View Full Version : Yellen: Pull out all stops for grim economy

01-04-2009, 10:03 PM
Sun Jan 4, 2009 6:06pm EST

By Ros Krasny

SAN FRANCISCO (Reuters) - The U.S. economy faces a potentially long period of weak growth and a rising risk of deflation, making it worth "pulling out all the stops" with a big fiscal spending program, Janet Yellen, president of the San Francisco Federal Reserve Bank, said on Sunday.

"The financial and economic firestorm we face today poses a serious risk of an extended period of stagnation -- a very grim outcome," Yellen said on a panel discussion at the American Economics Association's annual meeting in San Francisco.

"If ever, in my professional career, there was a time for active, discretionary fiscal stimulus, it is now."

Yellen said she was skeptical about suggestions for broad-based, permanent tax cuts and backed the "diversified package of policies" suggested recently by the International Monetary Fund.

Specifically, Yellen urged "spending on goods and services with higher rather than lower social value," but said measures should be consistent with "long-term fiscal discipline" to be the most effective.

If the public doesn't believe that spending increases are temporary, then long-term interest rates are likely to rise in response, "undercutting, conceivably even overwhelming, the short-term stimulus," Yellen said.

President-elect Barack Obama has said that signing a major economic stimulus package will be his first priority when he takes office, with a goal of creating or saving 3 million jobs over two years.

Speaking on the same panel as Yellen, renowned economist Martin Feldstein said that $300 billion to $400 billion in fiscal measures in 2009 and 2010 seemed justified.

Feldstein, former head of the National Bureau of Economic Research, also warned that the current recession, with its roots in a financial crisis rather than restrictive Fed interest rate policy, could easily drag on for the rest of 2009.


With the United States already bogged down by a year-long recession, Yellen said there is a rising risk of deflation, or a persistent decline in prices that could cause consumers to delay purchases, dragging down the economy further.

"With an extended period of abnormally high unemployment in the forecast, it is increasingly likely that inflation will fall to undesirably low levels," she said.

That, in turn, would risk pushing up real interest rates as inflation expectations decline at a time the Fed has already reached the "zero bound" on official rates.

Yellen said the trigger for the current recession, the eruption of a severe financial crisis, suggested U.S. growth would remain weak "for an extended period."

"The current downturn is likely to be far longer and deeper than the 'garden-variety' recession in which GDP bounces back quickly," she said. "Many forecasters expect this to be one of the longest and deepest recessions since the Great Depression."

Yellen said the Fed has not run out of monetary policy options, despite having set its official lending rate at a rock-bottom range of zero to 0.25 percent in December.

The Fed's "nonconventional measures" would likely remain focused on improving the functioning of credit markets, complementing the actions of the Treasury and the Federal Deposit Insurance Corp.

A "thoroughgoing report of the financial system" is essential for a sustained economic recovery but will be "a long, drawn-out process," she said.

(Editing by Leslie Adler)

01-05-2009, 03:09 AM
I don't believe there will be a process of recovery to anything we would recognize or probably desire. Civilizations come and go...ours is going.

01-05-2009, 07:59 AM
Summary of Yellen's Proposal

1)Yellen wants to "pull out all the stops to ensure an extended
period of stagnation does not occur"

2)Yellen wants to do this even though the "approaches are experimental,
and there is a great deal of uncertainty concerning their likely effects.”

3)To top it off, Yellen admits that an extended period of stagnation will
occur anyway: “Even with vigorous Fed action to restore credit flows,
an extended period of economic weakness is likely.”

One Sentence Summary

Yellen wants to pull out all the stops using experimental approaches to
the fiscal crisis that she admits will not solve the crisis and might even
be detrimental.

The remainder of this scornful article can be found at ...

01-05-2009, 08:54 AM
Fed Officials Endorse ‘Big Stimulus’ to Battle U.S. Recession
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By Scott Lanman and Vivien Lou Chen

Jan. 5 (Bloomberg) -- Federal Reserve officials, after taking the historic step of cutting the benchmark interest rate to as low as zero, are calling for greater government spending to help revive the U.S. economy.

San Francisco Fed President Janet Yellen said yesterday at an economics conference in San Francisco that “it’s worth pulling out all the stops” with an economic recovery package. Charles Evans, president of the Chicago Fed, told the same gathering he believes a “big stimulus is appropriate.”

The remarks underscore the view of many economists that unprecedented fiscal measures are needed to combat the yearlong recession, and come ahead of meetings this week between President-elect Barack Obama and congressional leaders. They also reflect the failure of Fed efforts so far, including record rate cuts, emergency lending programs and backstops for debt markets, to halt the crisis.

Yellen, Evans and other officials at the conference didn’t specify their recommendations for the size of the stimulus. Obama is asking that tax cuts make up 40 percent of a package that may be worth as much as $775 billion, a Democratic aide said yesterday. Yellen said she favors a “diversified package of policies” that includes government spending.

“Fiscal stimulus has got to be an important part of the package” implemented by the federal government, Frederic Mishkin, a former Fed governor, said yesterday at the conference in San Francisco. The "$500 billion-plus question” is, “can they get it right?” he said.

