TJP

According to Federal Reserve chairman Bernanke, the recession is abating, but the job market remains weak. Bernanke said he is worried about the long-term impact of the recession on workers’ skills and wages.

CNN-Money indicated that several Republican lawmakers wanted to ask why the job market remained weak even though Congress passed a massive $700 billion stimulus package last year.

The Federal Reserve is responsible for conducting the nation’s monetary policy by influencing the monetary and credit conditions in the economy in pursuit of maximum employ­ment, stable prices, and moderate long-term interest rates.

The Federal Reserve restricted the growth of the money supply (M1) from 2003 until 2008. However, restricting the monetary base adversely affect the production process. When there is less money (income) in the economy, effective demand for goods and service diminishes. As effective demand diminishes, business inventories accumulate and layoffs are inevitable.

In a monetary economy, money and credit is necessary to expand the economy. Both are controllable by the Federal Reserve.

The Federal Reserve creates fiat money and the banking system, using the credit market, expands the monetary base. For instance, if the Federal Reserve increases the money supply by $1,000 by buying securities from banks and banks loaning funds, the banking system as a whole would expand the monetary base by $10,000 (see Money Creation).

The availability of credit is a necessary condition for consumers, entrepreneurs and businesses spending decisions. The Washington Post reported that lending by the banking industry fell by $587 billion in 2009.

It is clear that the recession resulted from lack of income, caused by restrictive Federal Reserve policies in an effort to control non-existing inflation.

Congressional lawmakers, on the other hand, do not understand how the economy works. Thus, they believe that fiscal policy, a blunt tool, would stimulate the economy. As a result, they are still passing fiscal bills, such as the jobs bill, as if business will increase employment in the absent of effective demand.

The way to increase effective demand is to facilitate consumer and business credit, particularly to restructure wealth losses resulting from Federal Reserve policies. If consumers remain strapped with upside down mortgages, the economic recovery will be slow and painful.

A lengthy recovery could lead to social instability and loss of human capacity. Thus, it is important for the administration and congress to facilitate consumer and business credit, whether through the existing banking system or a federal bank.

The economic sleight of hand and the unwillingness of the monetary authority to force the banking system to increase credit to Main Street could have unpredictable and lasting repercussions.   

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