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When will the Fed Alleviate the Monetary Crunch in Central Cities?

Byron A. Ellis

December 14, 2005

It is interesting to observe the Federal Reserve (Fed) behavior towards the monetary crunch plaguing the middle class. The monetary crunch has limited funds for borrowing and caused a slowdown in the housing industry. As a result, there are many unsold and foreclosed homes in middle class communities.

The Federal Reserve (Fed) solution is to lower interest rates and increase the money supply in an effort to jumpstart the housing market.

The monetary crunch is a permanent occurrence in low-income communities. However, the Fed has not devised a solution to alleviate the monetary crunch of low-income communities. Clearly, if intervention is appropriate for bailing out the middle class, it should be equally, or more, appropriate for bailing out the poor.

Ensuring that low-income communities have enough capital to finance profitable investments should be an actionable and measurable Fed policy goal. A robust central city economy would reduce crime rates and recidivism, provide learning and work opportunity for residents. So, why does the Fed ignore the monetary crunch of low-income communities?

Some will argue that it is due to antipathy; others will claim that low-income communities are not credit worthy, and some will even argue that it is due to past incompetence.

Antipathetic and perceptual discrimination could well prevent the Fed, or financial institutions, from providing necessary funds to low-income communities.

Low-income communities must demand equal treatment from the Fed and that instruments of monetary policy should be used to target economic growth in distressed communities. For instance, the Fed could provide favorable discount rates, as well as changes in reserve requirements for banks operating in, and funding, distressed communities.

The Fed, with the appropriate policy goal, in combination with community financial institutions could produce the desire effect on aggregate demand for goods and services in distressed communities and hence positively affect output, employment, and prices.

One of the Fed duties is to influence the monetary and credit conditions in the economy in pursuit of maximum employ­ment, stable prices, and moderate long-term interest rates. This duty should be applied to all communities in the United States.

Unfortunately, the Fed has not targeted ethnic communities for economic the expansion. As a result, most of these communities are in a continual monetary crunch, high unemployment, high crime rate, low educational attainment, and poor infrastructure.

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