Williams' Thought of the Day: Fiscal Reform, Not Monetary Easing

Sydney M. Williams, whose “Thought of the Day” is well-read in financial and investment circles, offered the following insights about the global debt crisis, and the steps required to set the U.S. economy right–reprinted here with permission:

In a de-leveraging economy, which is what we have (and need to have), there is less need for monetary easing than there is for fiscal reform. Unfortunately, there has been none. There is plenty of blame to go around. Congress has been of little help. But most of the fault must lie with the President. He sits at the desk where the buck is supposed to stop. However, Mr. Obama wasted his honeymoon period by focusing on ideological issues –healthcare, card check, green energy, etc.–instead of focusing on the economy. Who can forget Rahm Emanuel’s cry that a crisis is a terrible thing to waste?…

Now the Fed has raised a trial balloon about a possible third round of easing, driven it would seem, by the recent decline in asset prices, both financial and commodity. While such easing may provide temporary relief to the stock market, it is the wrong response for several reasons. First, it is akin to pushing on a string. Banks have plenty of liquidity. There is little demand for loans, as consumers gradually persist in deleveraging, again, as they should. An emphasis on monetary easing is a Santa Claus policy for banks, while Congress and the President should be focused on fiscal policy–tax reform and the Grinch-like, but necessary cuts in entitlement spending that will have to be made at some point. Easing money today serves to detract from the unpleasant fact that if nothing is done, January 1, 2013 will witness the biggest tax increase the U.S. has ever experienced, a fact that will be of increasing interest to equity and bond markets as the year unfolds….

There is little question that our economy continues to struggle. Dissonance in Europe does not help. The Federal Reserve deserves credit, as does Treasury, for staving off what could have been a catastrophic collapse of financial markets three and a half years ago. Both agencies responded quickly and effectively. But monetary expansion has done little for economic growth in the years hence. Taking the period from the first quarter of 2008 through the third quarter of 2011, the Federal Reserve expanded its balance sheet by $1.8 trillion. The increase in GDP during that time? $86 billion. A 0.05% return over three and a half years should be unacceptable. It is time to turn to fiscal policy.