THURSDAY, JULY 8, 2010


KLMNO


Fed weighs steps to keep economic recovery afloat


Moreover, the Fed’s purchases


European debt crisis, other issues raise risk of regression, officials fear


by Neil Irwin


Federal Reserve officials, in- creasingly concerned over signs the economic recovery is falter- ing, are considering new steps to bolster growth.


With Congress tied in political


knots over whether to take fur- ther action to boost the economy, Fed leaders are weighing modest steps that could offer more sup- port for economic activity at a time when their target for short- term interest rates is already near zero. They are still resistant to calls to pull out their big guns —massive infusions of cash, such as those undertaken during the depths of the financial crisis — but would reconsider if condi- tions worsen. Top Fed officials still say that the economic recovery is likely to continue into next year and that the policy moves being discussed are not imminent. But weak eco- nomic reports, the debt crisis in Europe and faltering financial markets have led them to con- clude that the risks of the recov- ery losing steam have increased. After months of focusing on how to exit from extreme efforts to support the economy, they are looking at tools that might strengthen growth.


“If the economic situation


changes, policy should react,” James Bullard, president of the Federal Reserve Bank of St. Lou- is, said in an interview Wednes- day. “You shouldn’t sit on your hands. . . . I think there’s plenty more we could do if we had to.” One pro-growth strategy would be to strengthen language in Fed policy statements that the central bank’s interest rate target is likely to remain “exceptionally low” for an “extended period.” The policymakers could change that wording to effectively com- mit to keeping rates near zero for even longer than investors now expect, perhaps adding specifics about which economic condi- tions would lead them to raise rates. Such a move would be op- posed by many members of the Fed policymaking committee who are wary of the “extended period” language, arguing that it limits their flexibility.


TOMOHIRO OHSUMI/BLOOMBERG NEWS


James Bullard of the Federal Reserve Bank of St. Louis says policies should reflect reality.


Another possibility would be


to cut the interest rate paid to banks for extra money they keep on reserve at the Fed from 0.25 percent to zero. That would give banks slightly more incentive to lend money to customers rather than park it at the Fed, although it also could cause technical problems in the functioning of certain credit markets. A third modest possibility would be to buy enough new mortgage securities to replace those on the Fed balance sheet that are paid off as people take advantage of low interest rates to refinance.


Role of mortgage rates


None of those steps amounts to the kind of massive unconven- tional effort to drive down mort- gage rates and prop up growth that the Fed took in late 2008 and early this year, when the econo- my was in a deep dive. Then, the Fed began buying Treasury bonds, mortgage securities and other long-term assets — more than $1.7 trillion worth by the time the purchases concluded in March.


Some economists have encour-


aged the Fed to launch a new as- set-purchase program, saying that with the unemployment rate at 9.5 percent and little apparent risk of inflation, the Fed should use every tool at its disposal to get the economy back on track. Fed leaders view such a strat-


egy as likely to have only a small impact on the economy and as carrying a risk of slowing growth. One of the key ways the earlier


securities purchases stimulated the economy was by driving down mortgage rates, which in turn propped up the housing market. But with mortgage rates near all-time lows, it is not clear that actions to lower rates an- other, say, quarter percentage point would result in much addi- tional home sales or refinancing activity.


of mortgage securities have re- duced the role of private buyers in that market, and some leaders at the central bank fear that fur- ther intervention could delay the resumption of normal market functioning. “The Fed probably believes


that unconventional policy does not have much traction as mar- ket functioning gets better,” said Vincent Reinhart, a resident fel- low at the American Enterprise Institute and a former Fed offi- cial.


Asset-purchase plan


Another risk is that global in- vestors could lose faith that the Fed will be able or willing to pull money out of the economy in time to prevent inflation. That would lead the investors to de- mand higher interest rates on long-term loans, which could re- verse the rate-lowering effects of the Fed’s asset purchases. When the Fed was buying


$300 billion in Treasurys in mid-2009, part of its try-every- thing approach to dealing with the crisis, rates on 10-year bonds temporarily spiked amid con- cerns that the Fed was “monetiz- ing the debt,” or printing money to fund budget deficits. With def- icit concerns having deepened in the past year, such fears could be even more pronounced now. All that said, Fed officials do not rule out launching a major new asset-purchase program. Rather, they say they would con- sider one only if their basic fore- cast — of continued steady ex- pansion in the economy — proves to be wrong. A key factor that would build support for new as- set purchases would be a rise in the risk of deflation, or a danger- ous cycle of falling prices — which has become more of a con- cern as the world economy slows. Fed officials express confi- dence that they have tools to ad- dress the economy further if con- ditions worsen. “I think we do have a variety of


tools available, and we shouldn’t rule any tool out,” Eric Rosen- gren, president of the Federal Re- serve Bank of Boston, said in an interview. “If we’re uncomfort- able with how long it’s going to take us to reach either element of our dual mandate [of maximum employment and stable prices], we’ll have to make some ad- justments to policy.” irwinn@washpost.com


