Economic Scene - The Caution of the Fed Comes With a Risk - NYTimes.com

Thoughtful piece from this morning's NY Times.

We have reached, it seems to me, an important juncture in the markets. Governments around the world are struggling to reconcile the need to address huge fiscal deficits with the truth that the economic recovery remains fragile.

Government intervention was crucial in starting the recovery 18 months ago, in my opinion. And once this support begins to be withdrawn, it is not clear that there is enough private demand to pick up the slack.

This morning's housing number is one example. Although it is just one data point, here's the headline from Bloomberg news:

May New Home Sales 300K vs 430K Briefing.com consensus; M/M -32.7%

June 23 (Bloomberg) -- Purchases of new homes in the U.S.fell in May to a record low as a tax credit expired, showing the market remains dependent on government support.

Sales collapsed a record 33 percent to an annual pace of 300,000 last month from April, less than the median estimate of economists surveyed by Bloomberg News and the fewest in data going back to 1963, figures from the Commerce Department showed today in Washington. Demand in prior months was revised down.

So what should the government do? That the Big Question. Here's an excerpt from the Times column, which suggests that Fed policy is doing too little rather than doing too much:

The main historical lesson of financial crises is that governments are usually too passive. They respond in dribs and drabs, as Japan did in the 1990s and Europe did in 2008. Or they remove support too quickly, as Franklin Roosevelt did in 1937, and then the economy struggles to escape its funk.

Look around at the American economy today. Unemployment is 9.7 percent. Inflation in recent months has been zero. States are cutting their budgets. Congress is balking at spending the money to prevent state layoffs. The Fed is standing pat, too. Bond investors, fickle as they may be, show no signs of panicking.

Which seems to be the greater risk: too much action or too little?

I'm worried that by restricting fiscal policy, and reducing the Fed's presence in the bond market, will lead to tougher economic times ahead.

Economic Scene - The Caution of the Fed Comes With a Risk - NYTimes.com