4 Questions for a Fed Chief (Answered by a Nobody)

Bernie Sanders and Elizabeth Warren had a good piece on Huffington Post asking the new Fed chief 4 important questions.  I decided I’d play fantasy and answer the 4 questions as honestly as I could:

Question 1: Do you believe that the Fed’s top priority should be to fulfill its full employment mandate?

Answer:  That depends on what you mean.  If you mean that the Fed should try to achieve ZERO involuntary unemployment then we should all be abundantly aware that the Fed does not have the tools to achieve such a thing.  The Treasury also does not have the tools to achieve such a thing.  The only entity that could achieve permanent zero involuntary unemployment is the US Congress and you and your colleagues would have to agree to hire anyone willing and able to work.  Of course, that’s a highly political decision and one you should ask yourselves and not someone like me.

If we’re talking about hitting an unemployment rate of 4-5% based on traditional economics thinking then of course – the Fed should always shoot to enact policy that can help the nation achieve full employment.

Question 2: If you were to be confirmed as chair of the Fed, would you work to break up “too-big-to-fail” financial institutions so that they could no longer pose a catastrophic risk to the economy?

Answer: The Federal Reserve exists to support the private banking system and ensure that the economy’s payment system is always running smoothly.  This is and always has been our first priority.  After all, if we don’t achieve this then we cannot achieve our other mandates.   If I am confirmed as Fed chief I will monitor the nations banks and report my findings and recommendations to the US Congress so that we can establish and maintain the healthiest banking system possible.  However, it is not my responsibility to personally determine the proper size and scope of the US banking system.  If I should find that the US banking system, is at times, unstable, I will report my findings to you and your colleagues so you can determine the proper legislation, if needed, to rectify any problems.

Question 3: Do you believe that the deregulation of Wall Street, including the repeal of the Glass-Steagall Act and exempting derivatives from regulation, significantly contributed to the worst financial crisis since the Great Depression?

Answer:   Yes.  And you and your colleagues have failed to enact policy that will remove the same risks from potentially building up in the future.  And though you will blame me when the next financial crisis occurs, I should state for the record that I do not have the tools at my disposal to ensure that a banking crisis cannot occur.

Question 4: What would you do to divert the $2 trillion in excess reserves that financial institutions have parked at the Fed into more productive purposes, such as helping small- and medium-sized businesses create jobs?

Answer:  Pardon my directness, but I don’t think your understanding of the Federal Reserve system is entirely accurate.  The excess reserves held in the banking system are within what’s called the interbank market.  They can be thought of as the deposit money that banks and banks alone use.  These excess reserves do not “leave” the system (in the sense you imply) and they have been “parked” there strategically as a result of my predecessor’s policies.  Banks do not EVER use their excess reserves to create new loans for businesses of any size.  That is simply not how modern banking works.

The Federal Reserve has taken extraordinary measures to help shore up the US banking system in recent years.  If there is presently not enough demand for loans or businesses are not viewed as creditworthy customers then the most efficient thing for the government to do is to add net financial assets to the private sector via increased deficit spending.  This would directly improve the creditworthiness of the private sector as the Treasury bonds are an asset for the private sector without a corresponding private sector liability.  This would certainly improve the private sector’s credit standing.  But again, this is something that only you and your colleagues can achieve.  It is not within the realm of my powers to do so unless I were to take some measures that you might not be so fond of.

In short, it sounds like you are both trying to shrug your responsbilities off on an entity that simply cannot achieve the things you expect from us.  But as a good American I will try my damndest with the limited tools you have legislated to me.