Tags: Roubini | Fed | risks | rates

Roubini: Central Bank 'Policymakers Are Damned if They Do, Damned if They Don't'

Friday, 01 Nov 2013 09:41 AM

By Dan Weil

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The Federal Reserve and other major central banks are between a rock and a hard place as far as what to do with interest rates, says New York University economist Nouriel Roubini.

"If policymakers go slow on raising rates to encourage faster economic recovery, they risk causing the mother of all asset bubbles, eventually leading to a bust, another massive financial crisis and a rapid slide into recession," he writes in an article for Project Syndicate.

"But if they try to prick bubbles early on with higher interest rates, they will crash bond markets and kill the recovery, causing much economic and financial damage."

Editor’s Note:
Obama’s Budget Takes Aim at Retired Americans

Obviously neither alternative looks too appealing. So unless central banks' handling of the financial system turns out just right, "policymakers are damned if they do, and damned if they don't," Roubini says.

It's too early to tell whether central banks will be able to create financial stability, he writes.

"If not, policymakers will eventually face an ugly tradeoff: kill the recovery to avoid risky bubbles, or go for growth at the risk of fueling the next financial crisis."

As for the Fed, Pimco CEO Mohamed El-Erian expresses some doubt about whether it can engineer an economic recovery.

"As yet, there is insufficient evidence to assure us that Fed policies will indeed succeed where it matters most — on Main Street," he tells CNBC.

Editor’s Note: Obama’s Budget Takes Aim at Retired Americans

Related Stories:

Economist Rupkey: Fed's Low Rates 'Distorting the Market'

LA Times: Federal Reserve May Be Headed for a Taxpayer Bailout

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