The Fed’s Job Creation Myth and the New Moral Hazard

Jeff Macke

Since its creation in 1913, the Federal Reserve's role has been tweaked and altered depending on the country's needs at the time. At this point in history, the Fed has only two jobs for official purposes. As stated on the Fed's website:

The Congress established the statutory objectives for monetary policy—maximum employment, stable prices, and moderate long-term interest rates—in the Federal Reserve Act.

In English, the Fed's goal is to pump enough money into the system to promote job growth without going so far as to create inflation. Despite constant complaints to the contrary, most evidence supports the idea that the Fed has managed to avoid inflation, at least on a nominal basis.

What the Fed hasn't done is create many, if any, jobs. Lee Munson, founder of Portfolio LLC and author of Rigged Money, says the lesson of the last few years of QE and other stimulus is that neither the Fed nor anyone else can do much, if anything, to eliminate the employment cycle.

The Fed's Job Creation Myth

You can't do anything about labor, says Munson in the attached clip, and "floating another $40 billion into the system is not going to help employment." This was one of the points in the argument against the round of stimulus announced by the FOMC last month. Even taking Bernanke's claim (that Fed policy created two million jobs) at face value, the cost per job is appalling: over one million per job if you divide those two million jobs by the cost of QE1 and QE2.

Even trying to ballpark an estimate for the number of jobs for which the Fed is responsible misses the point, as far as Munson is concerned. As those on the front lines of the crisis of 2008 and 2009 will tell you, Bernanke "printed the money to prevent the economy from collapsing," as Munson puts it.

The fact that the financial system did not, in fact, completely fail can arguably be credited to timely Fed intervention. That non-collapse certainly prevented jobs from being lost, but that's not the same as actually getting people hired. Three-and-a-half years after the grand money-printing experiment started, companies' balance sheets are awash in capital and the employment situation remains a disgrace.

Bernanke himself has said repeatedly that monetary policy can't cure what ails the economy, calling out for help on the fiscal side from lawmakers. If Bernanke admits that printing cash isn't a solution, then why does he keep his foot on the printing press pedal? Munson says it's political.

The Fed keeps printing for relatively arcane but frightening reasons that involve preferring inflation to deflation. Rather than explain that to those enraged at the printing of $40 billion a month, Munson says "it's a lot easier to say 'we're trying to do jobs,'" than to tell the truth.

The Risk of the Big Lie

Of course, the Fed taking the blame for jobs shields the politicians from owning the responsibility. As long as free money keeps us from a collapse, politicians have no compelling reason to actually compromise on a fiscal deal, relying as they are on Bernanke and Co. to keep us out of the abyss.

"The new moral hazard is printing $40 billion (per month) for the dubious veneer that we're going to create jobs," says Munson of the DC using dollar bills to paper over its failure to either create jobs or admit it can't.

Munson thinks Bernanke himself will concede the error of his ways in coming years. In the meantime, America will live with the repercussions, hoping for jobs that will never come while electing politicians incapable or unwilling to do their jobs in setting a budget.

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