Tags: Webman | defense | Fed | easing

OppenheimerFunds’ Webman: In Defense of the Fed

Tuesday, 19 Mar 2013 07:57 AM

By Steve Cortes and Dan Weil

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Many economists argue that the Federal Reserve has gone too far in its massive easing program, but Jerry Webman, chief economist of OppenheimerFunds, disagrees.

“I would argue that the Fed saw that a lot of money disappeared in the financial crisis,” he tells Newsmax TV in an exclusive interview. “They set about replacing that money by intervention. I think that was appropriate.”

The critics are concerned that too much central bank intervention means money will go to the wrong places. “You may be right about that,” Webman says. “I'm sure there are distortions that are created by that $3 trillion,” the size of the Fed’s balance sheet.

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Editor's Note: A full, unedited version of this interview is available exclusively to Financial Braintrust Alliance subscribers. Visit www.fbtalliance.com for more information and to sign up.

But that doesn’t explain why small businesses have been reluctant to invest, he says. That problem stems largely from deleveraging, particularly household deleveraging.

“Remember, most small businesses get funded not by the bank, but by the credit cards that you pull out of your pocket,” Webman says. “If households are finding they have less access to credit, you should expect to see slower small business growth.”

Editor’s Note: Put the World’s Top Financial Minds to Work for You

Taxes and regulation are an issue too, he says. “The uncertainty about what my taxes are going to be, what my healthcare costs are going to be, what penalties I pay if I don't provide all of that has kept small businesses reluctant to grow and expand.”

The Affordable Care Act needs to be reworked, Webman says. And, “we're going to have to rethink the very distorted tax system that we have right now.”

As for the Fed, it won’t fully reverse its quantitative easing (QE) anytime soon, Webman says. “What they have talked about, the term that you’ve started hearing is tapering,” he says.

For most of its recent history, the central bank has controlled only the federal funds rate on overnight bank loans, Webman notes. “Now, it has lots of irons in the fire, which in some ways is troubling because they are doing things that they never done before,” he says.

But “on the other hand, it means that there are lots of levers that they could pull,” he says. “So, there are lots of ways in which the Fed could begin to ease its easing before they call a full stop to QE.”

The Fed will probably stay accommodative into next year, “unless we get a major growth surprise. And then everyone would applaud, and the Fed would say, I declare a victory and ship the troops home.”

Some commentators are worried that the stock market owes its record-setting surge almost entirely to the Fed’s easing, and when that support is withdrawn, the market will plunge. Webman doesn’t share that concern.

“I think we [the Fed] won't take away those training wheels until the market can run on its own or until the economy can run on its own and the market's expectations about the economy” are strong, he says.

“The Fed made it pretty clear that they weren't going to do anything precipitously.”

Editor’s Note: Put the World’s Top Financial Minds to Work for You

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