–Stimulus Now Up to Tax,Regulatory Policy; Wary of Balance Sheet Growth
–Fiscal ‘Sinkhole’ Will Swallow Economy if Not Repaired

By Steven K. Beckner

NEW YORK (MNI) – Dallas Federal Reserve Bank President Richard
Fisher said Wednesday the Fed has reached the limit of what it can do to
stimulate the economy and it is up to tax and regulatory policy to
strengthen a recovery which he suggested is still somewhat anemic.

Fisher, who will be voting this year on the Fed’s policymaking
Federal Open Market Committee, indicated he would be reluctant to
support further quantitative easing, saying he is “wary” of further
balance sheet expansion.

What’s more, Fisher warned the Fed is jeopardizing its own
independent image by purchasing so much of the U.S. Treasury’s debt, in
remarks prepared for delivery to the Manhattan Institute.

And he put an urgent note on the need to rectify the U.S. fiscal
position.

“Over the years … Republicans and Democrats together … have dug
a fiscal sinkhole so deep and so wide that, left unrepaired, it will
swallow up the economic future of our children, our grandchildren and
their children,” he said. “They must now engineer a way out of that
frightful predicament without thwarting the nascent economic recovery.”

Fisher suggested the Fed has done its part, having cut short-term
interest rates “to nil” and going beyond that to ease monetary policy
quantitatively.

“We have expanded our balance sheet to unprecedented levels,” he
said. “After much debate — which included strong concern expressed by
one member with a formal vote and others, like me, who did not have
voting rights in 2010 — the FOMC collectively decided in November to
temporarily undertake a program to purchase U.S. Treasuries that, when
added to previous policy initiatives, roughly means we are purchasing
the equivalent of all newly issued Treasury debt through June.”

Fisher warned that “by this action, we have run the risk of being
viewed as an accomplice to Congress’ fiscal nonfeasance.”

“To avoid that perception, we must vigilantly protect the integrity
of our delicate franchise,” he said, adding, “There are limits to what
we can do on the monetary front to provide the bridge financing to
fiscal sanity.”

In fact, Fisher went on, “I think we have reached our limit. I
would be wary of further expanding our balance sheet.”

He pointed out that “the Fed could not monetize the debt if the
debt were not being created by Congress in the first place.”

Elaborating on why he thinks the Fed has done all it can to aid the
economy, Fisher said, “the key to correcting the underperformance of the
American economy and American job creation does not rest with the
Federal Reserve. It is in the hands of those who make fiscal and
regulatory policy.”

He said it is no accident that Texas, which has no income tax and a
business-friendly regulatory climate, has grown rapidly while states
such as California, New York and Ohio have lost population and in turn
seats in Congress. He said the nation as a while could benefit from the
Texas example.

“There is a reason Texas now houses more Fortune 500 headquarters
than any other state in the union,” he said. “There is an underlying
reason behind … the disparate employment growth that has taken place
in the 12 Federal Reserve districts over the past two decades.”

“That reason has nothing to do with monetary policy,” he continued.
“It has everything to do with the taxation and fiscal and regulatory
policies of the states.”

“The cost of capital does not explain the different economic
performances of the states; the cost of doing business has everything to
do with those differences,” Fisher went on. “However well-meaning tax
and regulatory initiatives in the laggard states may have been when they
were conceived and levied, they have had unintended consequences that
have led to economic underperformance and job destruction.”

Similarly, the key to correcting the underperformance of the
American economy and American job creation does not rest with the
Federal Reserve,” he added. “It is in the hands of those who make fiscal
and regulatory policy.”

The Fed has done all it can, he reiterated.

“The Fed has reduced the cost of business borrowing to the lowest
levels in decades,” he said. “It has seen to it that liquidity is widely
available to banks and businesses. It has kept the economy from
deflating and it has kept inflation under control.”

The Fed’s efforts have “helped raise the economic tide,” Fisher
said, noting that “recent data make clear that the risks of a double-dip
recession and deflation have ebbed and that economic growth and job
creation are beginning to flow.”

“Yet the ships of job-creating investment remain, for the most
part, tied to the docks — or worse, choose to sail for foreign ports
where tax and regulatory conditions are more favorable, favorable, very
much in the same way that Ohio, Michigan, New York and California
businesses and workers have navigated to Texas,” he said.

“I don’t believe this has much to do with the Fed,” he said.

** Market News International **

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