Federal Reserve Chairman Ben Bernanke has little control over US monetary policy and by using up all the traditional ammunition called the basis points by taking the Federal Funds Rate down to zero and indulging in this experimental medicine known as quantitative easing, Bernanke has pretty much abdicated control over the traction between the monetary policy and real economy, says Stephen Roach, a professor at Yale University and former non-executive chairman for Morgan Stanley in Asia.
“Flying blind” is one way to put it and Bernanke is hoping for the best trying to recreate an asset dependent US economy where the transmission effect goes from the unstable assets markets to the real economic decisions and it’s not going to work, Roach added.
Asked to define austerity and give his opinion on “deficit scolds”, Roach said it’s a cleverly coined word, and he doesn’t understand Nobel Laureate Paul Krugman’s opinion on fiscal responsibility. The idea is to draw the contrast between the short-term and the long-term, Roach observed.
The anti-austerity camp says since these economies are suffering right now, austerity should not be considered while the austerity advocates say maybe we should consider where the debt trajectory is headed for the longer term rather than focusing on short-term implications and take actions to control medium and longer term fiscal excess. It’s really a debate over time horizons, he noted.
Dallas Fed President Richard Fisher has been critical of the Fed’s latest move on quantitative easing and has said the central bank should cap or at least put a target on balance sheet expansion.
Would that be more credible?
Roach said Fisher has been very cautious in suggesting that the Fed needs to be judicious in applying untested experimental medicine on the economy. The point that Fisher tried to make is that the Fed’s current policy was designed to deal with an economy in crisis.
The crisis is over, the recession is over, yet the policy levers are still at their crisis settings, Roach noted. When pointed out that they were designed to deal with a stubbornly high unemployment rate, Roach said there is no empirical evidence that links monetary policy with structural unemployment.
Asked for his prescription that will result in a 5-6 percent of nominal GDP and 3 percent real GDP growth, Roach said the scientific approach for economic growth pursued by China may bear some economic lessons for America. Consumer spending, at 70 percent, forms the largest part of the US economy. Yet it has grown less than one percent on an annualized basis over the past 19 quarters. Consumers are on a balance sheet recession and need debt relief and savings incentives, Roach argued.
Asked if the Fed is following a weak dollar policy, Roach said the US doesn’t have any dollar policy. Instead it has a rhetorical conviction crafted by Bob Rubin that a strong dollar is always in America’s interest. The dollar however, has been weakening for over a decade now, Roach pointed out. You can watch the video here.