Wonk Room » How Increased Unemployment ‘Directly Undercuts’ A Fix For Banking

How Increased Unemployment ‘Directly Undercuts’ A Fix For Banking

By Pat Garofalo on Mar 9th, 2009 at 7:15 pm

How Increased Unemployment ‘Directly Undercuts’ A Fix For Banking

Last week, the unemployment rate climbed to 8.1 percent, a problem that has further reaching implications than simply the sheer number of people out of work. As Fortune pointed out today, “increasing joblessness directly undercuts the massive efforts underway to stabilize the banking system”:

In fact, the pace and magnitude of further job losses is one of the most critical (and elusive) factors in the unrelenting struggle of policymakers to resuscitate the banking industry. The ballooning ranks of unemployed are steadily feeding the near-tidal wave of homes on the brink of foreclosure as well as delinquencies on auto loans and other types of consumer lending. This process inevitably expands the already dangerously high levels of toxic assets on bank balance sheets.

And this is a vicious cycle, because as the banks deteriorate, they tighten up on credit, denying businesses access to the funds they need, which requires them to lay off workers.

This comes back to what President Barack Obama has referred to as the “three-legged stool” required to repair the economy: economic stimulus (to keep people employed), a housing fix (to keep them from foreclosure) and addressing the banking crisis (to ensure lending and credit is available). Without the others, the effectiveness of each individual plan is blunted.

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One Response to “How Increased Unemployment ‘Directly Undercuts’ A Fix For Banking”

jps Says:

Undercutting the efforts to restore full employment is the fact that the U.S. Federal Reserve System (Fed) has been paying 25 basis points of interest (0.25%) when the short-term target interest rate has been below that since December 16th. Ben Bernanke admits that contradicts their target rate:

“In principle, the interest rate the Fed pays on bank reserves should set a floor on the overnight interest rate, as banks should be unwilling to lend reserves at a rate lower than they can receive from the Fed. In practice, the federal funds rate has fallen somewhat below the interest rate on reserves in recent months, reflecting the very high volume of excess reserves, the inexperience of banks with the new regime, and other factors.”

I suspect “inexperience of banks with the new regime” is semantically equivalent to “Paulson’s rampant contradictions in refusing to use the homeowner provisions of last September’s bailout bill has caused us all to run around like chickens with our heads cut off and forget what the heck we are doing.”

So the Fed is still violating this law (specifically, the part about, “at a rate or rates not to exceed the general level of short-term interest rates,” so please call Sophia Allison and Margaret (”Marnie”) DeBoer at the (202/…) numbers listed in http://edocket.access.gpo.gov/2008/E8-24003.htm and ask them to stop breaking that law.
March 9th, 2009 at 8:25 pm