New York Times (NYT) columnist Paul Krugman (pictured), an economist by training, an Ivy League academic by profession, and no stranger to bold proposals, has offered another big idea, recommending that the U.S. Federal Reserve double its already record-high balance sheet.
Krugman wants the Fed to buy another $2 trillion in assets to make more credit available, something Krugman argues will help the U.S. economy grow faster and create more jobs, which the nation really needs. Currently, the Fed's balance sheet is $2.17 trillion.
Is the Fed's Job Half Done?
Essentially, Krugman argues that the Fed's job is half-done. He applauds Fed Chairman Ben Bernanke's efforts to-date -- a mix of conventional and unconventional measures that enabled the United States to avert a disastrous collapse of the financial system. Nevertheless, a financial collapse averted is not tantamount to a robust economy with large job creation.
And what the economy really needs, Krugman said, is a lot of new jobs -- a hiring boom that can't occur unless businesses small and large have access to ample credit with which to expand their operations as demand increases. One sobering statistic on the size of the nation's job hole says it all regarding what kind of growth the nation needs: If the goal is something approaching full employment, we'll need to create about 18 million jobs in five years, which means the U.S. economy has to create 300,000 jobs a month, Krugman said.
Given that the recovery journey is a long uphill trip, why did the Fed ease off the monetary accelerator? Krugman argues that the primary reason is that "ideological opponents of government activism," including those who oppose President Obama's fiscal policy as well the Fed's interventions, have probably made the Fed reluctant to uses it full power.
To be sure, Princeton professor Krugman does not absolve the Obama administration for the tepid job growth to-date: Clearly, the stimulus package was too small to start with, and was further decreased by Senate centrists. Fast-forward to the present: A separate jobs bill for infrastructure projects and the like also would help with job creation, he said. A second, large fiscal stimulus package is what's needed, but it's politically impossible at this juncture.
That puts the ball back in the Fed's court: It has to end its timidity and start lending, he said, to help get the great American job-creation machine going.
Audit The Fed?
Krugman's recommendation comes at a time when the mood in Congress is unsettled toward the Fed. Further, if one faction in the House has its way, the General Accountability Office would be given the authority to audit all Fed operations, from interest rates, to relations with foreign central banks, to bond market interventions -- essentially, it would audit the Fed's monetary policy. The faction that wants this lays a lot of blame for the financial crisis at the Fed's feet. But was the Fed the culprit? As they try to capitalize on public anger at the Fed's bail-out of the financial institutions that helped create the crisis, this largely conservative/deregulation-obsessed faction conveniently forgets the financial deregulation wave of the 1980s and 1990s, including the repeal of the Glass-Steagall Act -- which sprang from their own ideology.
The faction also ignores how effective the Fed was during the financial crisis' acute stage. Though hardly without error, the Fed has effectively restored confidence and at least modest credit market liquidity. Moreover, inflation (so far) has not surfaced. As the saying goes, "hindsight is 20/20" -- the aforementioned may not seem like much in December 2009, but these are major accomplishments compared to where the financial system and economy were in the fall 2008.
Meanwhile, for every lawmaker who wants to audit the Fed, there are just as many or more who don't. House Financial Services Committee Chairman Barney Frank (D-Mass.) supports increased oversight of the Fed, but he's opposed to and voted against a GAO-audit-the-Fed amendment, co-sponsored by U.S. Reps. Ron Paul (R-Texas) and Alan Grayson (D-Fla.), which the committee approved 43-26. At this juncture, the amendment, part of the Financial Services Reform Bill the House passed 223-202 last week, does not have majority support in the Senate.
The view from here argues that Krugman's analysis of credit conditions is on-the-mark: More liquidity is needed and the Fed has to play a larger role by increasing its balance sheet -- an action that would increase job growth by getting more credit to businesses that need it to expand.
That said, is the Fed likely to increase its balance sheet by another $2 trillion? As the GAO audit amendment indicated, the political climate on Capitol Hill won't support it, and it's hard to envision Fed Chairman Bernanke taking another bold quantitative step, even though it's in the interest of the nation and the economy to do so. Further, in addition to congressional opposition, there is still some concern about the longer-term impact of the Fed's larger balance sheet on inflation. Even though the $2 trillion Fed buy-in hasn't led to higher inflation, the policy remains unproven in the long term: We are still in uncharted waters from a Fed balance-sheet standpoint.
For now, due to the political climate and the newness of quantitative easing, it appears the nation will have to rely on market forces, the Fed's asset purchases to-date and the fiscal stimulus to generate the liquidity required to create jobs. Here's hoping that's enough.
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