Ex-Obama Adviser Romer: Now is the Time for More Fed Intervention

Wednesday, 13 Jun 2012 07:25 AM

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The Federal Reserve will hold its monetary policy meeting next week, and policymakers at the U.S. central bank will hopefully agree to intervene and stimulate the economy right now, writes Christina D. Romer, former chairwoman of President Obama’s Council of Economic Advisers.

Since the downturn began over four years ago, the Fed has sought to stimulate the economy by making large-scale bond buybacks from banks, injecting $2.3 trillion worth of expansionary liquidity into financial system in the process.

Critics say such a policy tool, known officially as quantitative easing, is really just printing money out of thin air that plants the seeds for inflation down the road.

Editor's Note: Economist Unapologetically Calls Out Bernanke, Obama for Mishandling Economy. See What They Did

The White House and Congress, many say, must take over and spur recover via fiscal reforms.

That’s not going to happen soon enough, Romer writes in a Project Syndicate column.

It’s up to the Fed to steer the economy away from decline via more stimulus measures and do what it can to encourage job creation.

“The argument for additional monetary action is straightforward. By law, the Fed is supposed to aim for maximum employment and stable prices. But the unemployment rate is 8.2 percent — a good two percentage points above what even the most pessimistic members say is its sustainable level.

Moreover, the spate of disappointing data and the deepening crisis in Europe make continued weakness all too likely,” Romer writes.

“I agree that we need more effective fiscal and housing policies. But neither is likely to happen, at least not before the presidential election,” Romer adds.

“As a result, the Fed is the only plausible source of immediate help for the American economy. It was set up as an independent body precisely so that somebody can do what’s right when politicians can’t or won’t."

Some senior Federal Reserve officials have expressed caution against further intervention.

Monetary stimulus works by pushing down long-term interest rates to encourage investing and hiring, but rates are already low enough thanks to past stimulus measures, interest-rate cuts and external factors.

The yield on the 10-year Treasury not dipped below 1.5 percent recently as investors fled European exposure to seek shelter in safe U.S. government debt even if returns are next to nothing.

Even Fed Chairman Ben Bernanke himself has said that Congress must make reforms to tax and spending policies for the economy to gain steam.

"Monetary policy is not a panacea," Bernanke told a congressional hearing recently, adding that "it would be much better" to have a broad-based policy effort implemented by Congress, ABC News reports.

"I would feel much more comfortable if Congress would take some of this burden from us and address these issues," he said.

Editor's Note: Economist Unapologetically Calls Out Bernanke, Obama for Mishandling Economy. See What They Did


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