Wednesday, November 28, 2012

Warren Buffett: Fed has no more bullets to stimulate the economy

Warren Buffett said according to a Telegraph report,

The Federal Reserve has "used up its bullets" to stimulate the US economy, Warren Buffet has said, as he warned that "D-Day" was here for politicians to strike a deal to solve the country's "fiscal cliff" problem. 
The billionaire investor said that it was now up to Congress to help boost America's flagging recovery. 
Speaking in an interview broadcast on Radio 4's Today Programme, he said: "I think [the Fed] has used up its bullets pretty much. When you drive interest rates to zero and when you buy almost a trillion dollars worth of securities and how you start buying longer-term securities -- you've done your part. I mean, Ben has given up the office."... 
"We've kicked it down the road for a long time," said Mr Buffett, "but D-Day is here and that doesn't mean we'll get the fiscal cliff problem solved by December 31. 
"I hope we do, but it may go over into January. But we are going to have to address important policy questions. I think Congress knows it, I think the president knows it, and certainly the American public knows it.
Mr. Buffett is right, the time to stop bailing out the banks under the Japanese Model for handling a bank solvency led financial crisis has come.  The US can no longer afford to protect bank book capital levels and banker bonuses.

The time has come to exit all the policies, like zero interest rates and quantitative easing, that were adopted to protect bank book capital levels and banker bonuses.

The time has come to see what the banks are hiding on and off their balance sheets.

As Iceland has shown and certainly the American public knows, the social safety net can be enhanced during a financial crisis when policy makers focus on protecting the real economy and the middle and lower class instead of the banks and the 1%.

The time has come to recognize that reducing the US debt is best achieved by adopting the Swedish Model and requiring the banks to recognize upfront the losses on the excess debt in the financial system.  This protects the real economy and allows money that is currently being diverted to support the excess debt burden to instead be used for reinvestment and growth.

A better economy means more tax revenue with which to repay the debt.

While we are at it, the time has come for the US banking system to recognize the value of deposit insurance and access to central bank funding and pay for the privilege.  Bankers can show their gratitude for these subsidies by donating their current balance sheet holding of US debt to the US Treasury.

This would dramatically lower the outstanding debt and would show the American public that bankers truly understand that they are there to serve the public and support the real economy and not the other way around.

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