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Friday, November 18, 2011

Fiscal Ammunition

This has been one of the hardest times for the Federal Reserve.
Last years QE2, where the Fed bought treasury bonds to keep interest rates low has not done what it was supposed to do.Growth in the economy has slowed and unemployment is still too high.
History proves that after the 1929 stock market crash, the Federal Reserve stood by and did nothing.
It was the worst decision to sit back and watch it all unfold.
In that crash, the economy collapsed, GNP plummeted by 27% and unemployment rose to over 30% by today's measurements and a 25% deflation crushed those
already in debt.
Compare that with today's economic situation.
"The Great Recession" saw GNP fall by only 5% and output has almost reached pre-crash highs.
Unemployment is just below 10% and price levels are steady.
The Federal Reserves aggressive moves to give reserves to keep the banking system above water and the financial markets functioning have made all of the
difference between then and now.
And thanks to the Feerderal Reserve the US has done better through this crisis than other countries whose central banks like the Bank of England and the ECB
(European Central Bank) have not done the same.

Operation Twist is the Fed's initiative that has lowered long term interest rates which has the 30 year mortgage rate at an all time low.

It's not over yet.

The Fed can also reduce the interest rate it pays banks on their excess reserves. The rate is 1/4 of 1%. It could be eliminated therefore giving banks less incentive
either to invest their reserves or lend them out.

The Fed's role has always been to keep inflation at 0% to 2% and provide liquidity in times of crisis.

What the Fed wont do is spur growth in productivity, stop excessive government regulation or fix the deficit problem.
We will need sound fiscal policy which should include long-term deficit reduction and short-term tax relief (maybe extending and enlarging the payroll tax

The US economy is driven by the confidence of consumers and investors and by the innovation of workers and entrepreneurs.

Let's use all of the tools we need so that we can get back to shared prosperity sooner than later.

(Stats from Wharton School study)