– Economy To Perform Well Below Potential Without Credible, Long-Term Fiscal
Plan

By Brai Odion-Esene

WASHINGTON (MNI) – Dallas Federal Reserve Bank President Richard Fisher
Wednesday said he is concerned the Fed has placed itself in a tough position
with the aggressive measures it has implemented to bring about a faster economic
recovery, warning the central bank could face difficulties when it comes time to
withdraw the massive amounts of monetary stimulus.

And Fisher — never one to mince words — slammed the performance of the
U.S. government, particularly Congress, and warned that without a long term
fiscal plan, the U.S. economy would perform “well below” capacity, in remarks
prepared for delivery to a conference at the libertarian Cato Institute.

The Fed’s policymaking Federal Open Market Committee last month unveiled a
program to buy $40 billion a month in mortgage-backed securities, an open-ended
plan that it said will continue until it sees sustained improvement in the labor
market. Combined with the Fed’s maturity extension program, it amounts to $85
billion a month in large scale asset purchases until the end of the year at
least.

“Hawks like me worry that our central bank has done far more than what was
required and are concerned about the difficulties we will encounter when we need
to tighten policy and exit from uber-easy monetary policy,” Fisher said.

Having emerged from the 2008-2009 recession “revamped and hyper-efficient,”
Fisher argued that American businesses have “more than enough fuel in reserve to
finance a prolonged period of job creation and economic expansion.”

He stressed the vital role of domestic consumption and private sector
investment in the recovery, calling them “the best hope for us to remain ‘the
brightest spot in the world economy.'”

This is because U.S. exports will not drive final demand for the
foreseeable future due to the slowing global economy, Fisher said, neither will
the government — which he said has reached its limit as a direct source of
aggregate demand or impetus for investment.

The struggles of the global economy is certainly a great source of
uncertainty and a “retardant” to creation, but “nimble” business operators can
handle that risk, he said.

The deadlock on Capitol Hill is even greater weight on the minds of
businesses, Fisher argued.

“American businesses are muscular and fit, rich and ready to roll,” he
said. However, “a feckless American government — specifically, a Congress that
hasn’t created a budget for more than three years — is poised to drive us off
the so-called fiscal cliff.”

“It has contrived a tax code and regulatory structure that would baffle a
financial Houdini, has compounded the uncertainty facing businesses to a
stifling degree,” Fisher added.

However, addressing the uncertainty inhibiting job creation is not within
the purview of the Fed, Fisher said. The fix lies solely in the hands of fiscal
authorities, who have the power to shape taxes and spending programs to
encourage businesses to go out and hire “rather than ball up into a defensive
crouch.”

While it is vital to address the issue of the looming combination of
year-end spending cuts and tax increases, Fisher warned against a temporary
band-aid that fails to tackle the United States’ long term fiscal situation.

“Short-term fixes to our fiscal and regulatory pathology will not solve the
problem of unemployment and economic sluggishness,” he said.

A short-term plan would only push out the uncertainty, he said, with
businesses remaining on the sidelines in the absence of a long-term, dependable
resolution.

“A far better outcome will be for fiscal authorities to provide a
convincing, long-term solution to our fiscal woes,” Fisher said. “Until then,
our economy will perform well below capacity.”

** MNI Washington Bureau: 202-371-2121 **

–email: besene@mni-news.com

[TOPICS: MMUFE$,M$U$$$,MFU$$$,MGU$$$]