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Economist: Fed policies leave trillions on sidelines

The Federal Reserve’s use of quantitative easing to stimulate the economy and reduce unemployment hasn’t been as successful as it could have been and has created long-term problems, according to Allan Meltzer, a political economy professor with Carnegie Mellon University.

Meltzer, an economist and Fed historian, credited the Federal Reserve for stepping up and “saving us from a very serious problem” when the recession struck in 2008. But the policies that followed left trillions of dollars sitting on the sidelines.

“I have nothing but commendation for what the Federal Reserve did in 2008,” Meltzer told about 120 attendees at The Economic Club of Las Vegas’ inaugural event Jan. 23 at the Rio. “It saved us from a very serious problem. My criticism isn’t about that, it’s about what they did after that.”

Meltzer said there is about $2.5 trillion on the Fed’s balance sheet that belongs to the banks. It is holding “more than $2 billion in cash and noncash assets,” he said.

“Back before the crisis it would have been $100 billion,” he said, “Now it’s $2.5 trillion. What does the Federal Reserve think it’s doing when it adds to that pile of cash? There isn’t anything they can do now that the banks can’t do without them.”

Meltzer said banks hold $1.73 in reserve for every $1 in a checking account. He said there was no need for any more “of this money,” and that it will take years to reduce the $2.5 trillion being held in reserve.

“I believe the Fed’s monetary policy is wrong-headed,” Meltzer said. “Nobody knows what is going to happen when the $2.5 trillion gets sent out. There is a good chance of inflation.”

Meltzer, former chairman of the Shadow Open Market Committee, a group of economists and academics that meet to critique the Federal Reserve’s Federal Open Market Committee, touched on government regulations and other topics during his 25-minute speech.

He’s no fan of the unemployment rate as a measure of economic health. He said it’s a “terrible number,” one that gets revised month by month, so “why anchor to that?”

He said the reason the unemployment number has come down is because “people have dropped out of the workforce.” Meltzer said, “That’s an economy that looks a lot like Europe.”

The Economic Club of Las Vegas, which launched in October, provides an independent forum for economic and political debate. The nonprofit, nonpartisan organization’s goal is to achieve national recognition by attracting well-known speakers to Las Vegas.

Jonathan Galaviz, managing director at Galaviz &Co. and club president, said Meltzer’s speech was an important event for Las Vegas in many ways, especially as the region tries to “harness our intellectual capital.”

“There was a time when we thought Las Vegas was immune from recession,” Galaviz said. “Then 2007-2008 illustrated Las Vegas is not immune to that. We need to understand that fiscal policy is important to us.”

Galaviz described the club as “prestigious, not elitist” in the mission to bring speakers to Las Vegas.

The Economic Club of Las Vegas has not announced its next event, but more information can be found at www.econclublv.com.

“I welcome the idea of doing this,” Meltzer said. “Politics does what the public wants when the public is informed and we certainly need an informed public these days to try and get us to a much better place than we are now.

“I welcome the idea of having a good discussion in Las Vegas or anywhere else that will focus on major issues confronting us.”

Meltzer also told an enthusiastic audience the he was not a forecaster. He said he believed that “too much attention” is paid to short-term quarterly forecasts and the public would do better “if we didn’t pay so much attention.”

Contact reporter Chris Sieroty at csieroty@reviewjournal.com or 702-477-3893. Follow @sierotyfeatures on Twitter.

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