One of these holidays I will get around to posting a “Public Enemies, Establishmentarian Economist Edition.” Right now it’s in the fetal stage, but Frederic Mishkin, Larry Summers, Bob Rubin and Ben Bernanke have pretty much locked down the top 4 spots. There’s another Harvardian blowhard financial priest whom I had nearly forgotten about, considering that he hadn’t made an idiotic pronouncement for a long time (what, 3 days or so). He’s Marty Feldstein, and as of right now, he’s seeded at No. 5.
Dec. 14 (Bloomberg) — Harvard University economist Martin Feldstein, head of the group responsible for dating U.S. economic cycles, said there may “easily” be a recession next year if consumers cut spending amid sliding home values.
“I would put it at about 50 percent,” Feldstein, head of the National Bureau of Economic Research, said in an interview today when asked about the chance of an economic contraction. The risk “clearly has been increasing,” he said.
There’s a danger of the U.S. falling into “stagflation,” with gross domestic product shrinking and inflation increasing by around 3.5 percent, Feldstein said. Government figures today showed U.S. consumer prices in November rose the most in more than two years on higher energy, clothing and rent costs.
“We are looking at a slightly higher inflation rate than we want,” Feldstein said. Still, “we are not back to the very high inflation rates we had in the late 1970s,” adding that whether the U.S. is heading for stagflation “depends on how you want to define it.”
The Federal Reserve’s decisions to lower interest rates and pump billions of dollars into the banking system may not be enough, and the U.S. will need fiscal stimulus, such as temporary tax cuts, if the economy remains weak next year, he said.
“The Fed is trying to get around what is a very difficult situation, where credit markets are not working in a normal way,” Feldstein said. “But I think the Fed policy tools are limited.”
Fed policy makers lowered their benchmark rate by a quarter-point on Dec. 11 to 4.25 percent, the third cut since September, disappointing some investors who had expected a half- point reduction. The next day, the Fed, European Central Bank and three other central banks moved in concert to alleviate the credit squeeze.
The dollar was helped by the Fed’s coordinated plan and interest-rate cut. The U.S. currency’s gains this week pared its loss this year to 8.5 percent against the euro. [wtf?–ed]
“It needs to come down substantially further in order to shrink our trade deficit,” Feldstein said. “And that’s good news for the U.S. economy in 2008. If the economy is going to have strength, a lot of that strength is going to have to come from our net exports.”
P.S. Dear Kathleen and Vivien,
The US dollar was not helped by Wednesday’s gruesome Charge of the Bernanke Brigade. It was helped because the Fed is seen as boxed in by the latest, craptastic inflation figures, which were abetted by the Fed’s trigger-happy cutting during what was supposedly 4.9 percent Q3 GDP growth.
Please consider taking a macroeconomic course or two.