Worst Shock

The “financial shock” that caused the current crisis is “worse than the one that happened during the Great Depression,” he said. Mishkin left the central bank in August and returned to his post as a professor of economics at Columbia University.

The stimulus that emerges from talks between Obama’s aides and Congress will be much larger than the $150 billion proposal from lawmakers in October, when Chairman Ben S. Bernanke endorsed the concept of such a program. He noted then that the impact of the $168 billion stimulus a year ago had waned.

Obama, who has picked New York Fed President Timothy Geithner as his Treasury secretary, is honing a combination of tax cuts and spending on roads, bridges and other infrastructure to create or save 3 million jobs. Economists and a group of Democratic governors led by New Jersey’s Jon Corzine have called for a $1 trillion program. Obama takes office Jan. 20.

Time ‘Is Now’

“The current downturn is likely to be far longer and deeper than the ‘garden-variety’ recession,” Yellen, who became chief of the San Francisco Fed in 2004, said in a speech. “If ever, in my professional career, there was a time for active, discretionary fiscal stimulus, it is now.”

Yellen was an adviser to the last Democratic president, Bill Clinton, serving as chairman of his Council of Economic Advisers from 1997 to 1999 after a stint as a Fed governor in Washington.

Last month, Fed policy makers reduced their target for the federal funds rate, or the rate banks charge one another for overnight loans, to as low as zero for the first time in an attempt to end the longest economic slump in a quarter-century.

The central bank is also shifting its focus to the amount and type of debt it buys, with announcements of new lending programs or asset purchases serving as the principal signals of policy.

Economy Deteriorates

Economic data released last week show U.S. consumer confidence sinking to the lowest level in at least 41 years and home prices in 20 major cities declining at the fastest rate on record. Another report showed that the decline in U.S. manufacturing deepened in December.

“The current downturn is likely to last much longer than previous ones,” said Harvard University economics professor Martin Feldstein, former president of the National Bureau of Economic Research. “So, fiscal policy is likely to be useful.”

Still, such stimulus would increase the long-term burden on taxpayers, Evans said in his Jan. 3 speech.

“Federal debt held by the public is 38 percent of GDP, states have large unfunded liabilities and growing numbers of retiring baby-boomers will further pressure the unfunded liabilities for Social Security and Medicare,” Evans said.

University of Chicago professor Raghuram Rajan, former chief economist at the International Monetary Fund, said in an interview at the conference that he’s “in the crowd that is a little more skeptical” about a federal effort to rejuvenate the economy, especially a proposal to provide federal funds to states.

‘Clear Plan’

“The U.S. is of course central to the world economy, and so getting the U.S. back on track I think is very important,” Rajan said. “The real issue is cleaning up the financial sector,” he said, adding he wants to see from the Obama administration a “clear plan” of how to handle “weak” companies.

The outgoing Bush administration has thrown a lifeline to the troubled automobile industry, granting loans worth $13.4 billion to keep General Motors Corp. and Chrysler LLC from bankruptcy for now. The U.S. Treasury also threw the door open to taxpayer financing for a widening array of companies and industries last week, drafting broad guidelines on aid to the auto industry.

Treasury guidelines would let officials provide funds to any company they deem important to making or financing cars. That left room for the government to provide money from the $700 billion Troubled Asset Relief Program beyond loans already committed to GM, Chrysler and GMAC LLC.

Mishkin said working as a Fed policy maker during the credit crisis is similar to serving in a wartime Pentagon.

The central bank is “fighting a war,” he said. Instead of deploying “tanks and guns,” it’s “monetary policy, credit policy and liquidity policy.”

To contact the reporter on this story: Scott Lanman in San Francisco at slanman@bloomberg.net; Vivien Lou Chen in San Francisco at vchen1@bloomberg.net
Last Updated: January 5, 2009 00:01 EST

01-05-2009, 10:27 AM
President-elect Barack Obama has said that signing a major economic stimulus package will be his first priority when he takes office, with a goal of creating or saving 3 million jobs over two years.

3 million new jobs of which 600,000 are new gov't employees. :eek: Most of these will probably bank examiners/liquidators working for some RTC type organization.:lol: Not exactly the kind of stimulus we need.

Here's a link that gets the quote from obama.


Prez-Elect Makes New Pitch, Promises on Job Creation -- Including 600,000 New Government Employees
January 03, 2009 9:52 AM

In his radio address today, President-elect Obama uses some new language when discussing what he wants the stimulus package to achieve in terms of jobs. First off, he has a name for the package -- the "American Recovery and Reinvestment Plan."

The president-elect says he wants to "create three million new jobs" -- this is a change from a few weeks ago, when he said he wanted the plan to create OR SAVE two million jobs.

He says the "No. 1 goal of my plan ... is to create three million new jobs, more than 80 percent of them in the private sector.”

If you do the math: 20 percent of three million means 600,000 new government employees.

01-05-2009, 04:42 PM
Flat Spin.