Tags: Feldstein | Fed | QE | economy

Harvard's Feldstein: 'Economy Is Limping Along' Since Fed's Easing Has Failed

Friday, 10 May 2013 11:38 AM

By Dan Weil

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The Federal Reserve's effort to boost the economy with quantitative easing (QE) has failed, says Harvard economist Martin Feldstein.

"[T]he evidence suggests that the program has done little to raise economic growth while saddling the Fed with an enormous balance sheet," he writes in The Wall Street Journal.

The central bank has added more than $2 trillion to its balance sheet since 2007.

Video:
Economist Predicts 'Unthinkable' for 2013

QE is supposed to help the economy by lifting stock prices, says Feldstein, chairman of the Council of Economic Advisers under President Reagan. The idea is that those higher share prices lead to greater household wealth, which then sparks increased consumer spending.

Despite the Fed's action, "the economy is limping along with per capita gross domestic product rising at less than 1 percent a year," Feldstein says.

"Even if all of the rise in the value of household equities since quantitative easing began could be attributed to the Fed policy, the implied increase in consumer spending would be quite small," he adds.

"At best, the Fed's long-term asset purchases reduced the extent to which the federal deficits crowded out equity purchases," Feldstein suggests.

"Although it is impossible to know what would happen without the central bank's asset purchases, the data imply that very little increase in [gross domestic product] can be attributed" to the Fed's effort to juice stock prices.

"The time has come for the Fed to recognize that it cannot stimulate growth and that a stronger recovery must depend on fiscal actions and tax reform by the White House and Congress," Feldstein writes.

Economist Gary Shilling says investors are so caught up with the benefits to assets prices of the Fed's easing, that they aren't even paying attention to economic problems.

“The reality is that investors are only enamored with what the Fed and other central banks are doing,” he tells Yahoo.

“Their attitude is don’t fight the Fed. As long as the money is there, I’ve got to own stocks. They couldn’t care less about what’s happening to economies on the ground."

Video: Economist Predicts 'Unthinkable' for 2013

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