Fed can’t fix the demand side of economic crisis

Marketplace Staff Aug 26, 2011
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Fed can’t fix the demand side of economic crisis

Marketplace Staff Aug 26, 2011
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Stacey Vanek-Smith: Federal Reserve Chief Ben Bernanke just announced that the Federal Reserve stands ready to help the U.S. economy, but is holding off right now.

Jill Schlesinger joins us now, as she does every Friday. She’s editor-at-large for CBS/Moneywatch. Good morning, Jill.

Jill Schlesinger: Good morning.

Vanek-Smith: Jill, markets all over the world were hanging on this speech from Bernanke waiting to see what the Fed would do to help the U.S. economy. Were you surprised that the Fed is holding off?

Schlesinger: You know, I think this was a little bit of a loaded situation for Bernanke, that he did this last year. So maybe what he thought was: you know what? Let me hang out here for a second. I’ll tell them that I’ll help them out if the economy really sputters, but I don’t have to do it in the exact same way as last year.

Vanek-Smith: Jill we also got word that the economic growth was really sluggish in the second quarter. Our gross domestic product grew just 1 percent. Should the Fed be doing something about this?

Schlesinger: I think the problem is that the Fed’s toolkit is limited. What we suffer from in this economy is an overhang from this big asset bubble — the housing bubble — that burst. And we also had that other bubble, the credit bubble, that also burst. And what that does is it reduces demand. No matter what the Fed does, it can’t address the demand side of the equation. So you can have rates really cheap, but that doesn’t mean that people aren’t going to stop paying their debt down. It doesn’t mean that you can force companies to go spend money. They really are looking at: what will actually fix this economy long term? And I don’t think the Fed can do it.

Vanek-Smith: Jill Schlesinger with CBS/Moneywatch, Thank you Jill.

Schlesinger: Take care.


For more analysis of Ben Bernanke’s speech check out Jill’s blog post.

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