The Fed Has Promised Too Much and Can Only Deliver Bubbles (Video)

In an interview on Bloomberg, former Morgan Stanley chief economist Stephen Roach tears apart the monetary policy of the Federal Reserve. Roach explains that Ben Bernanke has blatantly admitted that the Fed’s goal is to stimulate the economy by growing asset bubbles.

Roach’s indictment of the Fed and the US economy is severe, but he couches his language carefully:

We need to sort of wean ourselves from the temptation to juice up our asset markets to derive temporary satisfaction from bubble-induced economic growth.”

Translation: the Fed needs to get out of the way and stop manipulating the markets with quantitative easing and abnormally low interest rates. The worst part is that the Fed’s strategy only enriches the financial elite while forcing Main Street to deal with the real effects of secular stagnation.

Highlights from the interview:

Stephen Roach: We have tried to squeeze too much juice out of the lemon… We’ve opted for financial engineering through bubbles. That provides some temporary gratification, but ultimately comes back to bite you with the balance sheet recessions that occur in aftermath of the bursting of the bubble — we’re in one right now…

We’ll definitely having difficulty in dealign with another piece of bubble-induced economic activity, as we’re doing right now. The debt overhang is there. The inability of the economy to generate sustained job growth and income generation through normal economic fundamentals remains a profound problem for the US economy…

We do have an excess of supply over demand. We’ve been on the demand side of the equation, the United States, for a long time. The emerging economies, especially my favorite one, China, have been on the supply side. They’ve been producers. The world needs to rebalance and realign and get more demand out of the producers and less demand out of the excess consumers like the United States. We need to live within our means. Countries like China really need to step up and stimulate internal private consumption. They’ve just begun that process…

We need to sort of wean ourselves from the temptation to juice up our asset markets to derive temporary satisfaction from bubble-induced economic growth. Ben Bernanke [said], ‘We can opt to create financial bubbles from time to time if we can’t lower real interest rates below the negative two-percent level.’ That’s an explicit admission of what’s gone wrong with monetary policy. Bernanke admits that he’s tried to use bubbles to stimulate economic growth…

Brendan Greeley: If what you’re saying is right, it’s not just the economists who need to adjust their assumptions. It’s everybody. It’s voters, it’s people saving for retirement. We have an entire system built upon this assumption of post-war growth.

Roach: We’ve promised too much and we’ve delivered poorly on those promises. Every time we get into a growth problem, we seem to go for more juice from asset markets to address that problem, and that’s not the way to do it…

Tom Keene: We’re almost in a bi-modal America, two Americas. We’ve got an America really doing pretty well, and another group of America where it’s just not happening. Do we need a Fed that needs to do their day-to-day work looking at two Americas, or can they just assume a great macro economy?

Roach: The Fed’s got blunt instruments. They have a hard time directing a piece of that stimulus to one part and a piece to the other part. What they’ve been doing with QE is they’ve been providing a lot of wealth for wealthy people. And that doesn’t really address the middle-class problems…

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