Tags: Roach | Fed | Stimulus | Demand

Yale’s Roach: Fed Stimulus Tools Do Little to Spark Demand

Wednesday, 01 August 2012 12:16 PM EDT

The Federal Reserve is meeting to consider stimulating the economy with monetary policy tools, yet past stimulus measures haven’t sparked the one thing the economy needs to pick up — demand, says Stephen Roach, former chairman of Morgan Stanley Asia and current Yale economist.

Since the economy slid into a recession over four years ago, the Fed has rolled out two rounds of stimulus measures known as quantitative easing (QE), which saw the Fed buy $2.3 trillion in mortgage-backed securities and Treasury securities from banks, pumping liquidity into the economy to spur recovery in the process.

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 interest rates low.

The economy isn’t better off today, Roach says, as monetary stimulus measures produce diminishing returns.

“They’ve done QE1, QE2, Twist 1 and Twist 2, so that’s four actions of unconventional monetary policy. One of them worked: QE1,” Roach tells CNBC.

“The others have not worked. The Fed puts out research that says they all worked, but that’s propaganda. They’re batting .250, and if you were a baseball player batting .250, you’d get sent down to the minor leagues.”

The Fed is currently meeting to discuss the economy’s progress, and recently Fed officials have suggested a need to intervene with stimulus measures.

Monetary stimulus measures work by pushing down interest rates when cuts to the Fed’s benchmark lending targets aren’t enough to spur recovery, with side effects including a weaker dollar and rising stock prices.

Critics say such stimulus measures, QE especially, print money out of thin air and plants the seeds for inflation down the road.

Supporters say such policies steer the country away from crippling deflation and foster job creation, arguing that even though recovery remains weak, doing nothing at all would be worse, an argument Roach rejects.

“This counterfactual stuff is ridiculous. There’s not one shred of evidence to say the counterfactual means that we would be in a depression or an ongoing recession. Consumers are in a balance sheet adjustment period, and they need help fixing their balance sheets,” Roach tells CNBC, pointing out that consumer demand hasn’t budged.

“Consumer demand has grown 0.7 percent now for 18 quarters in a row, four and a half years of the weakest consumption growth in the modern history of the U.S. economy,” Roach says.

Consumer spending drives about 70 percent of the U.S. economy, which grew 1.5 percent in the second quarter of this year, not enough to make a dent in high unemployment rates and below a first-quarter growth rate of 2.0 percent.

“In the current quarter, the third quarter, we’re tracking below the anemic 1.5 percent gains of the second quarter. The consumer is not benefiting from QE1, QE2, Twist 1, Twist 2,” says Roach.

Other experts agree that Fed tools pump up stock prices and create a wealth effect, but do little to improve the economy plagued by too much debt and not enough growth.

“[I]t hasn’t stimulated the economy. In fact, we’re probably in a recession right now,” Eric Sprott, CEO of Sprott Asset Management, told Newsmax.TV in a recent interview.

“We’re probably in a recession right now in the U.S. and we’re certainly in a recession in Europe. We’re certainly in a manufacturing recession in China. And these things that the central banks do, the bottom line is they don’t stimulate the economy. They keep asset prices inflated.”

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

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Wednesday, 01 August 2012 12:16 PM
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