DeMarco should be fired STAT

Can the Federal Reserve Help Prevent a Second Recession? by William Greider

What’s missing from Fed politics is the left: the countervailing voices of progressives, liberals and labor, who could make the case for more drastic action by the Fed. In effect, they could put an arm around Bernanke and encourage him to try more aggressive measures. Liberal-labor advocates could also defend the Fed against its right-wing enemies and act as principled critics who can pressure the central bank’s governors and push them further in a sensible direction than they might want to go.
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Joseph Gagnon, a twenty-five-year veteran of monetary policy at the Fed and now an economist at the Peterson Institute, lamented the one-sided nature of elite debate. “What bothers me,” he said, “is one side is nothing but critical of what the Federal Reserve is doing, and the other side is just silent. I just don’t understand. Why aren’t a lot of voices complaining that the Fed isn’t doing enough? The progressive side has been absolutely silent, and yet the conservatives have been jumping up and down. And this totally distorts the Fed’s environment.”

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Joseph Stiglitz, a Nobel Memorial Prize–winning economist at Columbia University, and Mark Zandi, chief economist at Moody’s Analytics, propose an excellent use for Fed-created money: funding a massive refinancing of home mortgages, which would cut monthly payments dramatically and free personal income for consumption. “Housing remains the biggest impediment to economic recovery, yet Washington seems paralyzed,” the two wrote in an August 13 New York Times op-ed.

A plan proposed by Oregon Senator Jeff Merkley, they explained, could boost disposable income for some 20 million families with underwater mortgages, including those not backed by the government-sponsored housing enterprises Fannie Mae and Freddie Mac. A “government-financed trust” would buy up the refinanced mortgages, thus giving private lenders the capital to make more loans. Several federal agencies could handle this, but Zandi told me that using the Federal Reserve would be the most efficient way. “The biggest impediment is the banking system,” Zandi said. “The pipeline for origination of lending has shrunk—a lot of midsize banks and mortgage companies got out—so the big banks now account for even more of the volume. They manage the flow by raising their eligibility standards. That’s why they are making so much money.” 

The Federal Reserve could change that, Zandi said, but he added, “I think the Fed would never go down this path unless the national economy is sliding back into recession.”