Economy: No Easy Fix

By JEANNINE AVERSA
AP Economics Writer
WASHINGTON (AP) – The Federal Reserve has little power left to
lift the economy out of its rut. Congress, with an election
looming, has no appetite for more stimulus. Shoppers are reluctant
to spend, and businesses are slow to hire.
Let’s face it: There is no easy or imminent fix for the flagging
recovery.
The sluggish economic summer wore on Friday with news that
Americans spent less at most retail stores in July. Earlier this
month came word that the trade deficit is ballooning and companies
are not adding jobs fast enough to bring down unemployment.
Typically, the Fed can lower interest rates to encourage
Americans to borrow money and spend it, invigorating the economy.
But the benchmark interest rate controlled by the Fed has been
almost zero for more than a year now.
The Fed this week took a new step by announcing it would use the
proceeds from its huge portfolio of mortgage securities to buy
government debt. The idea is to make cheap credit a little cheaper,
particularly for things like mortgages.
The problem there: Americans who are worried about their jobs,
not to mention volatility in the stock market, don’t want to
borrow. They saved 6.2 percent of their disposable income this
spring. Before the recession, it was more like 1.2 percent.
“You can’t force people to take out a loan or spend money that
they don’t want to spend,” says Alice Rivlin, who served as the
Fed’s No. 2 official in the late 1990s.
Sure, the Fed still has options. It could launch another
trillion-plus-dollar program to buy government debt or mortgage
securities like it did when it was battling the recession and
financial crisis.
Or the Fed could cut to zero the rate it pays banks to keep
money parked there, a move aimed at getting banks to lend more. But
banks are not exactly feeling free with their cash, either.
“It’s a pervasive level of uncertainty that people and
businesses feel about their economic futures,” says Ken Mayland,
president of ClearView Economics. “It’s frozen them into
inactivity.”
Congress has the power to regulate the economy by adjusting tax
rates and passing stimulus programs – the side of the equation
known as fiscal policy, as opposed to the Fed’s monetary policy.
But there is little interest on Capitol Hill to undertake a
major new stimulus effort. The midterm elections are less than
three months away, and Republicans and Democrats alike fear voters
are worried about the federal budget’s $1.4 trillion – and rising –
deficit.
A scholar of the Great Depression, Fed chief Ben Bernanke has
warned Washington policymakers not to repeat mistakes made during
the Great Depression by pulling in government stimulus too quickly.
Bernanke also suggested recently that extending the Bush tax
cuts, at least for a while, would be “one way” to “maintain a
reasonable degree of fiscal support – stimulus – for the economy.”
But Democrats and Republicans are divided on what to do. Most
Republicans want to make permanent the tax cuts enacted under
President George W. Bush in 2001 and 2003. That would amount to
nearly $3 trillion over the next decade. Democratic leaders want
the cuts for the wealthiest Americans to expire.
That leaves the work of jump-starting the economy for the time
being to everyday Americans and businesses, who can spend money and
accelerate the cycle of growth. But both are in a frugal mood.
Mortgage rates have sunk to record lows: Rates on 15-year
mortgages dropped to 3.92 percent this week, 30-year mortgages to
4.44 percent. Still, people aren’t scrambling to buy homes or
refinance the ones they already have.
Businesses, meanwhile, are sitting on a record $1.84 trillion
pile of cash, according to the Fed. They aren’t using the money to
expand operations or hire new workers because they, too, have
doubts about the strength of the economic recovery.
The economy grew at a 2.4 percent pace in the second quarter,
about half as fast as it was growing late last year. And it may
turn out, as the manufacturing sector is hurt by declining exports,
that growth right now is even slower than we think.
And the stock market, which had managed a significant rally in
July, is now absorbing the blow of the economic pessimism. The Dow
Jones industrial average fell this week from about 10,700 to about
10,300.
The key, says former Fed governor Randall Kroszner, is making
people feel more comfortable and confident that their jobs are
secure, and that the values of their homes and 401(k) accounts will
stabilize.
It’s just that no one is sure where that confidence will come
from.
“There is certainly no magic bullet to immediately turn thing
around,” he says.

(Copyright 2010 by The Associated Press. All Rights Reserved.)

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