Monday, December 6, 2010

Current Policy as Reason for Concern

Christina Romer's column in Sunday's New York Times offers her judgment on the affect that uncertainty is having on the economic recovery. She discusses several concerns that are in the popular press and on shows like SquawkBox. These concerns are the fate of the Bush tax cuts, and environmental regulation. (I think she leaves out some though). She argues the biggest concern is uncertainty over the health of the economy. Her solution for resolving this uncertainty is a reaffirmation from the president, Congress, and the Fed that they will do whatever is necessary to create jobs. Fiscal and monetary policy must be expansionary, but a plan for tackling the long-term budget problems should be developed also.

It appears she is calling for additional fiscal stimulus. She is sticking with a Keynesian approach for the current state of the economy. But, she is ignoring the housing market. The wealth of most households is impacted more by changes in the value of their homes than in their portfolios. Further, housing is part of the real economy. The inventory of houses still exists, defaults and foreclosures continue to occur, and many others are still under water. The housing market is no where close to a new equilibrium as yet. I believe both Romer and those still in the Obama Administration are focusing on the wrong solutions because they misinterpret the problem.

Ben Bernanke was on 60 Minutes last night. He defended Fed policy, including the current round of quantitative easing. He noted that the Fed can change interest rates on very short notice so that they can reverse their policy when the time is right. When asked how confident he was that the Fed could achieve the necessary reversal at the right time, he replied, "100 percent." I hope and trust that this comment was for the sake of public confidence. If he literally is that confident in the Fed's ability to turn quantitative easing around and that they can know when the proper time to do so, then I am very nervous. Economists have no reason for such hubris. When we think that we can control the economy or fine tune the economy, or act like engineers, it is time to panic.

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