Is there any evidence that Bernanke is a true believer in the monetarist faith? In the past, hasn’t he he laid all this out in some detail and all but gotten down on his hands and knees and begged the President and congress for some sane fiscal policy to go along with his loose monetary policy?

        And I’m certainly no friend of the banks, but who can blame them for not loaning if loan demand is slack and they perceive credit risks high? It seems to me that many of the more cautious and/or lucky (could we call them prudent?) of our species — the ones who are not already borrowed up — are at the moment avoiding debt as if it were the plauge.

        As you say, Bernanke has to play the hand he was dealt, and the hand he was dealt is a President and congress that are swept up in the fictions and pathologies of austerianism.

        1. joebhed

          If I may.
          The private debt-based money system – endogenous-money to MMT fans – works on the premise that we will have ‘circulating media’ only in the presence of creditworthy borrowers.
          With the national economy now still characterized as in a balance-sheet recession, it is a dire fact that the national economy is not a creditworthy borrower.
          So, our national economic problem becomes the manifestation of Atalanta Fed Credit Manager Hemphill’s 1934 ‘staggering thought’.

          “”This is a staggering thought. We are completely dependent on the commercial Banks. Someone has to borrow every dollar we have in circulation, cash or credit. If the Banks create ample synthetic money we are prosperous; if not, we starve. We are absolutely without a permanent money system. When one gets a complete grasp of the picture, the tragic absurdity of our hopeless position is almost incredible, but there it is. It is the most important subject intelligent persons can investigate and reflect upon.””

          So, to be clear, “the tragic absurdity of our hopeless position” is not the fault of Bernanke, nor of Obama nor the ‘cement-shoed’ Congress, it is within the faulty design of the money system itself.
          That’s why Minsky called for a new Monetary Commission and new institutions to solve for financial instability.

          Finally, re the monetarists.
          Friedman’s only real monetarist approaches were in his “Fiscal and Monetary Framework for Economic Stability”, and as contained in his “A Program for Monetary Stability”.
          What is noteworthy is that in each of these proposals, he called for direct PUBLIC money creation “BY RULE”, so as to avoid political interference in monetary affairs.
          There is no transmission slippage nor string-pushing possible with direct, rule-based public money creation.
          And that is what the intelligent people opining on these pages should be ‘investigating and reflecting upon’.

    2. Paul Tioxon

      You and some republican strategist were on to something, or so they thought!! Dan, you have tripped over the secret that the gop does not want to talk about, but it was prominently on display during the summer Olympics. In a promising bit of political push, the DRESSAGE GAMBIT, an effort by Mitt Romney’s horse in the Olympics, was to provide psychic pay in the form of nationalistic fervor in the dressage competition, with America beating the British Crown, in a subliminal re-enactment of the American Revolution. The idea was to juxtapose Romney, as a Revolutionary upstart, and a real classy winner, by which all of America, including the filthy 47% would bask in the wealth aura of a gold medallion. Commemorative dishware plates would be sold, so as to hang on the walls of unforeclosed homeowners, in venerable sites for all to see. It would replace Kennedy and MLK pictures, and with the gold medal pictured, we would all feel as rich as Romney. Some how, it all went awry.

      1. OpenThePodBayDoorHAL

        Nobody noticed when Repubs hijacked “the American Dream” and substituted the Mitt Romney story in its place. The old school American Dream was that people just wanted a modest house, small picket fence, a stable job, and maybe a little left over to retire on someday. Repubs thought all that sounded too much like socialism and trade unionism. So they convinced people, No, the American Dream is to get filthy rich, like Mitt. Jets, yachts, and plenty of money around in case you get sick.


      “Do not believe anything this government says.”

      They wouldn’t say it, if it weren’t a lie. Reminds me of the new Chairman coming in to the last bank I worked at. Of course, there was lot’s of speculation..”he’s this, he’s that, blah, blah, blah.”

      I simply commented that he was given the job, BECAUSE HE’S THE BEST LIAR AMONG THEM.

    2. Susan the other

      My comment just got lost so I’ll try again. Last week Hugh posted an analysis of the lastest BS from the BLS and concluded that the real unemployment rate is 17% and we need 28 million jobs. But Bernanke comes up with the same time-honored nonsense of keeping employment down to 6% to keep inflation down to 2%. 6% has always been the magic number, but that was when we actually had an economy to fudge. We no longer have an economy because productivity has killed it. So what we need are 30 million good paying low productivity jobs of high social value. It is amusing to hear the Fed still fears inflation in a system that has turned to junk and can’t tell inflation from growth. All the economy does anymore is backfire and stall. We need a new economy that demands high social value.

