The Fed and the Great Recession That Won’t Go Away

In the shadow cast by mass media coverage of elections in which under 40% of eligible citizens voted, the Federal Reserve recognized what the candidates could or would not.  The capitalist crisis is still upon us, shows few signs of fading soon, and provides strong hints that it might get worse.  So despite record cash on banks’ and non-financial corporations’ balance sheets, the Federal Reserve decided to buy another $600 billion worth of Treasury bonds in the open market.  Once again the hope is that this extra printed cash distributed to those willing to sell Treasury bonds will not end up merely adding to their existing cash hoards.  This time, so the story goes, it may end up being lent to business and individuals who will spend the money and thereby goose the economy out of deep recession.

Given the huge deficits in the federal government’s budget — necessitating the issuance of huge new amounts of Treasury bonds — no doubt many of those bonds will be bought by banks and others for immediately resale to the Federal Reserve.  This buy-and-sell gambit makes nice, quick profits for those engaged in it.  More importantly it effectively means that the Federal Reserve’s new money created out of nothing is what finances the Treasury’s deficits.  This exercise in “high finance” injects massive additional purchasing power into the economy.  If and when that actually gets spent on goods and services — the ostensible goal of the Federal Reserve policy — the risk of provoking inflation is clear.

Conservatives in the US worry about the inflation potential in their ideological rush to reduce government.  They pronounce homilies about inflation’s dangers in order to reduce the size of government.  By cutting government spending — and thereby forcing more reliance on the private capitalist sectors — it will be possible to cut deficits, thereby reduce Treasury bond issuance, and thus relieve the Federal Reserve of the need to create money to finance the deficits.  Conservatives downplay the risk of worsening unemployment by an abiding faith in the private sector’s capacity to hire everyone willing to work.

Liberals in the US worry about unemployment in their ideological rush to reduce the risk of worker-based anti-capitalist upsurges.  They pronounce homilies on the costs of unemployment in order to support government expenditures aimed at reducing unemployment.  To appease the rich and big business, they do not propose taxing them to raise the funds for government employment-generating programs.  Instead they advocate borrowing those funds (chiefly from the rich and big business) to enable federal government budget deficits.  This certainly pleases the rich and big business, since they prefer buying Treasury bonds (lending to the federal government at interest) to being taxed by that government.  Liberals downplay inflation risk by reminding everyone that the Federal Reserve has tools to reduce as well as increase the money supply.

The Federal Reserve also has an eye on what might happen if it did not buy up Treasury bonds now.  Then the Treasury might have to offer higher interest rates to induce lenders to cover the massive ongoing deficits that Washington has chosen to try to get through this crisis.  Such higher interest rates would undermine the already weak and fragile prospects of the crucial housing and automobile industries.  Higher US interest rates might attract foreign funds into the US, thereby strengthening the dollar, increasing US imports and weakening US exports.  Massive new money creation injected by the Federal Reserve into the US economy may prevent all that.

No wonder so many other countries reacted badly to the Federal Reserve’s money-expanding action.  For them, the weakening dollar threatens the still important US market for their exports and threatens them with enhanced competition from US exports.  For those with reserves invested in dollar-denominated assets, the value of those assets is diminished by a cheapening dollar.  And the rising risk of inflation from Federal Reserve action worries everyone.  The vulnerability of other nations to the US Federal Reserve grates ever more sharply on them.

If and when the Federal Reserve’s vast new increase in the US money supply actually helped to stimulate sufficient purchases of goods and services to reduce unemployment, the potential for serious inflation is obvious.  Whatever tools the Federal Reserve has to limit the inflation, they may not be applied soon or strongly enough and, in any case, they may not succeed.  Such inadequacies and failures have certainly happened repeatedly in the century of the Federal Reserve’s existence.  Yet the Federal Reserve apparently found no other choice acceptable as this Great Recession deepens.  With Republicans who oppose greater deficits strengthened by the 2010 mid-term elections, that road to mitigate the Great Recession was closed.  That left these stark alternatives: either the risk of a worsened economy or another injection of new money to try to prevent that.

The Federal Reserve and the US Treasury plunged into the collapsing US economy in 2008 without worrying about the longer-term risks of what they did — from letting Lehman Brothers collapse to pouring trillions into the US credit market and credit institutions.  Why should we be surprised that they now plunge in once again without much worrying about future risks?  As the Great Recession deepens despite (or partly because of) all that they did before, desperation mounts too.

Richard D. Wolff is a Professor Emeritus at the University of Massachusetts in Amherst and also a Visiting Professor at the Graduate Program in International Affairs of the New School University in New York.   He is the author of New Departures in Marxian Theory (Routledge, 2006) among many other publications.  Check out Richard D. Wolff’s documentary film on the current economic crisis, Capitalism Hits the Fan, at  Visit Wolff’s Web site at, and order a copy of his new book Capitalism Hits the Fan: The Global Economic Meltdown and What to Do about It.

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