by Calculated Risk on 10/13/2009 10:58:00 PM

From Steven Pearlstein at the WaPo: Don't Reinflate the Old Bubbles

What we're witnessing here is pretty simple: another bubble in financial assets. All that "liquidity" created by the Federal Reserve and other central banks has accomplished its task and prevented a global financial meltdown. ...

Many analysts now look at the economy and conclude that unemployment is still way too high and the threat of inflation still way too low for the Fed to even think about beginning to raise interest rates again. ...

The right policy response is for the Fed to begin withdrawing some of this extraordinary monetary stimulus even as the rest of the government steps up its effort to stimulate the real economy. That means more money for extended unemployment benefits; more aid to the states so that they can maintain the most vital public services; and more money to expand mass transit, state college and university systems, efficient energy production and basic scientific research. ...

What would surely not be good policy, by the way, is to extend and expand the current tax break for first-time home buyers that is set to expire at the end of the year, as many in Congress are now advocating.

It is tricky to balance monetary and fiscal policy. It appears the next stimulus package will include an extension to the inefficient first-time home buyer tax credit, and will not include some of the items Pearlstein suggests.