Richard C. K. Burdekin
Professor of Economics, Claremont McKenna College
Consumers are thinking about their money, talking about it and counting it — a lot. People may be doing this to an obsessive degree, especially when jumping into the rush of holiday spending. The Fed’s role in the economic recovery via mortgage-backed securities and other forms of qualitative easing are fodder for discussion among those suffering from recession obsession.
In this interview, Richard C. K. Burdekin, professor of economics at Claremont McKenna College, answers questions about the Fed, mortgage-backed securities, the odds of another recession and other economic issues that warrant attention.
Have the odds of a recession in 2012 declined, and if so, what odds would you now put on recession in 2012?
News that U.S. real GDP (gross domestic product) growth rose from 1.3 percent in the second quarter of 2011 to 2.5 percent in the third quarter makes an outright recession look less likely going forward. It’s too early to tell whether we can expect any sustained improvement, however. Unemployment remains stubbornly high, the housing market shows no real signs of recovery and consumer confidence is still low. With the federal budget deficit already near 10 percent of GDP, there is not only limited scope for additional fiscal stimulus but also the worry that any further weakening of the economy would make this deficit even worse than it already is. Falling levels of business activity automatically lower tax collections and boost spending through higher unemployment claims, making fiscal recovery hostage to general economic recovery.
Concerns about the U.S. fiscal position, while serious in themselves, remain dwarfed by the ongoing debt crisis in Greece and other members of the eurozone. Sovereign defaults in Europe would threaten the sustainability of the European common currency and likely hurt the United States not only through direct adverse effects on U.S. exports and European operations but also via contagion effects along the lines of those experienced during the 1997-98 Asian financial crisis. This means the risk of recession in 2012 certainly cannot be dismissed, but the actual odds of this depend upon too many unknowns to be sensibly predicted at this point.
Do the pros outweigh the cons if the Federal Open Market Committee initiates purchases of mortgage-backed securities or another form of quantitative easing?
Just as there is little remaining scope for fiscal stimulus, the Federal Reserve too has already exhausted most room for the traditional boost arising from lower interest rates. There is still scope for continued quantitative easing whether by buying mortgage-backed securities or indeed any other assets of the Fed’s choosing. The evidence thus far suggests further quantitative easing may not be that much help, however. When the most intense phase of the financial crisis began in September 2008, the monetary base (reflecting money created by the Fed, or “high-powered money”) stood at approximately $875 billion. It more than doubled by January 2009, meaning more than half of all the high-powered money ever issued by the Federal Reserve at that time had been created in a scant four months.
The latest figures for Nov. 2, 2011, show the monetary base at $2.637 trillion, more than triple the September 2008 level. Although this expansion may well have played a key role in staving off the threat of financial collapse, it does not seem likely that additional quantitative easing could be expected to jump-start more rapid growth when the massive monetary emission already undertaken has failed to do so. Moreover, further easing runs the risk of leading to added weakness in the dollar and provoking excess money creation that could only fuel existing upward pressures in commodity prices. The Federal Reserve has likely exhausted most of its ammunition already.
What one single economic issue isn’t getting the attention it should?
An economic issue that is perhaps not getting the attention it deserves is the downdraft in the dollar that has been camouflaged by the similar weakness in the euro. It is telling that the dollar has not made any substantial gains against the euro even in the midst of a crisis that threatens the very existence of the single European currency. This dollar weakness reflects not only the performance of the U.S. real economy but also, in my opinion, the massive liquidity expansion undertaken by the Federal Reserve. It hardly seems coincidental that the tripling of U.S. high-powered money since September 2008 has been accompanied by the march of gold prices to record highs and strong price gains in many other commodities — a pattern, in fact, rather reminiscent of the 1970s.
Special thanks to Richard C. K. Burdekin, Jonathan B. Lovelace professor of economics at Claremont McKenna College, for sharing his insights in answering these questions. Greg McBride, CFA, senior financial analyst for Bankrate, contributed the questions.