The Federal Reserve’s decision last Tuesday to plow its maturing mortgage securities back into the purchase of Treasury bonds didn’t come with a warning that a double-dip recession could be around the corner. But it effectively signaled that concern nonetheless. Perhaps more importantly, it telegraphed a political message that Congress – and particularly Republicans – should heed: Elevate stimulus work over concern about short-term deficits, lest the economy fall back into a trough.
The warning is implicit. The Fed has lowered its core interest rate to banks about as close as possible to zero to juice the economy. It has thus used up its main lever for bolstering the economy and guiding it back to good health. Using the proceeds of maturing mortgage securities – securities it bought after the 2008 financial meltdown to help get the recovery on track – to buy at least $10 billion in new Treasury debt securities each month is its next best tool to keep liquidity in the market. The purchases will keep interest and mortgage rates down, and hopefully help spur bank lending, consumer spending and business loans.
The Fed wouldn’t be doing this if the recovery had stayed on the upward track, as it was still predicting just three months ago. Its modest announcement made that clear. As the Fed’s open market committee put it, the recovery “has slowed in recent months … (and) the pace of economic recovery is likely to be more modest in the near term than had been anticipated.”
Money managers and investors had no trouble reading the smoke signals in the dour assessment. The market, spurred as well by economic angst in Europe and Asia, immediately swooned the rest of the week.
It takes no great seer to read the signs. Employment gains, housing values, wage growth and consumer spending – the forces that propel consumer spending, which accounts for more than two-thirds of economic activity – remain tepid or static. The trade imbalance is widening again. Home foreclosures remain high, and defaults on home equity loans are even higher. Banks and corporations are sitting on their growing stockpiles of cash, waiting for consumer spending to pick up before they crank up production and hiring. And consumers, waiting for job growth and economic resurgence, are staying tight-fisted until they see new hiring and wage gains.
As if this vicious downward cycle isn’t enough, there are more troubles abroad. Though the euro and yen have strengthened against the dollar (for all the reasons just cited), markets in both Europe and Asia remain fragile. Europeans see little substantive growth, and little improvement in the euro-zone’s weaklings, the PIIGS countries – Portugal, Ireland, Italy, Greece and Spain.
China is contending with labor unrest, and simultaneously cutting back its own industrial base and output in an effort to regroup and build around its most efficient producers.
Unless the conflicted Congress quits partisan combat over stimulus spending, circumstances are bound to worsen.
The nation needs bold programs and stimulus spending to prop up state governments, reinforce the safety net and create infrastructure and other make-work jobs that add long-term civic value while stabilizing the economy.
Yet Congress, driven by Republicans’ novel, politically-timed myopia on deficit spending, is spinelessly letting the salve of robust stimulus spending sink out of sight. The hypocritical irony of Republicans on this issue is that it was Republican policies, coupled with a blind eye to Wall Street’s unregulated casino trading, that drove the economy in the ditch. (For starters, consider the party’s history before the 2008 financial crash: In his two terms, George W. Bush doubled the federal deficit from less than $6 trillion to over $12 trillion with needless tax cuts for the rich while running two wars on borrowed money. As Dick Cheney notoriously declared when asked about Bush’s borrow-and-spend policy: “Deficits don’t matter.”)
Putting the wars’ cost back on the visible budget tab, plus paying massive unemployment and Medicaid benefits in a Great Recession that axed tax revenue, has, admittedly, added to national debt. But current stagnation problems will add more debt, one way or the other: through a longer double-dip recession, or stimulus spending for a faster, stronger recovery.
Stimulus spending is the better route. Fueling economic recovery, and the jobs it would bring, would begin winding down federal debt more quickly. The Federal Reserve can not turn the economy around alone. If we have to pick our poison, best would be stimulus spending for jobs for bold infrastructure programs and civic needs.
The alternative, it now seems clear, is a long, slow decay, with more lost jobs, more lost tax revenue, deflation, and a lost decade of growth like Japan suffered in similar circumstances in the 1990s. Standing around and watching that happen is futile. Stimulus spending would lead the way out.