Furchtgott-Roth: Monetary Policy Will End with ‘Tears and Regrets’

Monday, 04 Mar 2013 09:28 AM

By Michelle Smith

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Monetary policies that are pumping out easy money will end in tears, Diana Furchtgott-Roth, a senior fellow at the Manhattan Institute, wrote in an article for MarketWatch.

Last week, Federal Reserve Chairman Ben Bernanke expressed his continuing belief in the policies he has put into place.

“We believe the monetary policies we have conducted have helped get stronger recovery and more jobs than we otherwise would have had,” Reuters quoted Bernanke as saying.

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

Furchtgott-Roth, who was chief of staff of President George W. Bush’s Council of Economic Advisors, explained that what the Fed policies actually do is create record-low interest rates. That encourages investors to take higher risks. Meanwhile, there is little incentive for banks to help the masses because low interest rates make lending unattractive.

Such conditions are not the way to lead the country's economy back to health, according to Furchtgott-Roth.

There is a growing crowd who insist that the Fed cannot suppress interest rates forever, and when they do, she foresees a lot of “tears and regrets.”

If Americans are concerned about national debt now, they will really have something to cry about. Higher interest rates will increase public debt, and therefore deepen the deficit.

Furchtgott-Roth noted the value of the high-risk investments that people are flocking to will decline when interest rates rise. And older people are expected to be especially hurt by that fall.

“We're in the biggest mess we've been in since the 1930s,” Allan Meltzer told Furchtgott-Roth. “We have never had a more problematic future.”

Meltzer is well-qualified to offer his take on current conditions. In addition to teaching economics at Carnegie Mellon for more than 50 years, he spent more than a quarter of a century as chair of the Shadow Open Market Committee, which analyzes Fed policies. And he also wrote a three-volume work titled “A History of the Federal Reserve.”

But make no mistake, it is not only the United States that is facing problems, Meltzer explained. The rest of the world is not doing much better.

Japan feels forced into the currency devaluation game for the sake of competing with the dollar and the euro. And Meltzer believes Korea is likely to join the party.

In addition, people believe they are seeing improvement in Europe, but it is really the deceptive appearance painted by austerity. Furthermore, with the Egyptian economy in the hands of the Muslim Brotherhood, Meltzer forecasts that economy blowing up.

“I don't see any bright spots of importance, just dead ends,” he told Furchtgott-Roth.

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

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