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Tags: Greenspan | Fed | Economy | policy

Greenspan: Fed’s Tactics Have Done Little to Help Economy

Thursday, 12 July 2012 07:44 AM

The Federal Reserve's monetary policy stimulus measures rolled out since the downturn have had little impact on the economy, says former Fed Chairman Alan Greenspan.

Since the downturn, the Fed has rolled out two rounds of quantitative easing, known widely as QE1 and QE2, snapping up $1.7 trillion in mortgage securities held by banks and another $600 billion in Treasury instruments with the aim of steering the country away from deflationary decline while creating conditions ripe for investing and hiring via the massive liquidity injections. 

The U.S. central bank has also rolled out a $400 billion program that shuffles its Treasury holdings, known as Operation Twist, later expanding it by another $267 billion.

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

Under Operation Twist, the Fed purchases longer-duration Treasury securities in the market while selling an equal amount of shorter-duration Treasury securities with the aim of keeping long-term interest rates low.

Today, unemployment rates remain high and recovery tepid, and talk is brewing the Fed will roll out a third round or quantitative easing soon to jolt the economy.

The problem with such a tool, Greenspan says, is that it swell's the Fed's balance sheet and hasn't made too much of an impact on the economy.

"I've stayed away from commenting on Fed policy," Greenspan tells CNBC's The Kudlow Report.

"I will say this, however, that the data do show that the expansion of assets has had very little impact on the economy, for an important reason, that we've created a major increase in the asset side of the Fed balance sheet and a very large trillion and a half increase in excess reserves,” he said.

No evidence suggests that money is being loaned out.

"They are not relending it, and until those reserves get into the marketplace to the purchase of goods and services, it has no effect."

Turning to the broader economy, Greenspan says the economy overall is fundamentally steady, except for investment in long-term assets such as real estate properties.

“The best way I would describe it is to think in terms of two separate economies,” Greenspan says.

“One is probably 90-92 percent of the GDP and is doing actually reasonably well. The other 8 percent is largely structures or more exactly, long-lived assets. The attitude of business and households against committing to long-lived assets is extraordinarily suppressed.”

"It’s a capital strike for long-lived buildings, you know, those with 20 years of potential life and longer," Greenspan says.

In the minutes from the Fed's June 19-20 monetary policy meeting, the Fed reveals that voting members largely favor stimulating the economy via easing measures but only if it deteriorates further.

In other words, monetary policy officials are sticking with a wait-and-see approach.

"A few members expressed the view that further policy stimulus likely would be necessary to promote satisfactory growth in employment and to ensure that the inflation rate would be at the Committee's goal," the Federal Reserve minutes read.

"Several others noted that additional policy action could be warranted if the economic recovery were to lose momentum, if the downside risks to the forecast became sufficiently pronounced, or if inflation seemed likely to run persistently below the Committee's longer-run objective" of 2 percent inflation rates.

Investors were hoping for more clarity.

"We really don't see any clear indication in these minutes that the Fed is any closer to QE3 than at their previous meeting," says Omer Esiner, chief market analyst at Commonwealth Foreign Exchange in Washington, according to Reuters.

"Very cautious on the economic outlook and the door remains open to QE3, but nothing imminent in these minutes."

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

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Thursday, 12 July 2012 07:44 AM
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