Mohamed El-Erian, chief executive of bond giant Pimco, doubts that the Federal Reserve can do anything more to stimulate the economy or create jobs.
Speaking today at the Federal Reserve Bank of San Francisco, he said that no matter how much stimulus the Fed puts into the system, it cannot overcome five economic problems that require structural or long-term solutions: housing, the labor market, long-term public finance, the flow of credit and infrastructure. Only Congress and the administration can solve these problems, but so far they have only been providing short-term or cyclical or solutions.
“Suppose I’m overweight,” El-Erian said in an interview after his speech at the Fed’s Asian Symposium on Banking and Finance. “A cyclical solution would be, I’m going to starve myself for one day and then I will be okay.” A structural solution would be changing your eating and exercise habits.
He said the Fed has been providing a bridge to a long-term solution, but there has been “very little follow-through” from the government agencies that can and need to provide structural solutions. That’s why President Obama’s jobs speech tonight is so important, he said.
ReplyDeleteIn a speech in Minneapolis today, Fed Chairman Ben Bernanke said the central bank “has a range of tools” to provide additional monetary stimulus to the economy, but did not say what they are and whether they will be used when the Fed’s open market committee meets Sept. 20 and 21.
Some expect the Fed will consider selling some of its short-term Treasury securities and using the proceeds to buy longer-term Treasurys in an effort to bring down long-term interest rates. The Fed tried this plan once before in the early 1960s, when it was dubbed Operation Twist.
I asked El-Erian what he thought of this and other ideas that the Fed is said to be considering. “All of them are extending a bridge that has so far been a bridge to nowhere,” he said.
He said the Fed is like a “good hitter” on a baseball team. “It can come to the plate quickly and swing the bat,” but the economy also needs good pitching and good fielding from the rest of government.
El-Erian said he hope the national debate is moving forward after the manufactured crisis over the debt ceiling. He sees signs that politicians realize the debate was “really counterproductive” and that “political gains have a cost.”
He said government needs to recognize that unemployment needs a long-term solution that emphasizes “retraining and retooling.” It also needs a temporary solution that could include a payroll tax cut for employers and an extension of the program, set to expire at year end, that provides some people with up to 99 weeks of unemployment benefits. He would favor providing more than 99 weeks of benefits if done “as part of an overall program.”