Dueling Mandates

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What do you people WANT from me?

Imagine, if you will, two lots side by side in suburban America.  On one is a nice home, fully furnished and artfully landscaped.  Next door is a vacant lot of the same size.  Now, suppose I told gave you a robust set of resources and I told you you had two equivalent tasks.  First, you needed to build a nice new house on the vacant lot.  But equally important, you had to make absolutely certain that the house on the other lot didn't burn down.

There are a variety of ways you could bring your available tools and resources to bear on these tasks, as you've been instructed that it is nothing less than your job description to accomplish both.  But considering one is a LOT more resource intensive and requires a great deal more immediate action, it would make sense to focus your attention on building the new house.  Oh, you could send a few guys over and station them around the house, watching for the first telltale signs of smoke.  You could send over a team with some funds to place heat sensors around the house.  You could even send some expert safety inspectors over to make certain that there wasn't any unnoticed fire hazards anywhere on the property.  With that, the rest of the team could be allocated to begin building the new house.  You'd do something like that because, in light of the basic goal of accomplishing both tasks simultaneously, it would make sense to focus heavily on the task furthest from completion.

The Federal Reserve has, at the core of its mission, a "dual mandate".  Their role is to ensure price stability, and simultaneously work towards full employment.  Note that one is not given more weight or importance than the other - the Fed is expected, indeed exists, to produce both outcomes at all times.  Now, if one half of the dual mandate is well in hand, indeed being exceeded every quarter, and the other is a disaster area, it would make sense to commit more resource to the crisis than to the success story.  Of course, the interesting thing about the Fed's dual mandate is the interrelationship between inflation and full employment.  Obviously, when you approach full employment, there is much more demand, resources become scarce and wages and prices go up.  Conversely, when large numbers of people are out of work, there is downward pressure on wages and prices tend to fall when demand is weak.  So if the Fed were to actually focus on increasing employment, inflation would increase somewhat - but that's ok - the mandate is to try to accomplish BOTH, not accomplish one and ignore the other.

So as the American economic condition worsens yet again, it is appalling to note that the Fed yesterday decided, once again, to do nothing about unemployment.  They did announce a symbolic extension to "Operation Twist", an Open Market Operation intended to lower long term interest rates that will have no measurable effect on employment.  All around the country you could hear the jaws drop.  Literally everyone who is not named Willard Romney hoped and expected the announcement of some genuine expansionary monetary policy changes from Bernacke, and collectively we were left stammering as we tried to explain why the Federal Reserve might, at this point in the depression, once again refuse to act on their 'second' mandate.  How could this even happen?  Why would they choose not to act?  For that matter, what WILL it take for the Fed to take action to reduce unemployment?

I think there are two answers to this - one structural, one ideological. The structural argument is pretty simple - why did Bernacke do nothing once again?  Because he CAN.  The concept under which the Federal Reserve operates is one of the "Independent Central Bank".  The idea is the bank operates outside of political influence, thus preventing political leaders from using the bank to reward backers and punish the opposition.  The Central Bankers are well aware of this debate, but there is simply no pressure, no motivation, no incentive for them to do anything they don't want to.

Ok, sure.  But why don't they want to?  That's the ideological part.  Who are Central Bankers?  They are wealthy financiers and economists, and the constituency they both represent and belong to is one of the wealthy and powerful - what we have come to call the 1%.  So consider their options.  If they took actions that reduced unemployment to 5%, in the course of which saw inflation rise to 5%, who would benefit?  Well, the people with the jobs, and the people who sell them houses and cars and food and pizza. Working people, families, communities. Who would lose?  People who have a great deal of wealth, who don't make their income by earning wages.  Inflation acts directly to reduce the purchasing power of money - the more money you have, the more inflation costs you.  In this case, the 1% would lose while the great majority of everyday Americans would gain tremendously.  In the other scenario, the one we are watching play out now, inflation is well below even the 2% target, protecting the value of the wealth of the wealthy.  And who suffers?  Just folks - many of them the wrong color, the wrong politics, the wrong religion.  The suffering of the poor and the middle class is a feature, not a bug.  If there were fewer of them, the unemployment rate would go down all by itself, even as they were less of a drag on society.

So when you hear about another Federal Reserve meeting where they decided, once again to do nothing, and Ben Bernacke announced that decision in a grave voice with a long paragraph of economic double-speak, don't just shrug your shoulders and think none of this applies to you.  They are making a conscious decision to ruin tens of millions of lives in order to protect a few percent of wealth for the richest people in the world.  I often ask, somewhat rhetorically, what it might take to get the American people out in the streets, but at this point the answer seems to be, pathetically, that there is no betrayal we are unwilling to accept from our leaders.
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