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QUICK FIX WILL CRIPPLE ECONOMY IN LONG RUN, FED OFFICER WARNS

SHARE QUICK FIX WILL CRIPPLE ECONOMY IN LONG RUN, FED OFFICER WARNS

A top Federal Reserve official said Monday that any short-term fix for the staggering economy would result in a "severe collapse" within a few years.

Edward Kelley Jr., one of seven Fed governors, acknowledged the economy "is mired in an extended slowdown," but he said it will take time to achieve what he called "true progress."President Bush and many congressional Democrats are considering tax cuts and other proposals designed to rescue an economy that Bush said is in a free fall. Kelley, however, said he doesn't believe "there are any quick fixes or panaceas available to us."

His remarks were prepared for the Florida Council of 100, a business organization meeting in Tampa. Copies of the speech were made available in Washington.

Without mentioning tax cuts or still lower interest rates specifically, Kelley pointed to the danger of using either.

"If we were to get our economy going again by force-feeding consumer spending or reigniting financial speculation, we would then be setting ourselves up for a severe collapse later in this decade which would be deep and long lasting," he said.

Citing the potential for reigniting inflation, he defended the central bank against criticism that it has not eased credit quickly enough to keep the economy from drifting downward.

"Inflation is a killer of economies," he said.

Until it slashed the discount rate a full 1 percent last month, the Fed had been nudging interest rates down slowly to lessen the chances of setting off a wave of price increases. The Labor Department reported last week that inflation was just 3.1 percent in 1991, the lowest since 1986.

As has Fed Chairman Alan Greenspan and other economists, Kelley attributed much of the economy's problems to the enormous buildup of debt during the past decade.

"The consequence of crossing this watershed is that the 1980s era, wherein we were creating debt that financed an extended expansion, has now given way to a new era of servicing that debt, which has the reverse effect of slowing the economy," he said.

And the debt was caused by the era's "inflation psychology," which encouraged consumers and businesses to spend because savings would be eroded by rising prices.