The Federal Reserve relies on a Wall Street" model that gladly swaps higher unemployment rates and lower wages for financial stability and stable output growth. Even eleven interest rate cuts cannot undo the damage that policy had done to the U.S. economy.

"Why isn't the economy roaring?" asks Tom Schlesinger, from the Financial Markets Center. Christian Weller from the Economic Policy Institute provides part of the answer: "we're growing credit, but not incomes."

Real Threat of Deflation
Unless the Fed changes its policies soon, the current recession has the potential to last for years. "We are at an historic place," says William Greider, author of Secrets of the Temple: How the Federal Reserve Runs the Country. "If we screw up now, we are in trouble for years."

"We keep acting like this is just another cycle, but we are flirting with a depressive period much like Japan," explains Greider.

Schlesinger echoes his concerns: "We are at a turning point. Policy makers can't continue to deal with new problems using the lessons of old experiences."

Our economic problems are the "product of an aging and ineffective tool the Fed uses to implement monetary policy," explains Schlesinger. "The way Paul Volker (President Carter's Fed Chairman) and Alan Greenspan have steered our economic ship for the last generation reflects their fear of stagflation in the late 1970s and early 1980s."

"We're not re-running the 1970s in this era. Inflation is not the worst possible thing that can befall us. We need to haul this economy back from the brink of deflation," claims Schlesinger.

Changing the Fed's Priorities
"The Fed has more tools to use than just adjusting interest rates," says EPI's Weller. The Fed's interest rate hikes in 2000 kept the dollar high, helped to destroy capacity in the manufacturing sector, and exploded the U.S. trade deficit.

Its focus on interest rates may assure price stability, but that fixation ignores its legal responsibility for output growth, full employment and stable exchange rates.

"We need new guidelines ― legislated by a new Congress ― so all four goals receive the same level of priority," says Weller. Price stability should not receive a higher priority over the other goals of output growth, full employment and stable exchange rates."

Other tools the Fed failed to use are: adjusting the Reserve Requirement, which requires banks to set aside one dollar in a non-interest-bearing reserve account for every ten dollars deposited; tightening margin requirements, which make it harder for investors to play the market with borrowed funds; and by enlarging the money supply.

Using these other tools is unlikely given the current Fed chairman, Alan Greenspan, and his anti-worker animus. But there are other ways to skin a cat.

"Unions have to engage the Federal Reserve's Board of Governors," says Schlesinger. Union members should be at the table."

While the Fed's charter calls for a majority of its directors to be from labor, consumer, or some other non-financial interest, less than 10 percent are.