A Plan for Action on Jobs

Joe Gagnon:

Stop Sticking Our Heads in the Sand! A Plan for Action on Jobs, by Joseph E. Gagnon: ...The unemployment rate has remained near or above 9 percent for 28 consecutive months, a policy failure not seen since the Great Depression of the 1930s. Unfortunately, our leaders have been in denial about the true nature and magnitude of the problem. The ongoing stock market anxiety surely must wake them up.

Many actions that would be helpful—extension and enlargement of the payroll tax cut, extension of unemployment benefits, extension of aid to the states, and a substantial and accelerated infrastructure program—require Congressional approval. I have no insights as to how to get such actions approved in the face of determined opposition by many members of Congress.

Instead, I propose aggressive actions that can be taken by the Obama Administration and the Federal Reserve without a single vote in Congress. ...

First and foremost, the Federal Reserve should announce an additional $2 trillion of asset purchases, including longer-term Treasury bonds, agency mortgage-backed securities (MBS), and foreign exchange. ... The goals are to push down bond yields and mortgage rates, to push down the value of the dollar in terms of foreign currencies, and to boost stock prices. All of these help households deleverage their balance sheets and encourage consumption, investment, and exports... Businesses would need to hire more workers to meet the additional demand. ... An additional step the Federal Reserve should take is to stop paying interest on reserves held at the Fed. At a rate of 0.25 percent, these interest payments are a small but unnecessary subsidy to banks and a minor disincentive for bank lending.

The Obama Administration can help in two important respects: First, the Administration should use its control of Fannie Mae and Freddie Mac to force them to invite all homeowners whose mortgages are already guaranteed by Fannie and Freddie, and who are not delinquent in their mortgage payments, to refinance their current mortgage balance at the new low rates regardless of loan-to-value ratio. ... In addition, a renewed push on mortgage modifications for homeowners behind on their payments could also yield broad benefits to borrowers and lenders alike at little cost to the government. ...

Second, the Administration needs to acknowledge that the strong dollar policy, as enunciated for many years, is defunct and opt to embrace moderate further dollar depreciation consistent with monetary easing. ...

Naysayers will argue that this strategy is a recipe for runaway inflation. Indeed, they have been saying that for nearly three years, but inflation remains extremely low. Inflation will never increase to a significant extent as long as unemployment lingers at this elevated level. ....