Europe is top threat to global recovery IMF scales back


growth projections for the continent


by Howard Schneider


Europe’s weakened economy is now the central threat to global recovery, as its countries struggle with heavy debt, banks face a reckoning over their lack of cap- ital and growth is slowing, the International Monetary Fund said Wednesday in its first assess- ment of the world economy since a crisis over government borrow- ing in Greece. While the agency estimated


that growth in the United States and emerging Asian and Latin American countries remains on track, it scaled back projections for Europe and outlined a series of issues there that could — unless controlled — spark problems ri- valing those that caused the 2008 collapse of Lehman Bros. “Downside risks have risen sharply” in recent months, the IMF said. “The ultimate effect could be substantially lower glob- al demand.” In updating its World Eco- nomic Outlook, the IMF slightly raised its overall forecast for glob- al growth, to 4.6 percent for the year, compared with 4.2 percent in its April report. The improve- ment was based on a stronger than expected performance in the first months of the year, partic- ularly in Asia. The IMF said it also expected the United States to grow slightly faster than earlier predicted — about 3.3 percent this year and 2.9 percent next year, less than forecast by the U.S. Federal Reserve.


But the outlook for Europe was reduced, as the combined impact of government spending cuts, continued concern over national debt and uncertainty about the banking sector undermines an economy already lagging behind the rest of the world. The IMF projected that the 16 countries that share the euro as a currency


“On the heels of Greece’s fiscal troubles, investors are now re-pricing these risks across the region”


— From the International Monetary Fund’s World Economic Outlook report


will grow just 1 percent this year and 1.3 percent in 2011. The report and an accompany- ing analysis of world economic stability emphasized how a prob- lem that was considered limited in scope when it surfaced in Greece last fall eventually expan- ded to other European countries and is now one of the main issues facing the global economy. Gov- ernments across Europe are cut- ting spending and overhauling so- cial programs in an effort to curb record levels of debt, and the Oba- ma administration is studying similar U.S. measures. Although no other country has reached the crisis point hit by Greece — where borrowing costs skyrocketed until a joint Euro- pean Union-IMF bailout provided emergency funding — the IMF noted that European countries and the United States will be com- peting this year to refinance some $4 trillion in government bonds maturing in the second half of the year. With the United States and nations such as Germany consid- ered classic havens, there has been pressure felt in Britain, and in weaker euro-zone economies such as Portugal and Spain, to make a convincing effort to con- trol deficits to keep the favor of bond investors and analysts. While Europe, in conjunction with the IMF, established a fund to guarantee the repayment of euro-zone government debt, the IMF noted that thecalming effect of that program is “wearing off.”


HELAYNE SEIDMAN FOR THE WASHINGTON POST


Reshma Saujani, who is challenging nine-term incumbent Rep. Carolyn B. Maloney (D-N.Y.), talks to voters in Manhattan last week. “We need to extend a hand [to Wall Street] rather than a fist,” she says.


Challenger’s theme: Show Wall Street some love wall street from A1


and mortgage-backed securities. Saujani has positioned herself as the anti-Maloney, the only candi- date who understands how stress- ful and difficult the past few years have been for some of the wealthi- est people in America. Unknown just a few months


ago, Saujani has gotten the atten- tion of many of the city’s boldface names, and her Democratic pri- mary challenge to Maloney, who was long seen as unbeatable, has turned a sleeper contest into a closely watched curiosity. “We need to extend a hand


rather than a fist” to Wall Street, Saujani tells the guests at the apartment. “In New York, it’s complicated because 35 percent of our revenue comes from the fi- nancial services industry. We need to have transparency and re- form, but we also need to under- stand that . . . it’s just as easy to go work in Singapore and London and Bangalore, and we can’t make it so difficult to do business here that people will vote with their feet.”


Only on the Upper East Side of


Manhattan, where a run-of-the- mill penthouse goes for $13 mil- lion (Rush Limbaugh’s place on Fifth Avenue is available for about that much, FYI), would a politi- cian find it a plus to run this year as the candidate of Wall Street. Since she entered the race in


November, Saujani has received more than $800,000 in campaign contributions, an impressive tally for an untested candidate. Many of those checks came from New York financiers and their spouses. Former Morgan Stanley chief


The interest rates paid by coun- tries such as Spain and Italy — and even some, such as Belgium, considered at the heart of “core Europe” — have been rising again in comparison to those paid by Germany, the continent’s top eco- nomic performer.


