Tags: economic | recovery

Fed Needs to Make the Recovery Sustainable

By Hans Parisis
Tuesday, 25 Aug 2009 02:58 PM Current | Bio | Archive

U.S. markets reacted on Friday with a lot of optimism to the positive body language that came out of the symposium in Jackson Hole, Wyo. organized by the Federal Reserve and attended by central banks from around the world. But China’s Premier Wen Jiabao seemed much less optimistic in clear language.

He warned that China is still facing various uncertainties despite signs of economic recovery, saying the government will maintain its macroeconomic policies.

"There are still a lot of unstable and uncertain factors ahead and the economic situation ahead is still very grave, although both the world economy and the national economy are making positive changes now. We must clearly see that the foundations of the recovery are not stable, not solidified and not balanced. We cannot be blindly optimistic,” said Jiabao.

In my opinion, China’s premier is right. China is not able to change its growth model as quickly as it would like to. Because of that, they have no other choice than to pump up local demand in ad hoc ways, instead of steering the economy toward growth based on domestic demand.

Beijing is using stimulus as a stopgap until exports go up again.

If developed economies don't rebound as the Chinese hope they will, and I don’t expect we will see a second dip in China around the middle of 2010, then we could possibly see a second stimulus in China.

In Jackson Hole over the weekend, Mr. Bernanke mainly presented his report about what the Fed has done over the past year to save, undoubtedly with success, the United States, the global financial system, and consequently, all the economies involved from a full-blown collapse.

But that’s already history. What’s more important to me is the fact that Bernanke didn’t talk about the Fed’s exit strategy. This at a time when we hear more and more voices that show justifiable concerns about too much bailouts, too much debt, and too much deficit.

To me it’s crystal clear that the major central banks, including the Fed, are afraid of a double-dip recession scenario, which, at least in my opinion, will be very difficult to avoid.

In the United States, I think we could easily slip back into recession by the end of the year or beginning next year because what’s now called the recovery is only held up by the stimulus. It’s not self-sustaining.

Of course, there are a lot of people who say the stimulus, including Cash for Clunkers, has a multiplier effect. They are right. But I must add that the $14 trillion of reduced household wealth and housing starts that are down 75 percent also have their multiplier effect that completely outweighs the effects from all the fiscal stimulus.

Yes, the Fed has kept credit going. But it has not found a way yet to get the banks to provide credit again in the way they did prior to the financial crisis, the way they should, and hopefully the way they will do in the future.

We must keep in mind that the Fed has stepped in there where the private sector has remained absent. For now, the question of when will the Fed exit from its stimulus agenda remains on the back burner.

About the recession, we can say that it is bottoming out. Let’s hope that perception is in accord with reality and that the potholes won’t be too deep.

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U.S. markets reacted on Friday with a lot of optimism to the positive body language that came out of the symposium in Jackson Hole, Wyo. organized by the Federal Reserve and attended by central banks from around the world. But China’s Premier Wen Jiabao seemed much less...
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2009-58-25
 

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