Fed Vice Chairman sees “hailing range”

Dean Baker correctly alerts us to the ominous statements made by the Federal Reserve Board Vice-Chairman, Stanley

Stanley Fisher VP FRB
FRB Vice Chairman Stanley Fischer

Fischer. Baker points out that 2% is a inflation target average; not a ceiling. It would be economically counterproductive to raise the Fed Funds Rate when the US economy is in the 8th year of recovery from the worst recession in US history since the Great Depression. Wall St. banks have resisted easing credit since they were unable to establish values for themselves and their cohorts in October of 2008. Yes, students of the economy remember the meeting Treasury Secretary Paulson had with 9 of the biggest banks in the USA. At that meeting the values of each of the banks was assigned to them via a dollar amount he had written on a slip of paper. Each received a portion of $125B of Treasury funds in the form of purchase of preferred stock.

 

The Federal Reserve’s control of the money big banks can access is used to encourage economic expansion or cool off an economy that is expanding too rapidly. If it hikes the rates, banks can charge higher loan interest rates such as mortgages and they can pay depositors higher rates.

The Fed’s monetary actions have not had much effect on the lending of big banks. Several years of 0% to .25% failed to produce the loans necessary to cause business expansion. Failing this, the Fed resorted to “quantitative easing”…twice also with little effect. The QE, (link for sight impaired) as it is called forces banks to sell government bonds to the Federal Reserve thereby reducing the securities on their books and increasing their cash. The theory of QE is that without interest producing securities, banks are forced to find a market for this cash; hopefully retail borrowers.

A big part of the problem of bank lending is the domination of Wall St. banks in the banking industry. Wall St. banks have centralized credit policies that limit the lending of local bank managers. Businesses without hard collateral cannot meet the risk avoidance criteria of their local Wall St. bank branches. With slack lending through their thousands of retail branches, the Wall St. banks must look to businesses with a national presence. Here, they may be finding slack demand for credit. This slack demand is due to the fact that these businesses have excess productive capacity. That is, they are capable of producing more product but have no market for it. Currently, producers in the aggregate have almost 25% excess capacity; a full 5% below the average capacity utilization between 1972 and 2015. If you can produce more with what you already have, you have no need to expand, nor to borrow to finance that expansion.

This dilemma; having too much capital concentrated within centralized lending institutions while too little capital is in the hands of consumers is driving bizarre proposals such as Vice Chairman Fischer’s. The Federal Reserve cannot force the banks to lend and the banks can’t force these national corporations to borrow. If he has his way, this tepid economic recovery will slip into another recession a concern expressed by Baker and his colleagues at the Center for Economic and Policy Research.