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Fed's Supports "Experimental Approaches" to Prevent Deflation

Economics / Deflation Jan 05, 2009 - 12:32 PM GMT

By: Mike_Shedlock

Economics Nearly everyone is hopping on the Keynesian bandwagon as the urge to try something, anything, to halt this economic slide is simply overpowering.

Please consider Fed's Yellen Supports ‘Substantial' Economic Stimulus . The U.S. economy faces a “serious risk” of stagnating for an extended period of time and “it's worth pulling out all the stops” on fiscal stimulus, said Federal Reserve Bank of San Francisco President Janet Yellen.


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

Yellen's remarks indicate that support for new stimulus to revive the economy is gaining momentum within the central bank. Chicago Fed Bank President Charles Evans endorsed such policy yesterday, following Fed Chairman Ben S. Bernanke's lead in October.

“Although our economy is resilient and has bounced back quickly from downturns in the past, the financial and economic firestorm we face today poses a serious risk of an extended period of stagnation,” which may intensify financial-market conditions, Yellen, 62, said during the annual meetings of the Allied Social Science Associations and the American Economic Association.

“It's worth pulling out all the stops to ensure those outcomes don't occur,” she said.

“I am sanguine that the Fed's new programs will be helpful in restoring credit flows,” Yellen said. “But many of the new approaches are experimental, and there is a great deal of uncertainty concerning their likely effects.”

“Even with vigorous Fed action to restore credit flows, an extended period of economic weakness is likely,” she said.

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.

Interestingly, Yellen says the Fed Must Have ‘Exit Strategy' for Loan Programs .

Federal Reserve Bank of San Francisco President Janet Yellen said the U.S. central bank must have a “timely” plan for ending lending programs created since the start of the global financial crisis.

“Many of the interventions are novel, so no straightforward methods are available to quantify their effectiveness,” Yellen said in remarks prepared for a speech today in San Francisco. “The Fed must ensure that it has an exit strategy to wind down the facilities in a timely and effective way when they are no longer needed.”

To further recap, Yellen proposes "novel interventions" of dubious merit, admitting they will not work, and wants a "timely" plan to end them.

How about right now, before they do any more damage?

Writing the Rules for a New World

Does "experimental" economic policy make any sense? Fareed Zakaria writing for Newsweek thinks it does. Please consider Writing the Rules for a New World

As bad as it looks, the current financial crisis will end. I don't know when or how, but the combination of government interventions will eventually work. Why do I say this? Because governments are more powerful than markets. They can close markets down, nationalize firms and write new rules. And Washington has one other, unique power: it can print money.

I cringe when I read such monumental stupidity.

Every nation on the planet has the ability to print money. There is nothing unique about Washington's ability. And if you print and spend enough of it you look like Zimbabwe. Yes the US will survive, but it will be in spite of such stupidity not because of it.

By Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com

Click Here To Scroll Thru My Recent Post List

Mike Shedlock / Mish is a registered investment advisor representative for SitkaPacific Capital Management . Sitka Pacific is an asset management firm whose goal is strong performance and low volatility, regardless of market direction.

Visit Sitka Pacific's Account Management Page to learn more about wealth management and capital preservation strategies of Sitka Pacific.

I do weekly podcasts every Thursday on HoweStreet and a brief 7 minute segment on Saturday on CKNW AM 980 in Vancouver.

When not writing about stocks or the economy I spends a great deal of time on photography and in the garden. I have over 80 magazine and book cover credits. Some of my Wisconsin and gardening images can be seen at MichaelShedlock.com .

© 2008 Mike Shedlock, All Rights Reserved

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