Desmond Lachman, Resident Fellow, American Enterprise Institute
Biography provided by participant
Desmond Lachman is a resident fellow at the American Enterprise Institute, after serving as a managing director and chief emerging market economic strategist at Salomon Smith Barney. He previously served as deputy director in the International Monetary Fund's Policy and Review Department and was active in staff formulation of IMF policies toward emerging markets. Lachman has written on topics such as economic policy, fund arrangements, monetary reform, import restrictions, and exchange rates. At AEI, Lachman studies major emerging market economies and the role of multilateral lending institutions. He received a Pd.D in economics from Cambridge University and a B.A. from the University of Witwatersrand.
Last year’s Great Panic abruptly reminded US baby-boomers how ill- prepared they are for retirement. Following that Panic, there would now seem to be a number of compelling reasons to expect the US saving rate to steadily increase over the next few years from its presently low level by historic standards. The most compelling of these reasons is that US household balance sheets have been seriously impaired by years of unusually low saving rates and by the ravages of the financial crisis. In this context, one has to be struck by the fact that US household debt… Read more
The Obama Administration’s claim that the fiscal stimulus package is working, in the sense that it is providing the basis for a sustainable economic recovery, sits oddly with the facts. At the time that the fiscal stimulus was introduced earlier this year, the Administration expected that, with the fiscal stimulus, unemployment would decline from a peak of a little over 8 percent in the third quarter of 2009 to around 7 percent by mid-2010. Today, even President Obama acknowledges that unemployment is soon likely to be in double digits while most forecasters expect that unemployment will remain in the… Read more
There can be little doubt that the loss of control over the US public finances poses a real long-run risk of high interest rates and high inflation that in turn could reduce the US economy’s longer run growth potential. This is particularly the case when one considers the very high degree to which the US government deficit is financed from abroad, which exposes the country to the risk of a dollar crisis. For this reason, one has to regret that the Obama Administration is yet to spell out in a credible manner how the US public finances are to be… Read more
There can be little doubt about the long-run inflationary threat to the US economy posed by the very large excess bank reserves created by the Federal Reserve. However, it is far from clear how imminent that inflation threat might be and how quickly the Federal Reserve should begin exiting from the extraordinary monetary policy loosening of the past year. There are several good reasons to believe that inflation is not an immediate risk to the US economy and that the Federal Reserve would be ill-advised to prematurely exit from its easing policy. First, one would think that… Read more
There are a variety of reasons that would make one expect that US household savings will revert over time to their earlier long run average of around 8-10 percent of disposable income. First, households are presently in the process of repairing balance sheets that have been severely impaired by large declines in housing and equity prices. The Federal Reserve estimates that over the past eighteen months household wealth has declined by US$13 trillion, or close to 100 percent of GDP. Second, households are and will remain for some time liquidity constrained as banks tighten lending standards and as… Read more
One has to be struck by the degree to which the Obama Administration has underestimated the depth of the current economic recession in setting economic policy at the start of its term. Whereas in January 2009 the Obama Administration thought that its fiscal stimulus package would prevent unemployment from rising above 8 percent, already by June 2009 unemployment has risen to 9.5 percent. Worse still, the rate of decline in overall hours worked is yet to show any sign of moderating, while the Administration itself recognizes that unemployment will peak at above 10 percent of the work force. The… Read more
(a) How does Mr. Bernanke assess the Fed’s policy of quantitative easing? Since the FOMC’s April announcement that the Fed would buy US$1,450 billion in Mortgage-Backed Securities and US$300 billion in US Treasuries, long term interest rates have risen rather than declined. Does this suggest that the Fed has limited power to affect long-term interest rates? (b) How much of a constraint does he find the Obama Administration’s budget proposal on the Fed’s room for maneuver? The CBO is suggesting that the Obama budget proposals would keep the US budget deficit high at between 4-6 percent of GDP for many… Read more
The OECD usefully defines a country’s fiscal policy to be sustainable if one can judge that the government might be able to continue servicing its debt without an unrealistically large future correction to the balance of its income and expenditure. Judged by that definition, it would seem that the Obama budget proposal is now raising major issues of fiscal sustainability for the United States. It would also seem that the US political system would do well to address these issues head on before they do further economic damage by offering a clear plan as to how public expenditures are… Read more
Floyd Norris is being overly hasty in his seeming advocacy of a European approach to job protection for the United States. For he does so in the midst of an unusually severe global economic downturn that is still far from fully playing out and that is very likely to reveal that the presently marginally lower unemployment rate in Europe than in the United States will prove to be ephemeral. In making his case for a European approach to job protection, Floyd Norris overlooks two key points. The first is that the European recession is significantly deeper and is… Read more
In the midst of the worst US economic recession in the post-war period, it is all too natural to be looking to high frequency economic data for signs of green shoots that an economic recovery might have begun. However, rather than grasping at straws, US policymakers would do better to honestly ask themselves the following two questions. Have the policy measures taken to date been commensurate to the enormity of the challenges posed to the US economy by the most severe asset price and credit market busts since the 1930s? Are we taking sufficient note of the… Read more
The key macro-economic policy question right now would seem to be not so much whether an US$800 billion fiscal stimulus package is sufficient to jump start a faltering US economy. Rather it is whether the fiscal stimulus package is (a) sufficiently front-loaded and (b) sufficiently well -designed to provide the immediate support so desperately needed by a US economy caught in the grips of a downward spiral. Sadly, the stimulus package presently wending its way through Congress appears to be sorely wanting on both counts, which makes it very difficult to be optimistic about its prospects for eventual success. … Read more
With every indication that the US economy is now in the throes of its deepest post-war recession, Federal Reserve Chairman Ben Bernanke is right to be worried about the risk of price deflation. However, in embracing unorthodox policy measures to avert Japanese-style deflation, Mr. Bernanke should be very careful not to throw caution to the wind. For by indiscriminately resorting to the Federal Reserve’s printing press, he could all too easily compromise the country’s future growth prospects. In 2003, at the time of an earlier US deflation scare, Mr. Bernanke delivered his famous “helicopter” speech. In that… Read more
Listening to the present fiscal stimulus debate, one cannot help get the feeling that the United States is going down Japan’s well trodden path in the 1990s. For rather than addressing the root causes of the present US economic malaise, the incoming Administration seems to be looking for a quick fix for the US economy with a large fiscal stimulus package to the exclusion of policies to address the US economy’s present fundamental weaknesses. There are two key issues that are not being currently addressed by the incoming- Administration, which would seem to be essential for laying the groundwork… Read more
At present, the downside risks to the US economy could hardly be more threatening. Over the past year, falling housing, equity, and bond prices have reduced household wealth by over 80 percentage points of GDP and there is every indication that asset price deflation will continue in the period ahead. At the same time, the vicious process of bank de-leveraging that has been all too evident in recent months has now spread to the unregulated hedge fund industry. Bank credit is now contracting at its fastest pace in the post-war period while credit spreads have widened to highly onerous levels… Read more
Biography provided by participant
