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KAI RYSSDAL: You don’t have to be an economist to know it’s a bad thing when there are more jobs lost than created. But we find ourselves in that predicament today for the fourth month in a row. The economy had 20,000 fewer jobs at the end of April than there were at the beginning.
Today’s jobs report capped the trifecta for the week. The Fed cut interest rates Wednesday despite fears of higher food and energy prices. We learned that same morning growth in first-quarter gross domestic product was an anemic 0.6 percent. The unspoken theme there is a familiar one. The credit squeeze.
Central banks have been all but giving money away to convince banks there’s money to be had. Today they launched their most coordinated effort yet. The Fed joined with the European Central Bank to pump billions more dollars into the banking system. Our senior business correspondent Bob Moon’s here to explain.
BOB MOON: Hello, Kai, I hope I can make it all clear for you.
RYSSDAL: Yeah, you know, that’s funny, ’cause me too. We have talked, you and I in fact, about signs, indications that the credit squeeze was loosening.
RYSSDAL: Hints. And now, here we have the Federal Reserve Bank of the United States doing this this morning, and what are we to make of it?
MOON: Well, you already know that the Fed’s been making tens of billions of dollars in loans available to the banking system. Well, today it’s basically admitting that these big institutions are just being stubborn about this — that they’re not lending to each other still. Basically, they still don’t trust each other. They remain worried about the exposure that they could put themselves in to these bad mortgage loans.
RYSSDAL: Powerful as it is, then, what can the Fed do?
MOON: Well, the Fed keeps telling these banks, “OK, look, come to our lending window instead. We’ll give you the money that you need to make loans to businesses and individual borrowers” — they’re really finding it difficult to find the loans they want right now. Well, this time the Fed is going to be boosting the total of emergency reserves that it’s offering to U.S. banks to $150 billion in the month ahead. That compares to about $100 billion it supplied in the past month.
RYSSDAL: Bob, I don’t understand though. With all this money that’s already out there, shouldn’t we just be flooded with liquidity?
MOON: Ah, that’s the big-money question here. There is some thought that the banks might be hoarding some of this cash. Or, to put it in more polite terms, they’re sitting on their reserves — OK? Maybe it’s just taking a little longer than the Fed had been hoping to top off their reserves. There’s one new estimate that when all is said and done here, the banking system is going end up needing about $333 billion of new capital, and that study figures that something over $200 billion has been raised already.
RYSSDAL: So we’re about two-thirds of the way through, right?
MOON: The other thing is that the weapons available to the Fed are really blunt instruments, if you will. I spoke today to John Silvia. He’s chief economist at Wachovia. And he points out the Fed can flood the banks with all the money it wants, but it can’t make the banks lend.
JOHN SILVIA: What the Fed can simply do is in general make credit available to the banks in its system. Now, what the banks do after that is entirely up to the banks. And that’s oftentimes expressed as pushing on a string.
RYSSDAL: What if the string goes the other way though, Bob, and the money goes to place the Fed doesn’t want it to?
MOON: There is concern that this flood of money is pouring into investments right now in commodities. Some critics are even suggesting that’s what’s behind the excessive run-up we’ve seen in food and oil prices is this flood of money. Wachovia’s chief economist John Silvia does voice some concerns about that, and what a sudden flood of money could do to inflation in the future:
SILVIA: You know, you flood the pipeline, somehow not much of it seems to be getting through the hose, and all of a sudden the day wakes up and everybody says, “Oh, everything’s OK!” And then all of a sudden you’ve got this huge flood coming through. So, yes, there’s a risk there.
MOON: To explain that further, Kai, the more dollars that flow into the economy, the more those dollars end up being worth less — you’re diluting the purchasing power, if you will. People start demanding more dollars to make up their buying power. So the Fed’s gambling, in a way, that all these different moves go according to plan.
RYSSDAL: Nice to know that Ben Bernanke’s gambling.
MOON: He is.
RYSSDAL: Marketplace’s Senior Business Correspondent Bob Moon. Thank you, Bob.
MOON: Thanks, Kai.
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