“On the heels of Greece’s fiscal troubles, investors are now re- pricing these risks across the re- gion,” the IMF said. In addition, European and oth- er economic analysts are awaiting the result of financial stress tests that will give a sense of how Euro- pean banks fared during the re- cent financial crisis and recession, whether they could withstand an- other downturn, and how much capital they might need to raise to be considered healthy. Stress tests in the United States helped restore confidence in the banking system. But IMF and oth- er analysts say that European banks have been slow to write off bad loans and raise new capital and, until now, have been protect- ed by national governments from a full accounting of their prob- lems. The issues of government debt and the health of the banks are re- lated: European banks own tens of billions of dollars in Greek, Spanish and other government bonds, and the stress tests will as- sess how those holdings affect each company’s overall financial health. The European banking system is plagued by a “legacy of un- finished cleansing,” the IMF said, which has left “pockets of vulner- ability, overcapacity, and poor profitability.” Banks have become hesitant to lend to each other — much as happened during the U.S. financial crisis — and are re- lying on an ultimately unhealthy mix of short-term loans from the European Central Bank to ensure they have enough cash. “Recent global stability gains are threatened by a confluence of sovereign and banking risks in the euro area that, without con- tinued and concerted attention, could spill over,” the agency said. schneiderh@washpost.com


executive John Mack has given her money. So has Apollo Man- agement founder Leon Black and the wife of J.P. Morgan Chase chief executive Jamie Dimon. Hedge fund mogul Marc Lasry hosted a fundraiser for her featur- ing singer John Legend that brought in $100,000. Saujani has also attracted help from prominent New Yorkers. Maureen White, a major Demo-


cratic donor and wife of financier Steven Rattner, is introducing her to potential donors. Diana Taylor, a Republican former investment banker and the longtime compan- ion of Mayor Michael R. Bloom- berg (I), is advising her campaign. “Reshma has a strong funda- mental understanding about how the industry works,” Taylor said. “You’ve got these people [in Con- gress] yelling and screaming who know nothing about what they’re talking about — nothing. And it just creates a huge problem.” Maloney isn’t going out of her


way to apologize. “I support any institution when I think they’re correct, and I point out ways it can be improved if I feel it can be improved,” she said. “I think that passing this financial regulatory reform bill will be good for the economy and therefore very good for Wall Street.” Maloney, who chairs the Joint Economic Committee, authored last year’s credit card reform bill (“mycredit card bill of rights,” she called it). She added, “We had a bill signing in the Rose Garden, and [President Obama] gave me the pen and a kiss.” This is not a politician who sounds worried about losing an election. And at this point, she does not seem to be taking her challenger very seriously. (Who- ever wins the Sept. 14 primary is virtually assured to be elected in this overwhelmingly Democratic district.) Maloney might have lost the support of many former Wall Streeters, but the rest of her con- stituents aren’t at all upset at her efforts to rein in the banking in- dustry. Maloney has raised more than $2 million this election cy- cle.


“It’s hard to see how [Saujani]


wins,” said Democratic strategist Hank Sheinkopf. “People are not running down the street scream- ing, ‘Reshma! Reshma!’ These kinds of insurgent campaigns re- quire that kind of energy.” In a survey that Democratic pollster Celinda Lake took for Ma- loney in mid-May, she beat Sauja- ni with 75 percent of the vote. “I


have wide support,” Maloney said. “I don’t even know what I won by in my last election. It’s something like 80 percent. I’d have to fact- check it.”


But Saujani thinks Maloney has overreached in her attacks on Wall Street. In the back seat of a taxicab racing down Park Avenue after the fundraiser, she said the financial industry has been un- fairly demonized in Congress. “Populism for the sake of popu- lism, to increase poll numbers, is not helpful,” she said. “We need to have people in Washington who feel comfortable with under- standing regulatory markets, eco- nomic terms. . . . I don’t think that she has practical real-world ex- perience.” (At the same time, Sau- jani’s campaign would like it known that financiers are not the only New Yorkers the candidate has attracted. She has also drawn support from young voters and tech entrepreneurs.) The campaign is getting per- sonal. Saujani’s supporters openly question Maloney’s fitness to serve and her intellectual heft. In an interview, White, the major Democratic donor, called Malo- ney “a good person.” But she said, “There’s a lot more to being a good representative: leadership, intelligence, hard work, a creative approach to policy, thinking things through. “When you look at this district, it should have a star,” White add- ed. “We need the best of the best, and I think Reshma is in that cat- egory in a way Carolyn isn’t.” Maloney, who lost her husband of 33 years in September when he died while mountain climbing in the Himalayas, isn’t sniping back. In a 30-minute interview, she nev- er mentioned her opponent by name and did not disparage her former supporters. “I’m just working hard,” Malo-


ney said. “I have successfully fought and passed bills and move- ments and issues that have helped bring stability to our economy and will help Wall Street remain successful in the long run.” ruckerp@washpost.com


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