      1. sharonsj

        Unemployment isn’t 6.5% and inflation isn’t 2% either. Since 2008, sugar is up 40%, the cat food I buy is up 100%, the dog food I buy is up 50%, and the candy I used to buy is up 100%. That’s just a tiny list that doesn’t even go into the shrinking packaging either.

        On top of that, the effing politicians want to institute chained CPI, which means less help for the poor, old, and disabled. But they never say a word about corporate welfare, because the kickbacks, campaign contributions, and high-paying jobs waiting for them buy their silence.

        If taxpayers really understood just how much of their money is going to companies like Bain Capital and ExxonMobil, we’d probably have a revolution.

          1. JenniferJ

            That’s right, thousands of new Central American peons undercutting low wages and sending their earning home to their home village can only help our economy, to say nothing of their anchor babys in our schools.

            Why should I hire some uppity American who demands weekends and holidays off when I can drive down to Home Depot and have a couple of grateful peons jump in the bed of my pickup and work for 12 hours for a hundred bucks?

  2. psychohistorian

    Keep stokin that fire Lambert. I hope you have a good wood supply for this season.

    How long are the unemployed going to suffer quietly? If we add another 1.5 million after the first of the year because of this fiscal cliff BS maybe that will tip the scales.

    Corporations use to have to apply to states to exist for specific reasons. Now they own our government and their profit accrues to the rich…..whocoodanode.

    Did KOS really call our president the Capitulator in Chief? The worm is turning, perhaps.

    Maybe we just don’t have enough faith.

    1. Lambert Strether Post author

      I don’t accept narratives of Democratic weakness. They do what they are determined to do, which is much the same as what the Republicans want to do, cloaked in different language and with different cultural markers.

      Since Kos’s business model depends on pressuring the Democrats, he’s got no problem with narratives of weakness; the idea is that the Kossack’s will give the Democrats “spine.” How’s that been working out?

      1. Brindle

        I think Kos’ business model is based more on the appearance of pressuring the Dems.

        As the Dems have moved towards the embrace of an elite ruling class, differing only from the GOP only in having a more diverse cultural/ethnic/sexual membership, Kos finds little problem with this.

        He (Kos) is content to trumpet Dems winning elections as proof that progress is being made. He is essentially a “bean counter” with a successful business strategy.

    2. from Mexico

      psychohistorian says:

      How long are the unemployed going to suffer quietly?

      For as long as the lords of capital and their paid liars and bumsuckers (read neoclassical economists and right-wing theologians) can convince the unemployed that their unemployment is their just reward or that it is just the nature of things.

  3. Chauncey Gardiner

    Interesting piece. I disagree with Mr. Pollin regarding the endgame of those who control the major banks and large transnational corporations. IMO the Banks are sitting on $1.4 trillion in Cash and corporations are sitting on $2 trillion in Cash not because they desire to speculate on another bubble, but because they believe it is highly probable there will be further material systemic disruptions in the global financial system that will in turn cause distress in the real economy, and that private and public assets will be available for purchase at very attractive prices as a result. In the aftermath they want to remain in control of real assets and the political system, and to further concentrate control of assets, wealth and power in their own hands. These are very careful and calculating people.

    In fact, there already is a bubble. It’s in Bonds, and it has led to severely maladjusted positions, particularly in derivatives.

    My questions relate to policy changes that are politically achievable now given that the destroyers have an inordinate level of influence over supranational entities, central banks, politicians and senior government officials. It is clear from what has occurred in southern Europe that Austerity is a failed policy on all fronts. The so called “Fiscal Cliff” is a canard that may in fact be designed to precipitate the very economic distress that will lead to the systemic disruption that they seek.

    1. from Mexico

      Chauncey Gardinersays:

      These are very careful and calculating people.

      I very much agree with everything you say in your comment, with the exception of the above cited statement. It seems like the plutocrats invariably end up outsmarting themselves.

      If one looks at human history of the last 5,000 years, the pathocrats are never satisfied to fleece the sheep, but seem to always end up slaughtering them. This results in the pathocrats’ own demise. This is the theory of history and social organization that Peter Turchin develops in War and Peace and War. He argues that the historical pattern can be broken.

