John Lipsky, deputy managing director of the International Monetary Fund, says the Federal Reserve’s aggressive policy to spark the economy and credit markets isn’t enough by itself to get the economy going.
The Fed on Tuesday cut the federal funds rate to a range of zero to 0.25 percent and announced ways it will expand its balance sheet to unfreeze credit markets.
“Those were very aggressive, innovative steps,” Lipsky told Bloomberg TV.
“The message is clear: they will do whatever it takes to make sure there is adequate liquidity to provide a basis for credit growth.”
But, the economy already is in a recession that seems to be deepening. “The news is likely to be bad for the next few quarters,” Lipsky says.
“So the Fed’s steps are helpful, but not enough by themselves to turn the economy and credit markets around.”
Lipsky says three developments are necessary to create recovery. “First, we need liquidity provision, and that’s what the Fed is doing,” he says.
“Second, we need capitalization, and that’s what the federal government has started.”
Finally, he says, “We need to cleanse bad assets off balance sheets. So far the efforts there haven’t been comprehensive, but partial. We need all three for a real healing of the financial system.”
Former Fed Vice Chairman Alan Blinder agrees with Lipsky. “The Fed gets an A to A-minus for effort and not very good marks for results,” he told The Wall Street Journal.
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