The White House and Federal Reserve have taken aggressive steps to head off an economic crisis, but the government’s ability to influence the economy is surprisingly limited, experts say.
“The government doesn’t run the economy; the private sector runs the economy,” economist Larry Kudlow told The Examiner. “The trick is to allow government, at the edges, to do some good. But that’s all it can do.”
Economist Gus Faucher said there are limits to both the Federal Reserve’s monetary policy and the administration’s fiscal policy.
“Fiscal policy can have an impact, but it’s a very blunt instrument,” said Faucher, director of macroeconomics for Moody’s Economy.com. “And certainly right now we’re seeing the limitations of monetary policy. I mean, the Fed can lower the Fed funds rate, but it can’t make banks go out and lend.”
So far this week, the government has been furiously tugging on its limited levers of influence over the economy. In a rare Sunday session, the Federal Reserve unveiled loans to financially strapped Wall Street investment firms and cut its emergency lending rate to financial institutions squeezed by the housing crisis.
The extraordinary moves were praised by President Bush, who huddled early Monday with Treasury Secretary Henry Paulson and other top economic advisers at the White House. Later in the day, Bush met with his task force on financial markets, which includes Paulson, Federal Reserve Chairman Ben Bernanke and Securities and Exchange Commission Chairman Christopher Cox.
“The United States is on top of the situation,” Bush said. “One thing is for certain — we’re in challenging times.”
Bush said that the government would continue to “act decisively, in a way that continues to bring order to the financial markets. In the long run, our economy is going to be fine.”
The central bank was expected to meet today and significantly slash another key interest rate in an effort to mitigate economic woes stemming from the mortgage meltdown. The Fed has already facilitated the fire sale of Bear Stearns, whose value collapsed over the weekend, to rival JPMorgan.
On Monday, presidential candidate Barack Obama predicted that “history will not judge President Bush kindly for his failure to act in a way that could’ve prevented or alleviated this economic crisis.”
But Kudlow said Bush has been using his limited powers to boost the economy, not harm it.
“A lot of people trashed Bush for trying to be optimistic about the long-run future of the economy during an economic speech he gave on Friday,” said Kudlow, who interviewed Bush before the speech. “But I don’t think that you have to make pessimism our national pastime. The market will eventually heal this.”
