Robert Pollin: If the Fed was serious about strengthening the basic economy, it would bail out American cities. (Photo courtesy of UMass Amherst)
By Paul Jay
Originally posted by The Real News Network.
PAUL JAY, SENIOR EDITOR, TRNN: Welcome to The Real News Network. I’m Paul Jay. And welcome to The Pollin Report with Bob Pollin, who now joins us from the PERI institute in Amherst, Massachusetts. Thanks for joining us again, Bob.
ROBERT POLLIN, CODIRECTOR, POLITICAL ECONOMY RESEARCH INSTITUTE: Very glad to be on. Thank you, Paul.
JAY: So we’ve talked about before about what the Fed could do in terms of trying to force banks to invest more in the economy. They’ve been shoveling money to the big banks to keep them liquid. Of course, it’s done far more than just keep them liquid. They’ve used all this money and they’ve been making a killing, a killing, record profits.
But the question is: why aren’t they doing more for the basic economy? And one would think one could start in the cities. And you’ve been working on that. What could the Fed do for the cities?
POLLIN: Thank you, Paul. So about two weeks ago, there was a very, very interesting conference in Washington organized by the outstanding organization Americans for Financial Reform. The conference was titled “Banking without Wall Street”. So what really can we do to run a banking system that doesn’t have to–every decision and every dollar doesn’t have to flow through Wall Street and benefit Wall Street? Rather, as you put it, what can we do to really help the basic economy? And one area of the basic economy, obviously, is our state and local governments, our municipalities.
Municipalities are the biggest source of employment in the whole country. So there’s about 14 million people that are employed or indirectly tied to municipalities. Now, the municipalities were put under severe stress during the Great Recession. The Great Recession ended, by the way, officially ended five years ago. So we’re five years past the Great Recession. But state governments are still operating under austerity budgets if they’re still operating. There are some cases–notably, especially, Detroit, that has experienced default. But the state and local governments, and municipalities in particular, have been unable to grow, have been unable to hire back the teachers, the health care workers, the public safety workers that make up the core of municipal activities. What we say municipal government, we really made public education, we mean health care, we mean safety, we mean parks. That’s what we’re talking about.
Now, thinking about what the Fed could do, as you said, the Fed has bailed out the Wall Street banks over and over again. They continue to do it by keeping the interest rate for the banks at zero. What the Fed could do right now without passing any new laws through Congress, the Fed could directly purchase municipal government bonds. The law as of today says that the Fed can do that by purchasing bonds only up to a six-month maturity. Now, that’s a relatively short-term bond, so it’s not ideal. It would be better if the Fed could buy longer-term bonds.
Be that as it may, right now under its current operating procedures, the Fed can intervene by municipal government bonds, and that would enable the municipalities to start investing again in infrastructure, including green infrastructure. The municipalities could, for example, start retrofitting for energy efficiency their own buildings, creating a lot of jobs in the process. They could hire back teachers. They could hire back bus drivers. And then, in the extreme cases, such as Detroit, it could bring them out of bankruptcy without having to completely decimate the services provided by the municipal government in Detroit.
JAY: So, in other words, the city would issue a six-month bond, and instead of trying to put that on the bond market, or unlikely [to get a?] longer bond, they just sell it to the Fed. So I assume this would be done at relatively low interest rates. And, I mean, if they’re doing this to the big banks at practically zero interest, then why can’t they do it for cities at the same amount?
POLLIN: Right. Fair is fair. Fair is fair. Right? The banks have zero interest rates. Municipalities should also get something like that. And that would help bring–again, the recession ended five years ago, officially. The municipalities are still in recession. They’re still down 1 million jobs relative to where they would be if this recession had proceeded like other recessions–that is, you come out of the recession. We haven’t come out of this recession fully yet. And so the Fed has the power to do this now. The Fed can just buy the bonds.
JAY: Now, wouldn’t one of the counter arguments be that they’re essentially just creating artificial money, and you start–. Now, I don’t know why the same argument doesn’t apply to the big banks. I suppose some–you know, so fiscal conservatives to apply it to the big banks. But you’re kind of just creating artificial money to give to the cities. And I guess in the final analysis, their argument is that winds up being inflationary and sort of debasing confidence in the dollar.
