I'm not trying to justify Aaron's economically illiterate conspiracy theorizing, but I would like to reiterate some of what I first emailed Aaron a few years ago when he first started talking about this (e.g. http://www.aaronsw.com/weblog/predatorstate ).

It's true to a degree that bankers don't aim for zero unemployment - i.e. implicitly they "let millions and millions of people be unemployed" - because to do so would create inflationary effects. Such an economy would be overheating. In an economy the size of the US, you would expect there to be a few million people unemployed at any given moment, simply because of turnover.

But this is pretty basic stuff. See e.g.:

http://www.investinganswers.com/term/unemployment-rate-809

http://en.wikipedia.org/wiki/NAIRU

It is however true that the Fed has a rather ridiculously overloaded mandate. It has basically one lever - the interest rate - with which it is supposed to target multiple goals - "maximum employment, stable prices, and moderate long-term interest rates". If you think about this for a moment, you'll realize it's not possible.