"The current mission of the United States Federal
Reserve System is," says the Economic Policy Institute's Jeff
Faux, "to intervene in the economy on the side of those who
invest for a living against those who work for a living."The
Federal Reserve relies on a Wall Street" model that gladly swaps
higher unemployment rates and lower wages for financial
stability and stable output growth. Even eleven interest rate
cuts cannot undo the damage that policy had done to the U.S.
economy.
"Why isn't the economy roaring?" asks Tom Schlesinger, from
the Financial Markets Center. Christian Weller from the Economic
Policy Institute provides part of the answer: "we're growing
credit, but not incomes."
Real Threat of Deflation
Unless the Fed changes its policies soon, the current
recession has the potential to last for years. "We are at an
historic place," says William Greider, author of Secrets of
the Temple: How the Federal Reserve Runs the Country. "If we
screw up now, we are in trouble for years."
"We keep acting like this is just another cycle, but we are
flirting with a depressive period much like Japan," explains
Greider.
Schlesinger echoes his concerns: "We are at a turning point.
Policy makers can't continue to deal with new problems using the
lessons of old experiences."
Our economic problems are the "product of an aging and
ineffective tool the Fed uses to implement monetary policy,"
explains Schlesinger. "The way Paul Volker (President Carter's
Fed Chairman) and Alan Greenspan have steered our economic ship
for the last generation reflects their fear of stagflation in
the late 1970s and early 1980s."
"We're not re-running the 1970s in this era. Inflation is not
the worst possible thing that can befall us. We need to haul
this economy back from the brink of deflation," claims
Schlesinger.
Changing the Fed's Priorities
"The Fed has more tools to use than just adjusting interest
rates," says EPI's Weller. The Fed's interest rate hikes in 2000
kept the dollar high, helped to destroy capacity in the
manufacturing sector, and exploded the U.S. trade deficit.
Its focus on interest rates may assure price stability, but
that fixation ignores its legal responsibility for output
growth, full employment and stable exchange rates.
"We need new guidelines ―
legislated by a new Congress ― so all
four goals receive the same level of priority," says Weller.
Price stability should not receive a higher priority over the
other goals of output growth, full employment and stable
exchange rates."
Other tools the Fed failed to use are: adjusting the Reserve
Requirement, which requires banks to set aside one dollar in a
non-interest-bearing reserve account for every ten dollars
deposited; tightening margin requirements, which make it harder
for investors to play the market with borrowed funds; and by
enlarging the money supply.
Using these other tools is unlikely given the current Fed
chairman, Alan Greenspan, and his anti-worker animus. But there
are other ways to skin a cat.
"Unions have to engage the Federal Reserve's Board of
Governors," says Schlesinger. Union members should be at the
table."
While the Fed's charter calls for a majority of its directors
to be from labor, consumer, or some other non-financial
interest, less than 10 percent are.
Schlesinger also urges unions to lobby Congress on the Fed's
next leadership team. Both Alan Greenspan and William McDonough,
president of the Federal Reserve Bank of New York, will retire
soon. And both are decade-long appointments.