Beyond economy, asset buys also have fiscal benefits: Rosengren

NEW YORK Fri Feb 22, 2013 10:17am EST

Boston Fed President Eric Rosengren speaks during the Sasin Bangkok Forum July 9, 2012. REUTERS/Sukree Sukplang

Boston Fed President Eric Rosengren speaks during the Sasin Bangkok Forum July 9, 2012.

Credit: Reuters/Sukree Sukplang

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NEW YORK (Reuters) - The Federal Reserve's massive asset purchases work to help not only the U.S. economy, but also the broader fiscal situation, a top Fed official said on Friday.

In a speech, Boston Fed President Eric Rosengren redoubled his defense of the U.S. central bank's policy of buying $85 billion in bonds per month, and he extended the argument to outline benefits to the government from the program.

The so-called quantitative easing program, known as QE3 because it's the third such effort by the central bank, reduces interest rates for the United States, and helps to lower the country's debt-to-GDP ratio, said Rosengren, a dovish Fed official who has a vote on the Fed's policy committee this year.

Further, he argued, the faster economic growth brought about by QE3 has the effect of bringing in more tax revenue. It also reduces government spending in areas such as unemployment insurance because such programs reduce joblessness, he said.

"We do well to also consider these benefits, and the costs of inaction, when evaluating policy," Rosengren said at a conference hosted by the University of Chicago Booth School of Business, according to prepared remarks.

The Fed is buying $45 billion in Treasury bonds and $40 billion in mortgage-backed securities per month in an effort to encourage spending and investment, and to help along the slow and erratic U.S. recovery from the 2007-2009 recession.

Though the buying is meant continue until there is a substantial improvement in the outlook of the labor market, some Fed policymakers are growing concerned that the central bank's balance sheet, now at $3 trillion, risks destabilizing financial markets or future inflation.

In a familiar argument, Rosengren also said that U.S. unemployment would be higher than the current 7.9 percent rate, and inflation would be even weaker than it is, absent the purchases.

(Reporting by Jonathan Spicer; Editing by Chizu Nomiyama)

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Comments (4)
jaham wrote:
Yes, Rosengren, Bernanke is helping to finance Obama’s fiscal recklessness.

My, how I wish we had THIS Barrack Obama as POTUS (where did he go?):

“Mr. President, I rise today to talk about America’s debt problem. The fact that we are here today to debate raising America’s debt limit is a sign of leadership failure. It is a sign that the U.S. government can’t pay its own bills. It is a sign that we now depend on ongoing financial assistance from foreign countries to finance our government’s reckless fiscal policies. Over the past five years, our federal debt has increased by $3.5 trillion to $8.6 trillion. That is ‘‘trillion’’ with a ‘‘T.’’ That is money that we have borrowed from the Social Security trust fund, borrowed from China and Japan, borrowed from American taxpayers. And over the next five years, between now and 2011, the president’s budget will increase the debt by almost another $3.5 trillion. Numbers that large are sometimes hard to understand. Some people may wonder why they matter. Here is why: This year, the federal government will spend $220 billion on interest. That is more money to pay interest on our national debt than we’ll spend on Medicaid and the State Children’s Health Insurance Program. That is more money to pay interest on our debt this year than we will spend on education, homeland security, transportation and veterans benefits combined. It is more money in one year than we are likely to spend to rebuild the devastated gulf coast in a way that honors the best of America. And the cost of our debt is one of the fastest growing expenses in the federal budget. This rising debt is a hidden domestic enemy, robbing our cities and states of critical investments in infrastructure like bridges, ports and levees; robbing our families and our children of critical investments in education and health-care reform; robbing our seniors of the retirement and health security they have counted on. Every dollar we pay in interest is a dollar that is not going to investment in America’s priorities. Instead, interest payments are a significant tax on all Americans — a debt tax that Washington doesn’t want to talk about. If Washington were serious about honest tax relief in this country, we would see an effort to reduce our national debt by returning to responsible fiscal policies. But we are not doing that. Despite repeated efforts by Senators Conrad and Feingold, the Senate continues to reject a return to the commonsense pay-go rules that used to apply. Previously, pay-go rules applied both to increases in mandatory spending and to tax cuts. The Senate had to abide by the commonsense budgeting principle of balancing expenses and revenues. Unfortunately, the principle was abandoned, and now the demands of budget discipline apply only to spending. As a result, tax breaks have not been paid for by reductions in Federal spending, and thus the only way to pay for them has been to increase our deficit to historically high levels and borrow more and more money. Now we have to pay for those tax breaks plus the cost of borrowing for them. Instead of reducing the deficit, as some people claimed, the fiscal policies of this administration and its allies in Congress will add more than $600 million in debt for each of the next five years. That is why I will once again co-sponsor the pay-go amendment and continue to hope that my colleagues will return to a smart rule that has worked in the past and can work again. Our debt also matters internationally. My friend, the ranking member of the Senate Budget Committee, likes to remind us that it took 42 presidents 224 years to run up only $1 trillion of foreign-held debt. This administration did more than that in just five years. Now, there is nothing wrong with borrowing from foreign countries. But we must remember that the more we depend on foreign nations to lend us money, the more our economic security is tied to the whims of foreign leaders whose interests might not be aligned with ours. Increasing America’s debt weakens us domestically and internationally. Leadership means that ‘the buck stops here.’ Instead, Washington is shifting the burden of bad choices today onto the backs of our children and grandchildren. America has a debt problem and a failure of leadership. Americans deserve better. I therefore intend to oppose the effort to increase America’s debt limit.”

- Senator Obama , March 16th, 2006

Feb 22, 2013 10:48am EST  --  Report as abuse
astroz wrote:
From the same school of thought as Obama and Krugman ….. debt doesn’t matter. Problem is, this new way of thinking is the same thinking that has resulted in over 25% unemployment in Greece and Spain, and nearly destroyed the economies several South American countries in the 90′s, and on and on. I feel like I’m living in a George Orwell novel where the “new speech” is the new norm. President Obama is the new Joeseph Goebbels.

Feb 22, 2013 11:14am EST  --  Report as abuse
Abulafiah wrote:

Spain had a debt level of only 36% of GDP in 2007. Can you explain, in detail, how that is too high?

Feb 23, 2013 3:58am EST  --  Report as abuse
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