POLLIN: Well, if that’s the case, I mean, then everything the Fed does every single day does the exact same thing. What the Fed’s main job, what the Fed normally does when it turns on the light every day and starts working, is that it buys U.S. government bonds. It buys short-term bonds primarily. When we talked about quantitative easing by the Fed, what that really was, all it was was that the Fed was buying long-term bonds, U.S. government bonds, not just short-term U.S. government bonds. During the recession, the Fed took a lot of extraordinary steps. The Fed bought bonds from the commercial paper market. The Fed bought bonds from the money market to stabilize it. The Fed is still maintaining zero interest rate policy that applies to commercial banks, which has enabled the banks to amass $2.3 trillion in cash reserves, 14 percent of GDP. So this is these are all absolutely extraordinary steps taken by the Fed. The Fed could do something–on a much smaller scale, by the way–to get the municipalities growing again, to start hiring more teachers again, to start hiring firefighters and police and supporting our public spaces again and investing in infrastructure.
JAY: I know one of your arguments was they could in these loans to the big banks, that under the, you know, basic rubric that they have to keep them liquid at afloat is so on, but there could be some conditions. For example, the banks themselves would have to then go buy municipal bonds. But they’re basically given this money condition-free.
POLLIN: That’s right. Now, interestingly, way back in the 1960s, the Fed did practice exactly what you describe. The Fed did try to bail out municipalities in the 1960s. It’s a famous case study. And the way they did it was that the Fed said, we will not make loans to the commercial banks anymore unless the commercial banks will either hold on to the municipal bonds they have or buy more of them. And that helped stabilize and strengthen the municipal bond market. So there is this important precedent historically where the Fed acted, not exactly with the same technique.
The easiest technique now would just be to buy the bonds. Now, again, it has to be short-term six-month bonds, but the Fed could roll over the bonds after six months, just buy them again. That would be the practice until Congress could maybe pass a law which allowed the Fed to purchase longer-term bonds.
Let’s say Congress doesn’t do that. The Fed can still nevertheless today buy six-month bonds and therefore help bring municipalities out of this, you know, half-decade long, quote, recovery out of recession from which there’s almost no recovery.
JAY: So why aren’t they? I mean, it seems–they must know they can do this. I mean, isn’t it partly ’cause this is not what their real agenda is? To a large extent the Fed is controlled by a lot of the big banks. It’s kind of this weird hybrid government-private thing. And the banks kind of to large extent dictate the tune of the Fed. I mean, they’re not doing this ’cause they don’t want to. No?
POLLIN: It may be that they haven’t thought about it. It may be that nobody’s put demands on them. That was one of the things that came out of this conference I was at a couple of weeks ago. I mean, there aren’t very many progressive people out there that focus on financial market issues and financial market policies, even though these are so fundamental for creating jobs, creating well-being, stabilizing, controlling Wall Street. These are all fundamental issues.
But if there were some pressure around the Fed to undertake this kind of action, who knows? I mean, at least we could fight for it. I will say that the present chair of the Fed, Yellen, is certainly the most sympathetic around these kinds of issues, around job creation, than we’ve ever had before. I mean, Yellen in her very first speech did say, I work for Main Street, I don’t work for Wall Street; my job is to create employment opportunities. So I’ll take her at her word, and let’s give her the tools to do her job well.
JAY: I mean, they can also do something to help, at the very least, significantly lower the interest rates of municipal bonds. Right now we know in Baltimore, where we are, Baltimore and many other cities were caught in this whole LIBOR scandal, or the interest rates of municipal bonds were being artificially manipulated to charge the cities more money.
POLLIN: Yes. Another really great part of this conference two weeks ago was we had some experts who really talked about the ways that municipalities do get manipulated. The LIBOR scandal’s only one of them. In fact, having very, very complex kinds of municipal bonds is itself an opportunity for Wall Street firms to skim off and really, really put the municipalities at huge disadvantages. They do this because they convince the municipalities that, you know, who are we to know how to do this right, that, you know, the Wall Street guys know way better than we do. So, yeah, they convince them that they–Wall Street guys convince them they know way better, and then they also convince them that therefore Wall Street has to be paid a lot of money in order to issue bonds.
So simply the fact if the Fed were to buy the bonds, we would be able to cut out all these machinations going on between Wall Street and municipalities, that we could sets of standards whereby the municipal bonds could be marketed in a much more reasonable way. That would lower the risk and it would lower the interest rate.
JAY: Yeah. Well, then you’d be questioning financialization, and that’s practically un-American.
POLLIN: Well, I consider myself a good American, Paul, and you too, even though you’re half Canadian.
JAY: And I’m also not afraid to criticize financialization.
Thanks very much, Bob.
POLLIN: Okay. Great talking to you.
JAY: And thank you for joining us on The Real News Network.