America’s Strategy Vacuum

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Apparently, policymakers at the Federal Reserve are havingsecond thoughts about the wisdom of open-ended quantitative easing (QE). They should. Not only hasthis untested policy experiment failed to deliver an acceptable economicrecovery; it has also heightened the risk of another crisis.
The minutes of the January 29-30 meeting of the Fed’s FederalOpen Market Committee (FOMC) speak to a simmering discontent: “[M]anyparticipants…expressed some concerns about potential costs and risks arisingfrom further asset purchases.” The concerns range from worries about the destabilizing ramifications of an exitstrategy from QE to apprehensionabout capital losses on the Fed’s rapidly ballooning portfolio of securities (currently $3trillion, and on its way to $4 trillion by the end of this year).
As serious as these concerns may be, they overlook whatcould well be the greatest flaw in the Fed’s unprecedented gambit: an emphasis onshort-term tactics over longer-term strategy. Blindsided by the crisis of2007-2008, the Fed has compoundedits original misdiagnosis of the problem by repeatedly doubling down ontactical responses, with two rounds of QE preceding the current, open-ended iteration. The FOMC,drawing a false sense of comfort from the success of QE1 – a massive liquidityinjection in the depths of a horrificcrisis – mistakenly came to believe that it had found the right template for subsequentpolicy actions.
That approach might have worked had the US economy beenafflicted by a cyclical disease – a temporary shortfall of aggregate demand. Inthat case, countercyclical policies – both fiscal and monetary – couldeventually be expected to plug the demand hole and get the economy going again,just as Keynesians argue.
But the US is not suffering from a temporary, cyclical malady. It is afflictedby a very different disease: aprotracted balance-sheet recession that continues to hobble Americanhouseholds, whose consumption accounts for roughly 70% of GDP. Two bubbles –property and credit – against which American families borrowed freely, havelong since burst. But the aftershocks linger: Household-debt loads were still at 113% ofdisposable personal incomein 2012 (versus 75% in the final three decades of the twentieth century), andthe personal-savingrate averaged just 3.9% last year (compared to 7.9% from 1970 to 1999).
Understandably fixated on balance-sheet repair, US consumers have not taken thebait from theirmonetary and fiscal authorities. Instead, they have cut back on spending. Gainsin inflation-adjustedpersonal-consumption expenditure have averaged a mere 0.8% over the pastfive years – the most severe and protracted slowdown in consumer demand growth in the post-WorldWar II era.
The bruteforce of massive monetary and fiscal stimulus ringshollow as a cyclical remedy to this problem. Another approach isneeded.
The focus, instead, should be on accelerating the processof balance-sheet repair, while at the same time returning monetary and fiscalpolicy levers tomore normal settings. Forgivenessof “underwater” mortgages (where the outstanding loan exceeds the home’scurrent market value), as well as reducing the foreclosure overhang of some 1.5million homes, must be part of that solution. How else can the crisis-battered housingmarket finally clear for the remainderof US homeowners?
The same can be said for enhanced saving incentives, whichwould contribute to longer-term financial security for American households,most of which suffered massive wealth losses in the Great Recession. Expandedindividual retirement accounts and 401K pension schemes, special incentives forlow-income households (most of which have no retirement plans), and an end tothe financial repression that the Fed’s zero-interest-rate policy imposes onsavers must also be part of the solution.
Yes, these are controversial policies. Debt forgivenessraises thornyethical concerns about condoningreckless andirresponsible behavior. But convertingunderwater “non-recourse” mortgage loans, where only the house is at risk, intoso-called “recourse liabilities,” for which nonpayment would have consequencesfor all of a borrower’s assets, could address this concern, whilesimultaneously temperingAmerica’s culture of leverage with a much greater sense of responsibility.
Timing is also an issue, especially with respect to savingincentives. To avoid the shortfall in aggregate demand that might arise from anabrupt surge in saving, thesemeasures should be phased in over a period of 3-5 years.
The main benefit of these proposals is that they are morestrategic than tactical – better aligned with the balance-sheet problems thatare actually afflicting the economy. As the quintessential laissez-faire system, the US hasoutsourced strategy to the invisible hand of the market for far too long. Thathas left the government locked into a reactive and often misguided approach tounexpected problems.
Thus, the Fed is focused on cleaning up after a crisis rather than on how toavoid another one. The same is true of US fiscal policy, with an event-drivendebate that now has ever-shortertime horizons: the fiscal cliff on January 1, sequestration of expenditures on March 1,expiration of the continuing budget resolution on March 27, and the new May 18debt-ceiling limit. A compliant bond market, which may well be the next bubble,is mistakenly viewed as the ultimate validation of this myopic approach.
The dangers of America’s strategy vacuum and the related penchant forshort-termism have been mounting for some time. Harvard Business Schoolprofessor Michael Porter famously raised thisconcern in a 1996 article in the Harvard Business Review. His focus was oncorporate decision-making and misaligned incentives leading to a worrisome dichotomy between theshort-term tactics of “operational effectiveness” (cost cutting, outsourcing,and reengineering) and the long-term visionary bets that frame successfulstrategies.
While Porter’s critique was directed at business managers,it bears critically on the current US policy debate. A successful long-termstrategy cannot be seen as a succession of short-term fixes.
The internal debate in the FOMC represents a healthy and long-overdue recognition that the central bank may bedigging itself into an ever-deeper hole by committing to misguided policiesaimed at the wrong problem. A comparable debate is raging over fiscal policy. Can Americafinally face up tothe perils of its strategy vacuum?

