A couple of weeks ago, the Federal Reserve announced that it will continue printing money to keep interest rates near zero until the headline unemployment rate drops below 6.5 percent, provided inflation does not rise above 2.5 percent. The Fed expects to continue this policy until the end of 2015.
The Fed is focusing on job creation by putting its foot on the monetary accelerator to spur consumer spending and housing purchases. Last month’s jobless rate was 7.7 percent, down from previous levels but still high by historical standards. Even though the recession officially ended in December 2009, unemployment has not been below 6.5 percent since September 2008.
The headline unemployment rate to which the Fed has attached itself actually declines as more people abandon hope of finding a job. The unemployment rate dropped to 7.7 percent in November because about 351,000 people left the workforce. lf the same percentage of adults were in the workforce as four years ago, the headline unemployment rate would be 11.1 percent.
To further accelerate hiring, the Federal Reserve also announced that it would continue its monthly buying binge of $85 billion in long-term Treasury bonds and mortgage-backed securities. To do this, you have to print a whole lot of money.
The Fed’s objective is to push long-term interest rates even lower. It’s not easy, considering that the 10-year Treasury bond is trading at 1.8 percent – less than inflation, which has averaged 2.3 percent over the last four years. Years after moving interest rates to near zero in December of 2008, the Fed is still redistributing income from savers and to borrowers.
The Fed’s catechism is that this will reduce already-low mortgage interest rates, which will help spur a housing recovery, which will lead the economy out of its doldrums. So much for claiming the government doesn’t pick winners and losers in the economy.
Sure, the housing market is on a slow road to recovery. But tight credit is standing in the way of a more robust housing recovery. Too many potential homebuyers cannot access interest rates that are at near historic lows. Potential buyers need pristine credit to get a mortgage because banks are afraid of owning the loan again if a borrower defaults.
If the federal government were serious about fixing the housing market, it would arrange massive refinancing at today’ s low interest rates for those who owe more on their homes than the structure is worth. That would give millions of homeowners more spending cash to lift the economy. We did, after all, spend more than 700 billion taxpayer dollars to bail out the banks without nailing any hides on the shed door.
The Fed’s near-zero interest policy also masks the real cost of financing trillion-dollar annual deficits that have become the norm. Low interest rates are an incentive for the federal government to continue borrowing at record levels. If the Federal Reserve were serious about getting the Obama administration and Congress to address the debt and enact fiscal policies to stimulate the economy, it would not keep enabling them with cheap money.
The flood of money from all over the world has helped push down the interest rate the U.S. Treasury pays to 50-year lows. But this ability to borrow enormous sums at incredibly low interest rates cannot and will not last forever, even if no one can say exactly when the day of reckoning will arrive.
Even the mighty U.S. government cannot assume it will always be able to cheaply borrow whatever it needs. Future Americans sending an unprecedented chunk of their incomes overseas to pay down debt means spending much more on our past than on our future. We should invest in education, R&D, infrastructure and addressing the job-skills deficit, not in robbing future generations of the opportunities we enjoyed.
originally published: December 27, 2012