Trial Balloon or Windbag?

   "Ah, brave new world, that hath such people in't." -- Shakespeare.

   "The fundamental things apply, as time goes by." -- Herman Hupfeld (1931). 

   "Round up the usual suspects." -- Captain Renault (Claude Rains) in "Casablanca," 1942.

   "The road ahead (is) unclear." -- Stanley Fischer.

   "The global recovery has been disappointing" since the Great Recession ended five years ago. So said Stanley Fischer, vice chairman of the U.S. Federal Reserve Board of Governors, in a speech in Sweden this week.
   No surprise there, so the bigger issue facing economists, government regulators and policy makers, then, is what to do about it, since the usual suspects have not worked as well as hoped. In short, fiscal policy will be more important than ever as economic and demographic forces affect the world economy in new ways.
   In effect, Fischer's speech was a trial balloon to gauge reaction and potential responses to modified strategies by major central banks. In economic recovery efforts, the same fundamental strategies should be used, even as they are modified to fit changing conditions. That's the problem today.
   In Fischer's view, "the depth and breadth" of the worldwide downturn "changed the economic environment in many ways." Moreover, three factors are stalling a more vigorous recovery in the U.S., he said: a weak housing sector, inadequate fiscal policy, and anemic foreign demand due to a growth slowdown, especially in Europe.
   And the slowdown may be more than cyclical, Fischer said, but structural as well. To prevent more permanent declines, Fischer noted, policy makers must pay more attention to macroeconomic features. Among these, three stand out: Increased rate of productivity per worker, expanding the frontiers of knowledge, and human ingenuity.

   The Fed for months has been critical of inadequate fiscal measures by the federal government to boost the economy, even as hardline conservatives continue to protest government stimulus programs. In his speech in Stockholm, Fischer said his opinion was that the Fed should continue its "flexible" monetary policy to encourage employment and maintain price stability. Moreover, policymakers need to strengthen financial sector regulation and supervision to reduce the possibility of another crisis."

   The full text of Fischer's speech is available on the Fed's web site, at http://www.federalreserve.gov/newsevents/speech/fischer20140811a.htm