Anthony Ricigliano - The Fed, Wall Street, and the Unemployed

News By Anthony Ricigliano: With so much going on around it, the Fed appears to have forgotten one of its two mandates; the forgotten one being to promote full employment. The last time anybody there looked, the unemployment rate was and still is 9.5%. This number is very likely to head higher in the second half of the year. The economy lost another 130,000 jobs last month and estimates for the GDP range from a slip back into negative territory to around 1% to the positive over the next four quarters.

With these circumstances the Fed, if they were following their mandate, would be taking aggressive steps to bring the economy back to full employment. With inflation numbers hovering around one percent, there are no worries that prices are going to run away anytime soon. In fact, inflation numbers in the 3 to 4% area would probably go a long way toward getting companies to begin hiring again due to a sharp decrease in real interest rates. 

The issue keeping the Fed from pursuing its employment mandate is that those levels of inflation would be very unpopular with Wall Street. Superseding the needs of Americans who are out of work, 3 to 4% inflation would be devastating to Wall Street by hammering the massive amounts of mortgage debt on which they’re currently sitting. So who is the Fed listening to?

The fact is that Ben Bernanke’s Fed has had Wall Street’s back all along, going back to the beginning of the banking crisis when, by their own doing, Wall Street’s banks teetered on the edge of bankruptcy. That time Bernanke conned Congress into passing the Troubled Asset Relief Program (TARP) by saying that the commercial paper market was in jeopardy of freezing up, with a near term result of denying access to short-term credit necessary to operate through the meltdown. What he didn’t mention was that the Fed could have opened its own lending facility for that purpose. Coincidentally, he announced the establishment of a lending facility to buy commercial paper the weekend after Congress approved TARP.

That the Fed had a direct responsibility for inflating the housing bubble goes without saying. Even as signs of overheating were becoming obvious, Alan Greenspan himself was talking up adjustable rate mortgages as a means buy a home. These were the same types of mortgages that started the housing debacle but the Fed stuck to its guns as long as possible.

What the country needs at this point is a truly independent Fed that is not beholden to Wall Street and remembers its mandate of promoting full employment for the citizens of this country. We don’t have that now and it’s hard to imagine getting something like that anytime soon. One thing is for certain, with the Fed behind it, Wall Street knows it can mess up big and the Fed will be there with a shovel to clean it up.

Author Anthony J Ricigliano