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Fed's Bullard: European Crisis Not Likely To Cause Another Recession


St. Louis Federal Reserve President James Bullard said Tuesday that the ongoing European sovereign debt crisis was unlikely to trigger a worldwide recessionary shock.

Speaking at London's European Economics and Financial Centre, Bullard said that global growth in GDP is expected to return in 2010 at a rate of 4.2 percent, and that growth in U.S. GDP is expected to continue in the coming years.

The St. Louis chief added that while the looming sovereign debt crisis in Europe poses a threat to global recovery, such a threat will fall short of a worldwide recessionary shock.

"To begin with, this is a question of sovereign debt, and sovereign debt crises have been with us for many, many years," he said. "There is nothing intrinsic about such crises that they need to become important shocks to the broader, global macroeconomy. Countries do default or restructure their debt from time to time, and the world goes on."

Bullard added that governments unwillingness to allow major financial institutions to completely fail will actually diminish the effects of contagion.

"Governments have made it very clear over the course of the last two years that they will not allow major financial institutions to fail outright at this juncture," he said. "Because these too-big-to-fail guarantees are in place, the contagion effects are much less likely to occur. 'Too big to fail' is a controversial policy, but it does have its upside in the current situation."

Bullard also said that that global macroeconomic volatility would likely be higher in the coming years, stressing that it would take time for large governments to transition back toward "types of credible, rules-based policies we know will deliver higher quality macroeconomic outcomes in the long run," and that limits on what can be accomplished through regulatory reform will keep volatility high.

Discussing volatility, Bullard said that reestablishing credibility for a successful rules-based economic policy will be a key challenge in the next few years.

"We know that it can take a long time to establish credibility," he said. "We also know that credible policies are more effective. While the crisis remains fresh, it may not be possible to attain first-best, full-commitment outcomes for the macroeconomy. Instead, policies may for a time be less effective than otherwise and private-sector actors may remain overly sensitive to the prospect of unusual, aggressive policy actions."

Bullard added that the regulatory reform debate in the U.S. shows that some regulatory issues cannot not be effectively resolved because of political restraints, which might leave some economic problems unsolved.

"The debate has shown that while some issues can be addressed legislatively, many problems cannot be addressed effectively either because of political constraints or, more likely, because it is simply not that clear which changes in current law might support the best economic outcomes," he said. "This suggests that some of the problems we have faced over the last three years will simply remain with us, and so will the volatility that was associated with those problems."

by RTT Staff Writer

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