International Policy

Fed Doesn't Have Tools For Global Problem

Former Federal Reserve governor Lawrence Lindsey wants the U.S. and other governments to raise funds to finance sound private economic activity and recapitalize financial intermediaries on a global scale. Emphasizing that this would not mean more transitory bailout money for the International Monetary Fund, he cautions that American taxpayers must be protected and should expect to benefit from any largess distributed.

Here are some of his arguments:

  • Investors have ceased to care so much about the rate of return on their capital -- replacing that with concern over the eventual return of their capital.

  • While a rate cut by the Federal Reserve will be of benefit domestically -- resulting in cheaper home loans, reduced credit card rates and lower-cost auto financing -- the global effect is likely to be minimal.

  • The Clinton administration's erratic policies regarding the dollar and exchange rate intervention helped destabilize Asian economies -- and its hectoring led to the downfall of one of the most reform-minded prime ministers in Japanese history.

  • The hair-shirt conditions the IMF attaches to its loans have led to a destruction in buying power in borrowing economies.

Washington might help oil-producing countries by taking this opportunity of low prices to refill the nation's Strategic Petroleum Reserve -- thus, for once, actually buying low and selling high.

The key to solving global economic problems, Lindsey believes, is to restart the engine of global demand. This requires a different fiscal policy as well as a trade policy less narrowly focused on meeting the demands of special interests.

Source: Lawrence Lindsey (American Enterprise Institute), "Lower Rates Are Not Enough," Wall Street Journal, September 28, 1998.

 

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