By Denny Gulino

WASHINGTON (MNI) – The Federal Reserve has been bold and decisive,
yet monetary policy needs reinforcement from fiscal policy if a robust
recovery is to arriving any sooner than much later in the decade, San
Francisco Federal Reserve Bank John Williams told a summit meeting on
inflation targeting being held in Santiago, Chile.

“The Federal Reserve has taken extraordinary actions during the
past four years to stem what could have been a meltdown of the financial
system and a horrific depression,” Williams said in a speech text
released to reporters, who were barred from the meeting itself.

It hasn’t worked, he said, and unemployment won’t be back to normal
until 2016.

Slowing the recovery are three powerful forces, with housing “at
the heart” of it all, he continued. “Massive destruction of wealth from
the crisis” was brought about “by the declines in house and stock
prices.”

Secondly, “is the severe tightening of credit resulting from the
financial accelerator mechanism, triggered by the decline in real estate
prices and the upsurge in residential foreclosures,” he said.

Finally, there permeates the world economic system a “heightened
uncertainty regarding European sovereigns and the overall health of the
financial system,” he said. Investors, therefore, “flee to safe assets
such as U.S. Treasuries.

From his perspective, Williams said, despite the Fed’s
extraordinary efforts, “progress has been frustratingly slow and
halting.”

The housing bust “has been at the heart of the slow recovery” and
according to one measure house prices have fallen less than half of
their 2006 overvaluation, down 30% after having been to pricey by 70%.

The housing shift wreaked huge damage, subtracting $6.5 trillion
from household wealth while stock price drops sucked another $11
trillion out of the system. It all translates into about a 4.5%
sustained reduction in consumer spending, he said, “a strong current
holding back a robust recovery.”

The evaporation of home equity leads to upward spikes in mortgage
delinquencies and foreclosures that triggered the financial crisis.

“Fortunately, calamity was averted,” he said. Yet the foreclosure
crisis continues as a source of “massive deadweight costs” to society
and keeps in place its own “cloud of uncertainty.”

The wounded credit system remains riddled with tightened lending
standards and “anecdotal reports indicate that mortgages are available
only to those with excellent credit and the ability to make heft down
payments.”

The fear index or VIX for the S&P 500 “is currently at very high
levels” and three eruptions of risk aversion in the past few years. “The
household debt overhang and the U.S. and European fiscal crisis have
sapped confidence. So investors “flock to the safe havens of U.S.
government securities and the highest rates securities” as risk spreads
elevate.

The Fed “is swimming against strong countercurrents that impede
recovery,” Williams said, and “fiscal policy actions that reduce
uncertainty and stimulate recovery are badly needed.”

Especially helpful would be “fiscal policy actions that work in
tandem with monetary policy to stimulate the economy.”

Surveying the universe of helpful actions, however, Williams found
little to cite. The upgraded effort by the Obama administration to help
homeowners who owe more than their house is worth could “eventually
provide a modest boost to consumer spending.”

There are “other actions,” he said, that address the continuing
problems in housing, which he did not specify.

** Market News International Washington Bureau: 202-371-2121 **

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