The Fed Can't Solve Our Economic Woes | Gerald P. O'Driscoll Jr. | Cato Institute: Commentary

The Fed Can't Solve Our Economic Woes | Gerald P. O'Driscoll Jr. | Cato Institute: Commentary: "the collapse of demand is a consequence — not the cause — of the bust. Policies to address crises must get cause and effect right."

"The solution lies in restoring balance sheets. For financial firms, that means raising capital. For consumers and businesses alike, that means saving more of their reduced incomes.

Yet public policy has focused almost exclusively on stimulating spending without much regard to why spending, especially consumption, has flagged. Until balance sheets (corporate and household) are restored, increased spending cannot be sustained."

"Its move toward Japan-style quantitative easing is a misstep. And historically low interest rates — about which the Bank of International Settlements, the bank for central banks, sounded a warning in its 2009/2010 annual report — will inevitably distort economic activity, as they did during the housing boom. Low interest rates slow the process of restoring balance sheets by keeping asset prices artificially inflated. They also penalize saving, thus prolonging the process of rebuilding balance sheets."