      In lower forms of life, the phenomenon is very common and easy to demonstrate, such as this:

      Figure 5. The bacterium Pseudomonas fluorescens illustrates tradeoffs between individual and group selection in experiments conducted by Paul B. Rainey and Katrina Rainey of the University of Aukland in New Zealand. In an unstirred broth, Pseudomonas cells can survive only at the surface. Cells with a gene called wrinkly spreader (green) secrete a polymer that forms a buoyant mat (left). Producing the polymer has a metabolic cost, which limits the cells’ rate of growth. Nonsecreting mutants (yellow) can live as freeloaders, benefiting from their
      neighbors’ exertions. The freeloader cells reproduce faster; when they become too numerous, however, the entire mat disintegrates and sinks (right), in a “tragedy of the commons.”
      Google>>>> David Sloan Wilson and Edward O. Wilson, “Evolution ‘for the Good of the Group’ “, American Scientist

    2. okie farmer

      Chauncey, that’s the exact outcome of the Great Depression, millions of people lost everything and their depreciated assets were scooped up by hoarders. In my family, my grandfather,and two out of three of his brothers lost their farms which sold to a hoarding banker in OKC. My great uncle who did not lose his farm, was primarily concerned with raising great bird dogs, and made a living raising mules – no mortgage.

      The hoarders absolutely know what’s coming.

  4. vtek

    interesting theory, and it arrives at a correct conclusion, but i don’t really buy the reasoning. this is obviously anecdotal in the extreme as it’s only my own experience, but i’m sitting comfy in cash not because i’m waiting for another bubble to blow (there already are a few if you’re observant), but because i don’t have the impression that anything has been fixed since the last collapse and the economy is instead still being built up on a house of cards that is an insolvent financial system. i am sure that there are many others who feel the same way.

    more personally still, i increasingly see investment in the stock market as immoral with nothing positive created and only emabling the obscene payoffs these corporate raiders enjoy. but that is not a consideration that will stop many others, though.

  5. vtek

    if i would have finished reading the comments before posting my comment, i would have noticed that mr. chauncey gardiner beat me to it. well done.

  6. lifefaterdebt

    It seems the answer to all our problems continues to be give more money to the banks. After four years of supporting banks who are so say too big to fail and witnessing only resistance to passing the benefits onto their victims, I struggle to understand why anyone thinks these particular leopards have now changed their spots and will use the next trench of funding to help anyone but themselves. I wrote this about the economic inertia we are experiencing the UK.

  7. diptherio

    I think Pollin’s prescriptions are slightly off-base. On the one hand he recommends increased and improved fiscal stimulus, which puts assets (wages and profits) into the hands of the real economy, counteracting the inadequate demand that Jay emphasized, and allowing the non-financial private sector to pay down accrued debts.

    But he also thinks it would be a positive to force the banks to start lending out their massive hoards of wealth, which is injecting debt into the economy, which increases liabilities in the real economy, which is the opposite of inserting assets. Pollin seems to repeat the standard econ error of equating credit with money. Injecting money into the real economy adds to assets, but injecting credit results in a net decrease in assets held by the non-financial sector, since (in aggregate) all principal is returned to the financial sector, plus interest.

    Since the banks are getting the money from the Fed for free, we should just take it all right back, leaving them with their pre-crisis reserve levels. The Fed can accomplish this via keystrokes, the same way as they created the funds in the first place.

  8. diptherio

    Ben Bernanke knows full well that QE will not lower unemployment and that the banks will not inject their hoarded reserves into the real economy any time soon. He makes that out to be a good thing (no inflation risk) in this lecture (link below). Skip to 19:10 to see his truly astounding graph showing the effects of the Fed bailout facilities and QE on reserve balances:

    @20:55 :

    …the amount of currency in circulation has not been affected by these activities. What has been affected…is reserve balances…And so the banking system has a large quantity of these reserves but they are electronic entries at the Fed. They basically just sit there, they’re not in circulation.

    No one expects QE directed at banks to stimulate the real economy in the midst of an on-going balance sheet recession. All noise to the contrary is strictly PR spin, intended only to snow-job the muppets (i.e. you and me).

    1. joebhed

      poor diptherio.
      Obviously, out of the room when the MMT memo came through.
      Perhaps the Governor was also out.
      For crying out loud, ALL MMT economist-seers know that reserves ARE money.
      And that when the private CB injects reserves into the economy – no matter how – the CB is creating ‘money’ at the same time. Get with the program here.
      It is part of the (cough, cough) vertical strand of the money supply.
      Geezum, until hizzoner and diptherio get their “reserves-are-money” facts straight, how are we supposed to advance our fave MMT theories.
      (End sarc)
      Really, diptherio, thanks a bunch for pointing out this non-monetary reality.

      But, but….. if the ‘government'(Treasury) doesn’t create money when it spends due to the requirement for a prior positive TGA balance, and, if the government(CB) does not create money when it “keystrokes” these reserve balances onto the bank balance sheets in a transaction, it seems that the entire “monopoly currency-issuing government” scenario falls flat on its deserves.

      The problem is that MMT did not understand the monetary system for what it really is BEFORE it was taught the mythology of ‘sovereign’ policy space brought about by getting off the Bretton Woods gold-exchange standard.
      Which really changed nothing.
      For the Money System Common.

  9. Hypothetical_Taxpayer

    Could Ben not know he is “pushing on a string”?

