Monetary policy changes aren’t enough to save the U.S. from a “double dip” recession, as the Federal Reserve has only limited ability to boost the economy, Nobel prize-winning economist Joseph Stiglitz said.
“So just like QE1 didn’t work, QE2, QE2-and-a-half is not going to work,” Stiglitz said in an interview with Bloomberg HT television in Istanbul yesterday. “If we’re going to get out of the current mess it will take fiscal policy.”
Federal Reserve Chairman Ben Bernanke and his predecessor Alan Greenspan “obviously did a very bad job managing monetary policy in the run up to the crisis and letting the bubble grow, not putting in place adequate regulation,” Stiglitz said.
“Now the Fed is going to try and seem relevant so it will try to do something,” he said. “Monetary policy is much better at restraining the economy than pushing it when you’re in a severe downturn such as the current time.”
Fixing problems created by Fed chairmen is much more difficult than creating them, he said.
Stiglitz, who won the Nobel prize in 2001 and is now a professor at Columbia University, said there’s “a serious risk at least for a double-dip for the United States and Europe” and growth will “almost surely” be “too anemic” to create jobs.
“The jobs deficit is going to be growing and the sense of the American economy not working is going to be worse,” he said.
The European debt crisis can be handled and it’s possible for Greece to avoid default, Stiglitz said.
The cost for European banks to fund in dollars rose today, signaling that investors view a global policy makers’ decision yesterday to offer loans in the currency as only a short-term measure. The cost of converting euro payments into dollars, measured by the three-month cross-currency basis swap, was 85 basis points below the euro interbank offered rate as of midday in London, from 81.9 basis points yesterday.
“The problem in Europe is that the political process is often slow relative to economic events and financial markets, so the question is not whether economically it would be possible to solve the problem, but whether politics is moving at a pace that’s commensurate with the economy,” Stilgitz said.