Housing recovery may take longer than usual

I have read that all this new money that the government will be pumping into the economy will increase the money supply and cause inflation. But I was wondering how much, if at all, that will be countered by the presumed reduction in money supply caused by the large drop in the stock market and real estate market.
— Bob B., Barre, Vt.

That’s exactly what the folks at the Federal Reserve are hoping. So far, there’s evidence that they’re right. Despite the trillions of new money pumped into the economy and banking system — from Fed loans, the Treasury bank bailout and the economic stimulus package — there’s been barely a whiff of inflation. Prices, in fact, have been falling at the fastest pace since the 1950s.

Falling stock and home prices are part of the story. Another is the sharp drop in energy prices after the oil market collapsed last year. A deep global recession has also taken the pressure off prices of raw materials and basic equipment. As demand has dried up, the cost of a ton of steel or a new drilling rig has fallen sharply.

Readers are quick to point out that not all prices are falling. Food costs are up more than 3 percent from a year ago. So are medical costs. And we can confidently report that college tuition payments continue to rise — as they have every year we’ve been paying them.

For now, the inflation risk from all those trillions of new dollars sloshing around the global finance system seems to be fairly low. That risk will rise when the banking system and economy get back on their feet. A return to global economic growth will once again put pressure on prices of energy and raw materials. The huge pile of cash that banks and consumers are now hoarding will again be chasing a limited supply of goods and services. If the Fed hasn’t pulled enough money back out of the system by then, we could be in for another round of inflation — or another asset bubble — or both.

Based on the minutes of recent Fed policy meetings — and comments from Fed Chairman Ben Bernanke — the central bankers are well aware of this risk, even if they don’t see it as an imminent threat. Though he told Congress in February he didn’t see signs of inflation coming back, he did say that “once the economy begins to recover — as usual, the Fed would have to begin to tighten policy. It is very important for us to begin then to unwind our monetary expansion."

The hope is that, with a gradual recovery, the Fed can gradually drain money out of the system and head off a surge in prices. But the timing will be tricky. In some ways, flooding the system with cash to head off the catastrophic collapse of the global banking system was the easy part. Now the Fed has to time its exit just right.

Treasury officials face a similar issue with the hundreds of billions of dollars used to shore up the balance sheets of big banks. While some banks are expected to pay the money back fairly quickly, others may require government funding for some time. Treasury Secretary Tim Geithner assured Congress on May 20 that for the bank bailout to work, it was important to “unwind it as quickly as conditions permit.” That is central to the effectiveness of the strategy.

But, Geithner told lawmakers, “I'm not prepared to talk to that today. It is not quite time yet. We're not quite there yet."

Also in msnbc.com business Companies scale back, cancel holiday parties Answer Desk: Overpaid and bailed-out at banks? Your Career: ADA expands to cover more workers Venza sorta-crossover is Toyota’s latest mistake   Video: Green motorcycles are born to be mild

MORE FROM ANSWER DESK

Answer Desk Section Front

Who needs overpaid bankers? Who gets extended jobless benefits Easing job losses point to wobbly recovery Long-term jobless face frayed safety net GDP growth overstates case Recession over? Readers don't believe it Breaking down the cost of health care Commercial real estate bust looms 'Official' job numbers don't tell the whole story Getting mortgage help Answer Desk Section Front   Add Answer Desk headlines to your news reader: