The Indispensable Man

Who is the most important person in government right now? According to Dean Baker in this post at The American Prospect, it isn’t Joe Biden or Kamala Harris or anyone else in the executive branch. It isn’t Nancy Pelosi or Chuck Schumer or some committee chairperson or anyone else in the legislative branch. And isn’t Chief Justice Roberts or Stephen Breyer (although I think he’s a close second) or any other individual in the judicial branch of government. It’s Federal Reserve Chairman Jerome Powell:

The story was that if too many people have jobs, then workers will have more bargaining power, and be able to get larger pay increases. These higher pay increases would get passed on in higher prices, which would lead workers to demand still higher wages, and we suddenly have a wage-price spiral like in the 1970s.

As Federal Reserve chair, Jerome Powell has broken sharply with this fixation on inflation. He has listened to the complaints that progressive Fed critics have been making for decades.

We have said that inflation is not always just around the corner. And when the Fed raises rates, it disproportionately hits those who are most disadvantaged in the labor market: Blacks, Hispanics, the disabled, workers with less education, and people with criminal records. We argued that the Fed needs to take seriously its legal commitment to full employment, not just its commitment to price stability.

Powell has explicitly embraced this logic. He has committed the Fed to keeping its key federal funds rate at zero until the economy approaches full employment. He sees the latter as being in the range of the 3.5 percent rate that we were seeing before the pandemic, not the 5.0 to 5.5 percent rates considered a floor by many economists just a few years ago.

I agree with him that far too frequently the Federal Reserve has stressed the “stable prices” flank of its dual mandate at the expense of its other mandate, low unemployment. Worse than that they certainly appear to be operating under the mistaken view that they are running the economy (something not in their empowering legislation) or that the prime purpose of the Federal Reserve is to ensure the DJIA goes up.

And where is the Fed in regulating banks and other parts of the financial sector? IMO they’re more in collusion with them than regulating them. Dr. Baker dismisses that as unimportant or at least a lot less important than full employment:

As far as financial regulation, it is important, as I have often said. But it is orders of magnitude less important than maintaining full employment. There is a myth about the cause of the Great Recession, that it was about the financial crisis, and not the collapse of the housing bubble. This myth was useful to Wall Street because it was their rationale for bailing out Citigroup, Goldman, and other behemoths who would have been sunk if we allowed the market to work its magic.

The claim was that the bank bailout was necessary to avoid a second Great Depression. I have often challenged proponents of this view, and in response have never gotten more than vigorous hand-waving, name-calling, and an occasional obscenity. The bailout prevented a once-in-a-century opportunity to eliminate a huge amount of bloat in the financial sector in one fell swoop.

I agree with that conclusion. I think that rather than bailing out Citigroup, Bank of America, et al. they should have been nationalized and split up. In 2008 they had a fully capitalized value of zero. Regulating banks isn’t the highest priority until it is and then it’s too late to minimize damage to innocent bystanders.

Present policies are incredibly perverse. State and local governments are slowly removing the impediments to the economy while the federal government is doing its level best to give people money to save (because that’s all they can do with it). Meanwhile the Fed is ensuring that savings aren’t worth anything. It’s not merely poorly aligned, it’s perverse.