With Persisting Foreclosures and High Unemployment the Economy would be Hurt if Stimulus was Withdrawn
With foreclosures and high unemployment still persisting, withdrawal of the stimulus would hurt the economy said Nobel Laureate Joseph Stiglitz. The Federal Reserve has decided to wind up its programme of purchasing mortgage backed securities by the end of March. This decision will push up mortgage rates and hurt the housing sector.
Speaking at an interview in Tokyo Stiglitz said, “The withdrawal of the support risks increasing the interest rate, increasing the number of foreclosures and exacerbating the strain, the stress, that American families are already facing.” He opined that the officials of the government had “misjudged things”. He forecasted that the failure of banks and continuation of foreclosures this current year would be more than the total of 2008 and 2009.
Stiglitz warned that the prime danger for the international economy is that the central banks will “exit too rapidly” from the steps taken during the crisis fuelled by “irrational” fear among some of the investors that this would cause inflation to increase. The liquidity that had been created by the central banks to tackle the recession will not be fueling consumer prices in all likelihood because of depressed demand from the consumers.
This warning from Stiglitz, economics professor from Columbia University and former chairperson of White House Council of Economic Advisors contradicts the measures being adopted by the Federal Reserve and its subsidiaries to contract the stimulus measures. In Asia the central banks are starting to increase interest to put on hold bubbles in housing prices.
The economies of Asia are growing at a faster rate than other places but it cannot compensate for the reduction in the demand of consumers in USA. It is not likely that the international economy would recoup to a “robust” health in the near future.
Although double-dip recessions are very uncommon but there is the “significant” risk of slowing down of international growth. The economy of America most probably will show signs of “weakening” in growth by the end of 2010 commented 67 years old Stiglitz. He was formerly the World Bank’s Chief Economist. He said, “The deeper risks I see for the global economy are continuing weakness in the American economy.”
In 2001 Stiglitz shared the Nobel Memorial Prize for Economics with George Akerlof and Andrew Michael Spence. Their work dealt with “analyses of markets with asymmetric information”.
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