A New Bubble Of the Fed's Creation

By Steven Pearlstein
WashPost
Wednesday, September 23, 2009

For the past two years, the central challenge of U.S. economic policy has been to find a way to stabilize the financial system and the economy without reinflating the bubble or going back to the days of consuming more than we produce. In the end, that may prove harder than it seems.

Yes, the financial crisis has passed and the economy is growing again, but there's a good chance that growth will be temporary -- the result of one-time events like "Cash for Clunkers," the tax credit for first-time home buyers and the restocking of inventories allowed to dwindle during last year's crisis. But with businesses still reducing payrolls, bank lending still contracting, and anxious consumers determined to save more and spend less, a sustained recovery in 2010 isn't looking very likely.

To its credit, the Obama administration has never lost its focus on the goal of creating the conditions for sustained growth. At the G-20 meeting in Pittsburgh later this week, the president will push world leaders to take measurable steps over the next few years to move away from a global model that relies on Americans who buy too much, Asians who consume too little and Europeans who spend too much time at lunch. To prevent future bubbles, the leaders are also expected to embrace new international rules requiring banks to hold more capital and bankers to take less pay.

Less noticed but no less important is the "innovation" strategy that Obama outlined in his visit Monday to upstate New York. In it, the president reprised the quantum leap in public investment in infrastructure and research that was tucked into the stimulus bill and his budget plan. But he also laid out a set of "grand challenges" -- solar cells as cheap as paint, next-generation supercomputers and educational software as compelling as video games -- challenges that, if met, would preserve America's place as the world's economic superpower.

(More here.)

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