US doomed to move from one bubble to another

[Homeslice]

Without a Plan, U.S. "Doomed to Move from Asset Bubble to Asset Bubble," Rajan Says

Posted Oct 26, 2010 01:52pm EDT by Aaron Task in Recession, Banking, Politics

In the aftermath of the 2008 crisis, trillions of dollars have been spent helping the financial system get back on its feet. Those efforts helped stabilize the global economy and "short-term we are in recovery mode," says Raghuram Rajan of the University of Chicago's Booth School of Business.

But the recovery is occurring with the official unemployment rate still at 9.6%. "We have people who don't have the skills necessary in the global economy," Rajan says. "We need to think about how to get them those skills; otherwise we're doomed to move from asset bubble to asset bubble, from excessive stimulus to excessive stimulus. We're in danger of doing that again in response to high unemployment."

Like many others at The Economist's Buttonwood Gathering, where the accompanying video was taped, Rajan believes we have "reached the limits" of monetary policy. The Fed "shouldn't throw a Hail Mary pass and hope someone catches it. It could land in the wrong place."

Rajan, a former chief economist at the IMF and author of Fault Lines, admits "there are no easy, off the shelf" solutions to the problem of under-skilled workers, but says the government should focus on skill building, retraining and improving our infrastructure.

"Where we can provide stimulus that alleviates deep pain, we should do that," he says. "Where we can build a bridge to the future -- create skills, infrastructure - we should do that too. But you have to do it right. There are lots of bad ways to spend money. Spending for the sake of spending is not good. You need to have a plan."

Similarly, Rajan says the U.S. needs to come up with a credible medium-term plan to tackle its huge deficit problem, including unfunded liabilities like Social Security and Medicaid. "We need to have a path which brings that under control," he says. "It's very important to tell the bond market and the public what that path is."