Stiglitz: Fed Stimulus Withdrawal to Hurt Economy

Tuesday, 23 Mar 2010 01:38 PM

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The Federal Reserve’s decision to allow mortgage-debt purchase programs to end this month could drive up home-loan rates and worsen the housing crisis, says Nobel laureate Joseph Stiglitz.

The Federal Reserve said it will end one of its main support programs for the U.S. economy — purchases of $1.25 trillion of mortgage-backed securities, according to Fox News.

That, Stiglitz says, is a bad idea at this time.

“The withdrawal of the support risks increasing the interest rate, increasing the number of foreclosures and exacerbating the strain, the stress, that American families are already facing,” Stiglitz tells Bloomberg.

The decision will lead to greater foreclosures, and bank failures for this year will exceed 2009 and 2008 totals, he said.

One of the biggest threats to the global economy is if central banks start yanking stimulus money out too early due to “irrational” fears among investors that inflation is going to be a problem.

Consumer demand, Stiglitz says, isn't strong enough to fuel inflation rates.

Nevertheless, the Fed's decision to stop buying mortgage-backed securities comes at the same time when the monetary authority decided to keep interest rates at nearly zero percent.

Marvin Goodfriend, a former research director at the Federal Reserve Bank of Richmond, says the Fed is basically conducting an experiment with its decision to stop buying mortgage securities.

“It would like private money to come back into the mortgage market, but if the interest-rate spread on mortgages over government securities that is needed to bring private money back is too high, it could impede the recovery of the housing market,” Goodfriend says.

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