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11/4/16

Finacial Industry: Easy Money is Dangerous Without Activist Fiscal Policy - by Teresa Ghilarducci

Weak fiscal policy and a political commitment to permanent austerity in many advanced economies has left monetary policy do a job for which it was never designed, and at which it is failing.[1] The supply of easy money amid conditions of austerity is increasingly dangerous, not only because it weakens the economy but also because it threatens to destroy the advance-funded pension model. These policies, and a cynical reliance on private debt to fuel consumption by  households in the bottom 90 percent of the income distribution — and especially the bottom 50 percent[2] — will doom all forms of private pensions that rely on advance funding with financial assets.

Given the limited tools available to them, the world’s central banks are unable, acting alone, to stimulate the world economy. That much is plain in the impotence of the European Central Bank without a robust fiscal union,[3] and even in the U.S. experience.

In 2008, Fed chief Ben Bernanke rapidly extended the Fed’s activity to provide liquidity through “quantitative easing,” including providing loans to all financial institutions, not just commercial banks; loaned money to businesses through the “commercial paper” market; and loaned money to AIG, an insurance company. As a scholar of the Great Depression of the 1930s[4], he was mindful of the scale of the danger posed by the financial meltdown, and acted quickly and appropriately to implement a monetary ease, buying bonds from untraditional sources[5] and lowering interest rates.

Short-term low interest rates have their place as a temporary measure; without those, the recession would have been longer and deeper. But the low interest rate policy was complemented by quick action by Congress and the President to decreases taxes and boost spending, but only for a limited period. When these fiscal measures expired, so did the recovery.

Low interest rates plainly can’t stimulate the economy – and can actually be dangerous — without activist fiscal policy, for seven main reasons:  eak fiscal policy and a political commitment to permanent austerity in many advanced economies has left monetary policy do a job for which it was never designed, and at which it is failing.[1] The supply of easy money amid conditions of austerity is increasingly dangerous, not only because it weakens the economy but also because it threatens to destroy the advance-funded pension model. These policies, and a cynical reliance on private debt to fuel consumption by  households in the bottom 90 percent of the income distribution — and especially the bottom 50 percent[2] — will doom all forms of private pensions that rely on advance funding with financial assets.

Given the limited tools available to them, the world’s cencentral banks are unable, acting alone, to stimulate the world economy. That much is plain in the impotence of the European Central Bank without a robust fiscal union,[3] and even in the U.S. experience.

In 2008, Fed chief Ben Bernanke rapidly extended the Fed’s activity to provide liquidity through “quantitative easing,” including providing loans to all financial institutions, not just commercial banks; loaned money to businesses through the “commercial paper” market; and loaned money to AIG, an insurance company. As a scholar of the Great Depression of the 1930s[4], he was mindful of the scale of the danger posed by the financial meltdown, and acted quickly and appropriately to implement a monetary ease, buying bonds from untraditional sources[5] and lowering interest rates.

Short-term low interest rates have their place as a temporary measure; without those, the recession would have been longer and deeper. But the low interest rate policy was complemented by quick action by Congress and the President to decreases taxes and boost spending, but only for a limited period. When these fiscal measures expired, so did the recovery.

Low interest rates plainly can’t stimulate the economy – and can actually be dangerous — without activist fiscal policy, for seven main reasons: Click on link below for full report.

Read more: Easy Money is Dangerous Without Activist Fiscal Policy

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