    Here is where Ben goes to work everyday. The Marriner S. Eccles Building.

    Here is what Marriner S. Eccles had to say about Monetary Policy in the 30s.

    According to Roger G. Sandilans and John Harold Wood the phrase was introduced by Congressman T. Alan Goldsborough in 1935, supporting Federal Reserve chairman Marriner Eccles in Congressional hearings on the Banking Act of 1935:

    Governor Eccles: Under present circumstances, there is very little, if any, that can be done.

    Congressman Goldsborough: You mean you cannot push on a string.

    Governor Eccles: That is a very good way to put it, one cannot push on a string. We are in the depths of a depression and… beyond creating an easy money situation through reduction of discount rates, there is very little, if anything, that the reserve organization can do to bring about recovery.

    The phrase is, however, often attributed to John Maynard Keynes: “As Keynes pointed out, it’s like pushing on a string…”, “This is what Keynes meant by the phrase ‘Pushing on a string.'”

    Keynesian economists later renamed “pushing on a string” to “Liquidity Trap” because it sounds more professorly.

  10. Glen

    The problem is that the companies sitting on the hord of cash are right to do so. The American consumer economy is dead, and the fundamental FLAWS which caused the crisis are even larger now than in 2008.

    Ben keeps trying to recreate the economy that CAUSED the crisis. The really solution was to reform the banking and financial industry that CAUSED the problem rather than bailing it out. Just keep giving the banks more cash will never solve the problem. The restructure solution was ALWAYS within the power of the Fed and the SEC, they just don’t want to do it. Maybe now, Ben will relaize the error of his ways, quite being a Greenspan clone and FIX the problem.

    1. Hypothetical_Taxpayer

      Except that Gentle Ben says he wants to leave the Fed, in a year I think it was. Janet Yellen is current #2 and is like Ben, except on an overdose of estrogen.

    2. joebhed

      The private central bank of the United States is unfortunately a one-trick pony.
      My Dad used to say that it does not work in reverse.

      Having entered the ‘real’ debt-deflation phase associated with what the financial seers on these pages are calling the ‘balance-sheet recession’, our monetary policy mechanisms (ZIRP and QE) against our idled resources and increasing wealth concentration are impotent.
      The Fed is incapable – legally – of putting any real money into the hands of consumers who can jump-start this economy with increased demand.
      Only the Congress could do this and only by again issuing Greenbacks. Electronic Greenbacks, of course.
      The Kucinich Bill proposes to do exactly that.
      But again, the NC seers claim it would actually cause a recession.
      This despite the very real fact that the concepts for the modern solution were originated by the monetary econmist(Fisher) who coined the title “The Debt-Deflation Theory of Great Depressions.
      We’re lacking a certain dialogue here.
      Based, I believe, on a false construct relating to the cost of reserves.
      But I am certain that it will come.
      For the Money System Common.

  11. Lyndon

    Nice video! But if the US dollar is created through the government supposedly by the people and for the people, why are banks (either central or otherwise) allowed to create the money supply? Shouldn’t the government be creating it and distributing it directly to the people? The people can then decide through taxation, saving, spending or investing how they want their own money to be allocated? Why should a money created by keystrokes at no effort and requiring no work be subject to interest charges by banks?

    1. joebhed

      Yeah, exactly.
      Not only is the problem one of ‘systemic transmission slippage’ -a.k.a. pushing on a string, but of the ‘moral hazard’ of having a central bank that is privately owned and that acts exclusively THROUGH the private banking system in implementing the nation’s monetary policy.
      FRBNY is the “Banker’s Bank”.
      It is not the ‘bank for the national economy’, or for we the people who OWN the money power that Congress has transferred to the private bankers.
      But, please be aware.
      The MMT construct is based on preserving a high level of comfort in the so-called endogenous money system.
      Until we trash that way of thinking, you and I and the rest of we the people do not have access to the money system, except via the private issuance of debt.
      In case the balance-sheet-recession poets haven’t stumbled upon this reality, the national economy is not a creditworthy borrower. Thus auterity, in the face of unpayable debt.
      Change the money system, or suffer its consequences.
      For the Money Sytem Common.

  12. Schofield

    Friedman’s only real monetarist approaches were in his “Fiscal and Monetary Framework for Economic Stability”, and as contained in his “A Program for Monetary Stability”.
    “What is noteworthy is that in each of these proposals, he called for direct PUBLIC money creation “BY RULE”, so as to avoid political interference in monetary affairs.
    There is no transmission slippage nor string-pushing possible with direct, rule-based public money creation.
    And that is what the intelligent people opining on these pages should be ‘investigating and reflecting upon’.

    How exactly does Public money creation By Rule work?

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