Fed, ECB throwing world into chaos: Stiglitz

NEW YORK Tue Oct 5, 2010 5:37pm EDT

Economist and Nobel laureate Joseph Stiglitz in a file photo. REUTERS/Mike Segar

Economist and Nobel laureate Joseph Stiglitz in a file photo.

Credit: Reuters/Mike Segar

NEW YORK (Reuters) - Ultra-loose monetary policies by the Federal Reserve and the European Central Bank are throwing the world into "chaos" rather than helping the global economic recovery, Nobel Prize-winning economist Joseph Stiglitz said on Tuesday.

A "flood of liquidity" from the Fed and the ECB is bringing instability to foreign-exchange markets, forcing countries such as Japan and Brazil to defend its exporters, Stiglitz told reporters in a conference at Columbia University.

"The irony is that the Fed is creating all this liquidity with the hope that it will revive the American economy," Stiglitz said. "It's doing nothing for the American economy, but it's causing chaos over the rest of the world. It's a very strange policy that they are pursuing."

The U.S. dollar has weakened about 6.5 percent against a basket of major currencies since the beginning of September as prospects for further monetary easing by the Fed have led investors to seek higher returns elsewhere.

That flow of dollars caused currencies to appreciate in many emerging market countries such as Brazil, which offers strong growth prospects. The Japanese yen has also hit record highs against the dollar on expectation of additional greenback weakness.

Recent actions by those countries to curb the strength of their currency were "necessary," Stiglitz added.

"It's natural in that context for them to say -- we can't just let our exchange rates appreciate and destroy our exports," he said.

On Monday, Brazil doubled a tax on foreign investment into local government bonds, while Japan lowered the target for its benchmark interest rate to a range between zero and 0.1 percent.

The Bank of Japan also pledged to buy 5 trillion yen ($60 billion) worth of assets, in a strategy similar to the one adopted by the Fed to pump funds into the economy.

But additional monetary stimulus will "clearly" not solve the problems caused by lack of global aggregate demand, Stiglitz said.

"Lowering the interest rates may help a little bit, but that's much too weak to address the problems facing the United States and Europe," Stiglitz said. "We need fiscal stimulus."

(Reporting by Walter Brandimarte; Editing by Jan Paschal)

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Comments (13)
Gotthardbahn wrote:
I’m no fan of Mr. Stiglitz but he does have a point. Does Mr. Bernanke really know what he’s doing?

Oct 05, 2010 2:28pm EDT  --  Report as abuse
qualsdad wrote:
What’s wrong with the mo money mo debt policy?

Oct 05, 2010 2:42pm EDT  --  Report as abuse
JMRAG wrote:
If you put 12 economists in a room and ask them to comment on a problem. You will receive 13 comments. The Fed and ECB are fighting to prevent a depression. As for stability to the Foreign Exchange markets — when have they been stable? The dollar was very weak against the Euro before the collapse. They EU has been exposed. Several memebers are bankrupt with no way to pay their soverign debt and it is pulling down the currency. Bad fiscal management by governments for 40 years did that. Not monetary policy of the last two years. During the collapse, the dollar was the safe haven. Spot monkeys trading foreign exchange don’t analyze economics or purchasing price parity. They have no clue. Neither does Stiglitz.

Oct 05, 2010 2:54pm EDT  --  Report as abuse
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