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MOSLER'S LAW: There is no financial crisis so deep that a sufficiently large tax cut or spending increase cannot deal with it.

Fed’s Williams:Fiscal Policy Actions ‘Badly Needed’

Posted by WARREN MOSLER on November 20th, 2011

A step in the right direction:

Fed’s Williams:Fiscal Policy Actions ‘Badly Needed’

Fri Nov 18 14:04:45 2011 EST

–The Federal Reserve’s actions have not been enough to deliver a robust recovery

–The recovery has been hurt by the decline in housing and stock prices, tightening of credit and uncertainty in Europe

–Fiscal policy actions to reduce uncertainty and stimulate recovery are ‘badly needed’

By Anusha Shrivastava

NEW YORK-(Dow Jones) — The Federal Reserve’s actions during the past four years have not been enough to deliver a robust recovery so fiscal policy actions are “badly needed”, said a central bank official on Friday.

“What would be especially helpful at this juncture are fiscal policy actions that work in tandem with monetary policy to stimulate the economy,” said John Williams, president of the Federal Reserve Bank of San Francisco, speaking at the Central Bank of Chile in Santiago.

Williams, who expects the U.S. unemployment rate to remain above 7% for three more years, named three “powerful currents” slowing the pace of recovery.

There has been a “massive destruction of wealth” because of the financial crisis, stemming from a housing collapse, he said.

Second, there’s been a severe tightening of credit because of the decline in residential property prices and the wave of foreclosures.

The heightened uncertainty in Europe and overall health of its financial system is another contributory factor diminishing the appetite for risk such that investors are fleeing to safe assets like U.S. Treasurys, he added.

Given the weakness in the economy and the uncertainty impeding recovery, Williams called for fiscal policy actions that work with monetary policy to boost the economy.

One example of such a policy is the recently announced U.S. government initiative to make it easier for homeowners whose houses are now of lower value than when they bought them, to take advantage of very low rates and refinance their mortgages.

“This will trim monthly payments for some households and could reduce foreclosure rates,” Williams said. “It could also eventually provide a modest boost to consumer spending.”

16 Responses to “Fed’s Williams:Fiscal Policy Actions ‘Badly Needed’”

  1. Ralph Musgrave Says:

    “What would be especially helpful at this juncture are fiscal policy actions that work in tandem with monetary policy to stimulate the economy” Agreed, but I’d go further: why should fiscal ever be separate from monetary? To implement either one alone is bound to be distortionary. For example adjusting interest rates (an example of “monetary”) boosts an economy only via entities that are reliant on short term loans rather than long term loans or equity. You might as well boost an economy only via people with red hair: you’d definitely get a trickle-down effect from the red heads.


  2. Ryan Says:

    Why did congress give Treasury the power issue bonds instead of the Fed? Sort of ties the Feds hands on regulating unemployment and inflation.


    Unforgiven Reply:


    Oh, for political reasons, I’m sure.



    the fed can issue debt as well. what congress did is forbid the fed to allow an overdraft in the tsy’s fed account


  3. Kristjan Says:

    What about our children? We are consuming today what they will produce in the future. I have a skolimon today. What is It you ask? It’s going to be invented in 2018. Federal deficit spending makes time travel possible.


    Kristjan Reply:

    Paul Ryan talks about time travel



    poor kids are going to be forever shifting balances from fed securities accounts to fed reserve accounts as bonds mature.


  4. Dan Kervick Says:

    Finally a Fed statement that I can get behind.

    Germany, the US Congress and the Cameron government are the Fourth Reich: hyperinflation cranks and economic incompetents killing a generation under a jackbooted austerity regime.


    ESM Reply:

    @Dan Kervick,

    Is there a reason you left the Obama administration off your list? Its actions (or lack of action) have been far more damaging domestically than Congress’, and it has been less than helpful in foreign economic policy (where Congress has almost no power whatsoever).


    roger erickson Reply:


    Ok, if you’re going to go there, how can you leave off the current electorate of the USA? And if they get mentioned, you have to include the bulk of orthodox economic faculty, down to even high school economics.


    zanon Reply:

    @roger erickson, why is congress on the list?

    everyone (including Obama — 4 more years pleases!) is just doing what academic economists tell them is right?

    Dan Kervick Reply:

    @ESM, Yes, Obama deserves a world of blame for debt hysteria and austerity-mongering as well, including appointing the Bowles-Simpson-Peterson commission, and for doubling down on a “grand bargain” during the debt ceiling debate. But he backed off slightly with his jobs bill, which though inadequate still can’t get past the Congress.

    It’s interesting that since Larry Summers left the administration, he has moved increasingly to the fiscalist and aggregate demand side of the debate. Unfortunately, Obama doesn’t have many people left in the actual administration to give him non-crazy advice.


  5. roger erickson Says:

    Wow. Gotta like this guy Williams. How’d he slip through the squid’s tentacles?

    Nevertheless, he still under-characterizes our context.

    Wealth? Doesn’t define it. Ability to invent = more wealth than anything we can currently hoard.

    Wealth destruction? More succinctly, we’ve had wealth-creation throttling, and absolutely unprecedented transfer of commodity assets from wielders to useless hoarders.


    Dan Kervick Reply:

    @roger erickson, That’s a good point Roger. So many people keep saying that “savers” need to be rewarded. But shouldn’t wealth creators be supported above all?


  6. pebird Says:

    In addition to hearing how important fiscal policy actions are, it would be good to have a Fed official say the super committee is a sideshow and a waste of time.


  7. RyanVMarkov Says:

    “…fiscal policy actions are “badly needed”, said a central bank official on Friday.”

    Doesn’t the central bank official see the Congress and Super Committee are working very hard on a badly needed fiscal action?


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