Meltzer: Fed Should Begin Raising Rates

" my next guest says it may be time for the Fed to change course now and begin raising interest rates. Oh my goodness Allan Meltzer of really heavy he's a professor -- Carnegie Mellon -- fed historian and the author of a history of the Federal Reserve. Alan you know a lot about how the Fed has behaved in the past and you actually believe that we may be creating yet another bubble are real problem here. By adding so much of monetary help I guess assistance of all of this this attacking of of the problem best be to that specifically what are you most worried about."

" Well there are a lot of things to worry about these days not immediate problem by the way I don't think there's going to be an inflation. Tomorrow or next month or even probably next year but the long term outlook is very bad we have it. A trillion dollars worth of excess reserves of the banking system. We have a government that doesn't know how to say no to spending so we have the largest deficits we have. The administration brags about the fact. That's going to cut the deficit in half by the end of its first term ought to still be 57. The higher GB GDP numbers that we'll have them and they probably overestimated. What the growth rate is and they certainly underestimate. The amount that is spending so we have lots of problems and about. The Fed has always followed a policy of doing one thing at a time it worries about unemployment. Later. May be worried about inflation. That's not a good way what a good way to do you can do things would be to say well we accounting on the banks. To hold a lot of these pictures reserves as we raise interest rates as we raise the rate we pay the banks. So why don't we tell us that while big tests that bring the rate up to a half a percent and seeing how many more reserves to a bank the banks. Willing to hold. That would seem to be did you have some information that they need."

" While Israel and Australia tightened rates and the first time Australia did it. The markets went higher but of course just recently when they did at the market's panicked -- debate in Asia certainly but. You wrote an Op Ed for The Wall Street Journal a little over a week ago that I wanted to let our viewers know about in case they had missed it and you argue that monetary and fiscal policy is actually creating. The next financial crisis. Tell us aside from what you've just laid out -- a number 11 thing the Fed should be doing at the moment to reverse what you see as a spiral."

" They should begin to tell people. Look we're going to gradually begin to increased rates. We're not going to be -- unconcerned about unemployment but we're going to become unconscious we are going to be concerned. About both unemployment. And inflation which is what I'm mandated. We're not going to do repeat. What we did in the past. Which was to remain concerned about unemployment. And then suddenly the public changes its mind we have to become concerned about inflation so we bring in Paul Volcker. We have the economy into a deep recession. That isn't the way to do what the way to do it is to gradually begin to do it now. It'll take a couple of years before we begin to feel the effects of tighter policy on inflation. So we have to begin to do it before the inflation starts so we won't have to hurt the economy. How about how worried are you about the US dollar -- Well the US dollar is so obvious symptom of all the things that I see that are going wrong we we have an administration. That just spends and spends. -- it tells us that the health care program will be balanced well nobody should believe that they're going to cut 200 to 300 billion dollars. Out of Medicare. They've never been able to do anything like that nobody should believe that they're going to cut the doctors pay by 21%. Nobody should believe that when they say that we're going to increase the number of people on Medicaid. The the states are going to pay a big share of that. Where the State's gonna get the money they're going to have to get of the federal government all that adds to the prospective deficits."

" I'll come Alan hey great to see you and there are a lot of people who agree with you out there some would certainly counter it but I have very happy to hear your perspective thank you for coming on fox this really."

" Tell you that I had mail from all over the world about the outlook on The Wall Street Journal. But it runs about ten to one format that."

" About. Allan Meltzer a fed historian and Carnegie Mellon."