Roubini and Wolfensohn - the threat facing the west pt2

1 Oct 2010 Zeitgeistminds.com
Nouriel Roubini discusses the impotent nature of monetary and fiscal policy in today's new normal and explains how to structure a more dynamic policy framework around long-term and short-term effects of the system.

Nouriel Roubini --
In terms of the relative powers of the world sometimes we overemphasize. Like Germany and Japan before. Now as per capita income rises wages rise and the comparative advantage China has will be lost so the global is going to rebalance from China to other Asian countries through competitive shifts. No country is going to rule the world. But it's true that some countries could be the global centre. This century could be the century of Asia. The remaining shift is from export to consumption.

[Presenter -- What would you do if you were in Washington?]

Nouriel Roubini --
The reality is we are running out of policy bullets.
Policy rates are already zero and we have doubled base money [Amazing]. Banks are sitting on trillions of dollars of losses. They are not lending it because of either credit demand or credit supply [!]. They did not lend out the first trillion [of Quantitative easing], why would they lend the second trillion? Monetary policy is becoming impotent because it can deal with liquidity problem, not solvency problem.
The source of the problem is the private sector.
There is a debate between fiscal stimulus and austerity. In Europe they are leaning more to austerity. In the US they are more towards fiscal stimulus. Even the US cannot go from a budget deficit of 10% of GDP to 15% of GDP -- at some point the bond vigilantes would wake up and get them.

[Presenter - But what would you do right now? It's a terribly hard situation. Another stimulus?]

Nouriel Roubini --
I would say a plan of medium term fiscal consolidation and monetary stimulus in the short run [Amazing] As long as you can commit to reducing the budget deficit over the medium term by raising taxes and controlling entitlement spending then you can afford in the short run to do more of a stimulus in infrastructure. Instead of subsidising capital with an investment tax credit, I would actually have a temporary cut in the payroll tax. It's going to boost demand for labour. It's going to make labour cost lower for firms. The problem in the United States is that firms are not doing enough investment [!], they are not hiring workers because the cost of labour is too large. So I would do a two year payroll tax cut funded by increasing the taxes that are expiring on the rich. That's going to be budget neutral.
The bring problem is jobs. We are not creating jobs. Anything that can create jobs is going to be key. The longer these people are unemployed the more they lose their skills, their human capital.

Category:

People & Blogs

Tags:

• Roubini
• and
• Wolfensohn
• the
• threat
• facing
• the
• west
• pt2