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关键词：Strategy America Strateg Erica Eric expressed potential another deliver minutes

Apparently, policymakers at the Federal Reserve arehaving second thoughts about the wisdom of open-ended quantitative easing (QE).The concerns range from worries about the destabilizing ramifications of an exitstrategy from QE to apprehensionabout capital losses on the Fed’s rapidly ballooning portfolio of securities (currently $3trillion, and on its way to $4 trillion by the end of this year).
As serious as these concerns may be, they overlookwhat could well be the greatest flaw in the Fed’s unprecedented gambit: an emphasis onshort-term tactics over longer-term strategy.
he FOMC, drawing a false sense of comfort from thesuccess of QE1 – a massive liquidity injection in the depths of a horrific crisis –mistakenly came to believe that it had found the right template for subsequent policy actions.That approach might have worked had the US economybeen afflicted by a cyclical disease – a temporary shortfall of aggregatedemand
But the US is not suffering from a temporary, cyclicalmalady. It isafflicted by a very different disease: a protracted balance-sheet recession thatcontinues to hobbleAmerican households, whose consumption accounts for roughly 70% of GDP.Two bubbles – property and credit – against whichAmerican families borrowed freely, have long since burst.
The bruteforce of massive monetary and fiscal stimulus ringshollow as a cyclical remedy to this problem. Another approach isneeded.
The focus, instead, should be on accelerating theprocess of balance-sheet repair, while at the same time returning monetary andfiscal policy leversto more normal settings.The same can be said for enhanced saving incentives,which would contribute to longer-term financial security for Americanhouseholds, most of which suffered massive wealth losses in the Great Recession.
Debtforgiveness raises thornyethical concerns about condoningreckless andirresponsible behavior. But convertingunderwater “non-recourse” mortgage loans, where only the house is at risk, intoso-called “recourse liabilities,” for which nonpayment would have consequencesfor all of a borrower’s assets, could address this concern, whilesimultaneously temperingAmerica’s culture of leverage with a much greater sense of responsibility
Timing is also an issue, especially with respect tosaving incentives.
As the quintessential laissez-faire system, the US has outsourcedstrategy to the invisible hand of the market for far too long. That has leftthe government locked into a reactive and often misguided approach tounexpected problems.Thus, the Fed is focused on cleaning up after a crisis rather than onhow to avoid another one. The same is true of US fiscal policy, with anevent-driven debate that now has ever-shorter time horizons: the fiscal cliff on January 1, sequestration ofexpenditures on March 1, expiration of the continuing budget resolution onMarch 27, and the new May 18 debt-ceiling limit.
is focus was on corporate decision-making andmisaligned incentives leading to a worrisome dichotomy between the short-term tactics of “operationaleffectiveness” (cost cutting, outsourcing, and reengineering) and the long-termvisionary bets that frame successful strategies. A successfullong-term strategy cannot be seen as a succession of short-term fixes.