By Steven K. Beckner

(MNI) – U.S. Treasury Secretary Timothy Geithner Thursday evening
said the lingering effects of the financial crisis are preventing the
Federal Reserve’s low interest rate policy from having a greater
economic impact.

And Geithner argued strenuously against near-term reductions in
federal deficit spending, saying that fiscal reform needs to be more
long-term in nature. On the contrary, he said there is a “compelling
need for additional action” by Congress to spur economic growth.

The Treasury Secretary said he is “encouraged” by improvements in
the economy but said there are “tough challenges” ahead in prepared
remarks to the Economic Club of New York,

The Fed has held the benchmark federal funds rate near zero for
more than three years and expects to keep it there until at least
late-2014. It has also bought $2.3 billion of bonds to push down
long-term interest rates, like mortgage rates. Yet, the recovery has
been subpar by most standards. And unemployment, though down eight
tenths since last August, is still 8.3%.

Geithner acknowledged that the growth pace is “slower than previous
recoveries from deep recessions” and that “unemployment is very high,
and is improving more gradually than any of us would like.”

He also observed that “while there have been some welcome recent
signs of stabilization in the housing market, residential construction
remains weak.”

Geithner explained the sluggish expansion, high unemployment, weak
housing market and so forth by referring to research by Carmen Reinhart
and Ken Rogoff purporting to show that “recoveries that follow financial
crises are slower.”

“They are slower because the causes of financial crises —
typically a large rise in borrowing by households and the financial
sector and too much investment in housing and real estate-act to hold
down growth as they are unwound,” Geithner said.

“As people bring down their debt burdens and raise their saving
rate, they spend less,” he continued. “As banks are forced to reduce
risk and restore more prudent credit standards, they lend less.”

Geithner said “these forces work against the impact of lower
interest rates, dampening the otherwise potentially powerful effects of
monetary policy.”

Some economists, as well as some Fed officials, have argued that
increasing fiscal, as well as regulatory, burdens and uncertainties have
slowed the pace of recovery. They have stressed the need to rein in
deficit spending.

However, Geithner suggested that would be a mistake, at least in
the short-run. On the contrary, he urged more aggressive federal
efforts.

“While growth is gradually getting stronger, we still have very
high levels of unemployment, poverty, and other damage left over from
the crisis,” he said. “And we face additional challenges, with Europe
confronting a severe and protracted crisis and the world engaged in a
critical struggle with Iran, which is adding to upward pressure on oil
prices.”

“For these reasons, we believe there is a compelling need for
additional action by Congress to strengthen growth and get more
Americans back to work,” Geithner continued. “Congress should act on the
President’s proposals to rebuild our nation’s infrastructure, help small
businesses, and prevent more layoffs of teachers and first responders.”

President Obama proposed a fiscal 2013 budget with a $1.3 trillion
deficit last month.

Not unlike Fed Chairman Ben Bernanke, Geithner spoke in favor of
longer term deficit reduction but argued against short-run budget
cutting.

“Confidence, damaged so severely in the crisis, is more fragile —
more likely to be hurt disproportionately by new shocks, like we saw in
2010 and 2011,” said the Treasury Secretary. “It is going to take years
to fully repair the damage caused by this crisis.

“This is why it is so important that policy makers continue to work
to get the economy growing faster in the short term and not shift
prematurely to fiscal restraint or shift the focus of policy entirely to
reforms with only long-term payoffs,” he said. “Severe austerity now
would be very damaging.”

** MNI **

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