Since the Congress and the President have abdicated their responsibilities entirely, it’s long past time for the Fed to do something serious about unemployment.
Quantitative easing has been a mixed bag so far.
It certainly saved the American financial system, but giving only banks and corporations access to free money has not lead to an increase in demand.
Banks are busy speculating, as usual, while corporations are sitting on both record profits and mountains of cash.
The problem with the US economy right now is a lack of demand, primarily caused by the high unemployment and massive deleveraging that resulted from the bursting of the housing bubble.
The output gap’s on the order of $2 trillion, and the number of unemployed is probably close to 25 million.
It may take a decade or more for the US economy to recover if nothing is done.
If employers won’t hire, the Fed needs to step in and create demand.
Fortunately, the Fed has one great tool at its disposal: the ability to print unlimited amounts of money.
The best way to do so would be for Helicopter Ben to announce that the Fed will hire 10 million unemployed Americans at a salary of $30,000/year for the foreseeable future.
The cost of such a program would be $750 billion/year, or roughly the annual Pentagon budget.
While it would obviously be preferable that these Americans engaged in productive labor, the main point is to get them paying taxes, spending money, and staying in their homes.
This could also be coupled with a refinancing by the GSEs or the Fed of every underwater mortgage in America, reducing principal to current market values.
And finally, the Fed should announce that it is raising the target inflation rate to 5% for the forseeable future. A little inflation will go a long way towards getting the deleveraging disaster under control.
None of these steps requires Congressional approval.
It’s clear that the politically gridlocked Congress won’t be doing anything about unemployment until at least 2013, and will be idiotically cutting spending and reducing growth further throughout the next 2 years.
So, the Fed needs to do the heavy lifting of genuine national leadership.
It would also be useful for the Fed to engage in a coordinated inflation target raising with the ECB and the Bank of Japan.
And it would be extremely helpful for the otherwise worthless US Treasury Secretary to announce that the Administration intends to pursue a weak dollar policy.
We can’t address global trade imbalances when the Chinese, Indians, and Brazilians are, like America’s corporations, hoarding money and refusing to let their currencies appreciate.
The austerity and inflation fetishes currently being pursued by the developed world’s central bankers are entirely unnecessary and ultimately self-defeating: contraction is contractionary.
Gorilla says: “All Americans, Europeans, and Japanese need is the confidence and certainty of a regular paycheck, then they’ll take care of the rest!!!”
