Former Treasury Official: QEs ‘Are Like Morphine’

According to former Assistant Treasury Secretary Neel Kashkari, another round of quantitative easing would be good for stocks but not for actual economic growth. He says QEs are like morphine in the sense that it makes you feel better and makes things look better but doesn't actually translate to real economic growth.

By: Bruno J. Navarro
Published: Wednesday, 18 Jul 2012
CNBC

A third round of quantitative easing from the Federal Reserve would be good for stocks but not real growth, former Assistant Treasury Secretary Neel Kashkari told CNBC on Wednesday.

“We think QE3 would be good for the stock market, not necessarily for real economic growth. QEs are like morphine. It makes you feel better, makes the headlines look better, pushes up risk asset prices but doesn’t translate into real economic growth,” he said on “The Kudlow Report.”

Kashkari, who is managing director and head of global equities at Pimco, said that bold action from the Fed would boost markets now that most investors seem to think the global and U.S. economies are slowing.

The former Treasury Department senior official also weighed in on remarks Secretary Tim Geithner earlier.

“What the economy needs now is a very substantial well designed program of support for economic growth, better incentive for private investment, stronger public investment over time and infrastructure in particular, a sustained program to improve training and education, significant targeted support for basic scientific research, things that are important to long-term competitiveness,” Geithner said in an interview with host Larry Kudlow at the “Delivering Alpha” conference. “But those things need to be tied to and done in a framework in a set of well designed, long-term fiscal responsibility.”

Kashkari disagreed with some of Geithner’s points.

“For 30 years, our economy borrowed to boost consumption, boost GDP growth,” he said. “That illusion is over. We need to transition away from borrowing to consume toward savings and investment. There is smart spending to be had. You know, repairing bridges and roads that are crumbling rather than high-speed trains to nowhere. Those are examples of smarter spending in my book.”

Kashkari continued to say that “smart spending” can help if directed toward making the U.S. economy more competitive.

David Malpass, president of Encima Global, said that he did not believe QE3 would be good for markets.

“The reason is because stock market performance comes from earnings, and it’s very hard to tie QE3 to bigger earns or growth for the economy,” he said. “We have been doing this for two, three years. We are almost four years into a zero rate policy. The growth has been terrible. My view is that the zero percent interest rate policy from the Fed causes a credit rationing that’s been hurting small business and is actually contractionary.”

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