The Federal Reserve Board will soon decide once again whether to continue to hold down interest rates or to allow them to rise.
The board is in more or less the same position as a physician trying to decide whether to remove life support a patient who is in intensive care.
All the indicators are that the patient is too weak to be removed from life support. Yet the patient can’t stay on life support forever.
I used to criticize the Federal Reserve Board on the grounds that it preferred tight money and high unemployment to the possibility of inflation. That’s yesterday’s news. Now the Fed’s concern is how to get the country out of its long-term recession.
The historic Keynesian remedy for recession is to increase the money supply and hold down interest rates. The idea is that putting money in circulation and making credit readily available will encourage consumers to buy things and businesses to invest.
But this time around, it didn’t happen. Banks and financial institutions invested in debt rather than in production of tangible goods and services. Savers invested in stocks and bonds because they couldn’t get any interest on their bank accounts, but this didn’t stimulate the real economy either, or at least not very much.
During the Great Depression of the 1930s, the United States had the largest and most productive industries on the planet. All that was necessary was to get it up and running again, which, however, took World War Two to fully accomplish.
The Great Recession that began in 2008 is different. U.S. manufacturing industry has been hollowed out. Even if there had been a meaningful economic stimulus, much of its benefit would have gone to China and other countries that we Americans depend upon for imports.
President Obama had a much more difficult challenge than President Franklin Roosevelt. FDR had to restart a stalled economy. Obama had to rebuild a broken economy. Even with a cooperative Congress, that would have been difficult, and might have been impossible, to do.
I think Obama’s major decisions have made things worse, but even if he’d decided differently, the economy would still be in a bad way.
That’s even more true of Congress, especially the Republicans in Congress. I shouldn’t fall into the habit of writing as if Obama governed the country by himself.
Which leaves the Federal Reserve Board with no good choices. Each time the Fed hints that it may allow interest rates to rise, the Dow Jones Industrial Index and other stock price indicators tumble. But the present situation cannot go on forever which means, according to Stein’s Rule, that someday it will stop.
Return to Crisis: Things Keep Getting Worse by Mike Whitney for Counterpunch.
The Washington Post and the Federal Reserve Cult by Dean Baker for Fairness and Accuracy in Reporting. (Hat tip to Bill Harvey)
Talk of Raising Interest Rates Is Irresponsible by Mark Weisbrot for Al Jazeera America. (Hat tip to Bill Harvey)
Should the Fed tighten? by Tyler Cowen for MARGINAL Revolution. He’s not sure. Neither am I.