Federal Reserve Chairman Ben Bernanke has little control over US monetary policy and by using up all the traditional ammunition called the basis points by taking the Federal Funds Rate down to zero and indulging in this experimental medicine known as quantitative easing, Bernanke has pretty much abdicated control over the traction between the monetary policy and real economy, says Stephen Roach, a professor at Yale University and former non-executive chairman for Morgan Stanley in Asia.

“Flying blind” is one way to put it and Bernanke is hoping for the best trying to recreate an asset dependent US economy where the transmission effect goes from the unstable assets markets to the real economic decisions and it’s not going to work, Roach added.

Asked to define austerity and give his opinion on “deficit scolds”, Roach said it’s a cleverly coined word, and he doesn’t understand Nobel Laureate Paul Krugman’s opinion on fiscal responsibility. The idea is to draw the contrast between the short-term and the long-term, Roach observed.

The anti-austerity camp says since these economies are suffering right now, austerity should not be considered while the austerity advocates say maybe we should consider where the debt trajectory is headed for the longer term rather than focusing on short-term implications and take actions to control medium and longer term fiscal excess. It’s really a debate over time horizons, he noted.

Dallas Fed President Richard Fisher has been critical of the Fed’s latest move on quantitative easing and has said the central bank should cap or at least put a target on balance sheet expansion.

Would that be more credible?

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