Can Fed's New 'Twist' Prevent Another Recession? | WAMU 88.5 - American University Radio
Filed Under:

Can Fed's New 'Twist' Prevent Another Recession?

Play associated audio

The economic news has been nothing but grim lately: weak expansion, sluggish consumer spending and unemployment holding steady at just over 9 percent.

Overseas, the picture isn't any rosier, with Greece expected to default on its debts — possibly followed by Portugal and Ireland — and the International Monetary Fund predicting a global economic slowdown.

So is the U.S. heading for a double-dip recession? Or are we there already? And what can we do about it?

Operation Twist

Planet Money's Adam Davidson tells Guy Raz, host of weekends on All Things Considered, that the Federal Reserve is taking action ... sort of.

"The Fed is constantly buying and selling U.S. government bonds," Davidson says. "And what they've decided to do is buy more 10-year, 30-year, more longer-dated bonds" in an attempt to get the economy going again by pushing down long-term interest rates and making mortgages and credit cards cheaper.

The Fed is calling its latest action "Operation Twist."

"I don't think anyone thinks this is going to have a big impact on the economy," Davidson says.

He says the Fed is doing massive things that in other times would cause out-of-control inflation or other distortions in the economy, but they're not having an impact.

Davidson says he doesn't think interest rates are the problem. He looks at Operation Twist as almost a cry for help: "Wow, no matter what we do, the central bank just can't have the kind of impact that it normally does."

The day after the Fed announced Operation Twist, the markets tanked.

"Clearly the Fed did nothing to make them feel optimistic," Davidson says. "In part, that might be a growing realization that the Fed is sort of out of bullets. There just isn't much more they can reasonably do, especially in the current climate."

No Magic Elixir

Laura D'Andrea Tyson, former chairman of President Clinton's Council of Economic Advisers, says she thinks the Fed's move is important, especially in conjunction with President Obama's recent jobs proposal.

But, she says, there's no easy fix for worried Americans. "Economists are trying to explain the reality we face. We can't give answers that don't reflect the underlying situation," she says. "There is no magic elixir for a situation like this."

Tyson, a professor of business at the University of California, Berkeley, is critical of economic plans that focus on deficit reduction.

"Right now, to embark upon a massive amount of austerity — that is, to slash government spending to reduce the deficit," she says, "that would be actually the wrong thing to do."

The deficit is important, she says, but right now we need to recognize we need more monetary support.

"We cannot say that there's some single cause of how we got into this situation or single bullet for solving it," she says.

Brace Yourselves

Investor and economist John Hussman has a different analysis.

"Imagine trying to get out of a box, and you've got shackles on your legs and you've got paper handcuffs," he says. "Essentially what Fed policy has tried to do over the last several years is to actually tighten the shackles — by rescuing debt, for instance, that shouldn't be rescued — and at the same time playing around with the paper handcuffs when those aren't the constraints that are binding."

Hussman says what's holding the economy back is enormous debt burdens. He says the Fed needs to focus on restructuring debt in order to boost hiring and consumer spending.

"The amount of extra benefit that you're going to get by pushing interest rates a tiny bit lower really isn't going to provoke anybody to do anything different," he says.

A solution to this latest crisis really should come from somewhere other than the Fed, Hussman says. But, he adds, such a solution may not be possible.

Hussman says he doesn't think there's an option to stave off a second recession. "What I think is the option," he says, is recognizing that some of this debt is not going to be paid off and to "minimize the fallout."

No matter what plan the government pursues, Hussman says, we need to brace ourselves for the coming shock.

Copyright 2011 National Public Radio. To see more, visit http://www.npr.org/.

NPR

Snubs And Successes: 6 Lessons Learned From This Year's Emmy Nominations

HBO's Game of Thrones emerged as the most-nominated series with 19 nods for the Primetime Emmy Awards, but new series such as FX's Fargo and HBO's True Detective scored, too.
NPR

'Captain Pizza' Saves The Day, But Doesn't Save Himself A Slice

A pilot found himself hungry during a midflight delay. But instead of just buying a pizza for himself, he bought 50 pizzas for the entire Frontier Airlines plane.
NPR

Study: Statehouse Press Corps In Decline

A Pew report found that the number of full-time newspaper reporters covering state politics fell dramatically in the past decade, raising questions about their ability to closely monitor politicians.
NPR

A New Device Lets You Track Your Preschooler ... And Listen In

LG's KizON wristband lets you keep tabs on your child. But some experts say such devices send the wrong message about the world we live in. And the gadgets raise questions about kids' privacy rights.

Leave a Comment

Help keep the conversation civil. Please refer to our Terms of Use and Code of Conduct before posting your comments.