Monetary Policy Necessary But Not Sufficient – Pimco’s COO

PIMCO Chief Operating Officer Doug Hodge spoke with FOX Business Network’s (FBN) Cheryl Casone about the current state of the economy and what’s ahead for the markets. Hodge said that while monetary policy is necessary, it isn’t “sufficient.” He went on to say that “we’re in for a slow period of balance sheet rehabilitation,” and that, “We need policy that reigns in some of the spending in the deficits, that delivers consistent revenues and that promotes growth, and we are suffering on all three right now.” Excerpts from the interview can be found below, courtesy of Fox Business Network.

On what’s ahead for the markets:

“The big event that lies before us is the fiscal cliff. If you just simply list all of the different pieces of legislation that will roll off, that accounts for about $720 billion dollars in spending, 4.5% of GDP. No one believes that that’s what’s going to happen. They’ll be some negotiated settlement, whether it’s Republicans, Democrats, we’ve done the analysis, our estimates, and I think they are basically consensus, we’re looking at about $250 billion dollars of fiscal tightening, which is about 1.5% of GDP. Given the context of where we are, where the economy is growing at 1.5-2%, we’re back to something that feels like recessionary conditions. What we’ve learned though is that monetary policy alone, it’s necessary but it’s not sufficient. And that’s why we’re in the third round of quantitative easing. So we’re in for a slow period of balance sheet rehabilitation, and this is going to take years. There is no simple way out, we need a couple of things. We need policy that reigns in some of the spending in the deficits, that delivers consistent revenues and that promotes growth, and we are suffering on all three right now.”

On how companies balance regulation with the client needs:

“I think that if we are indeed serving client needs then we grow the size of the pie. The role of the financial services industry is to serve as an intermediary. It’s to move risk capital from those who have it to those that need it and in that process we earn a spread, we earn a commission, we earn a fee. And that’s really the root of what we do. If you are a bank, obviously you are in a different business. You’re in the business of lending, and you lend in ways that are responsible, and you manage your balance sheet in ways that are responsible. And again, we kind of lost our way. So I think there are ways to both reconcile the need to produce profits as well as serve clients.”

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