The Fed's debt-debate role
Judging by the latest signs and portents, President Obama and congressional Republicans appear to be at an impasse over taxes and spending, and the country might indeed be headed over the “fiscal cliff.” Next year's economic sluggishness and partisan recriminations could make today's look like a picnic.
The two parties and their allied pundits blame each other; each side has its points. But while everyone's pointing fingers, let me at least wave in the direction of the Federal Reserve and its chairman, Ben S. Bernanke. There's a case to be made that Bernanke's low interest-rate policies are part of the problem, too.
How so? What could the central bank's pursuit of its mission possibly have to do with Congress' handling of its tax-and-spend business?
The answer: nothing directly or intentionally, but everything indirectly and unintentionally.
With the U.S. economy still reeling from the Great Recession, the Fed has been trying to stimulate economic growth by holding down interest rates. It does this in large part by buying up government debt. It's perfectly consistent with the Fed's mandate.
However, in a properly functioning economy, rising government borrowing costs can play a useful role: They are the market's way of warning government that its debts are unsustainable. Muffle that signal, as Fed policy is doing now, and politicians are less able to guess right about how much time they have to fix fiscal policy.
According to the 2012 annual report of the global “central bank for central banks,” the Bank for International Settlements (BIS), “near zero policy (interest) rates, combined with abundant and nearly unconditional liquidity support, weaken incentives for ... fiscal authorities to limit their borrowing requirements.”
In short, the Fed is making it easier for Congress and the president not to do their jobs.
Bernanke has firmly denied responsibility for the politicians' fiscal dithering. In an Oct. 1 speech, he rejected the notion that the Fed should use monetary policy “to try to influence the political debate on the budget.”
“Suppose, notwithstanding our legal mandate, the Federal Reserve were to raise interest rates for the purpose of making it more expensive for government to borrow,” the chairman said. “Such an action would substantially increase the deficit” — both by raising borrowing costs and by weakening the economic growth upon which government depends for revenue.
Bernanke was correct. But no one is saying he is enabling the fiscal impasse on purpose — at least I'm not. Nor is anyone suggesting that he should reverse course on interest rates for the express purpose of disciplining the politicians.
The real point, as the BIS put it, is that “central banks are being cornered into prolonging monetary stimulus as governments drag their feet and adjustment is delayed.”
Bernanke can't raise rates without blowing up the economic recovery. The recovery, in turn, buys time for Congress and the White House to address fiscal issues under benign conditions. Yet without the spur of higher rates, politicians are more likely to waste that time — and, consequently, blow up the economic recovery.
It's anyone's guess how much longer this game can go on, before markets finally deliver an interest rate shock so powerful that even the Fed can't counteract it. But I am pretty sure that whenever that shock comes, it will be sooner than we'd like.
Charles Lane is a member of The Washington Post's editorial board.
Show commenting policy
TribLive commenting policy
You are solely responsible for your comments and by using TribLive.com you agree to our Terms of Service.
We moderate comments. Our goal is to provide substantive commentary for a general readership. By screening submissions, we provide a space where readers can share intelligent and informed commentary that enhances the quality of our news and information.
While most comments will be posted if they are on-topic and not abusive, moderating decisions are subjective. We will make them as carefully and consistently as we can. Because of the volume of reader comments, we cannot review individual moderation decisions with readers.
We value thoughtful comments representing a range of views that make their point quickly and politely. We make an effort to protect discussions from repeated comments either by the same reader or different readers.
We follow the same standards for taste as the daily newspaper. A few things we won't tolerate: personal attacks, obscenity, vulgarity, profanity (including expletives and letters followed by dashes), commercial promotion, impersonations, incoherence, proselytizing and SHOUTING. Don't include URLs to Web sites.
We do not edit comments. They are either approved or deleted. We reserve the right to edit a comment that is quoted or excerpted in an article. In this case, we may fix spelling and punctuation.
We welcome strong opinions and criticism of our work, but we don't want comments to become bogged down with discussions of our policies and we will moderate accordingly.
We appreciate it when readers and people quoted in articles or blog posts point out errors of fact or emphasis and will investigate all assertions. But these suggestions should be sent via e-mail. To avoid distracting other readers, we won't publish comments that suggest a correction. Instead, corrections will be made in a blog post or in an article.
- Rossi: Middling Steelers must make a statement
- Red Wings rally, shock Penguins in overtime
- Predators winger Neal caught ‘blindsided’ by trade from Penguins
- Steelers free safety Mitchell is still settling into role on defense
- Report linking field surface to cancer elicits Mt. Lebanon protest
- Steelers’ Adams delivers in pinch against Texans
- Queen sends first tweet, signed ‘Elizabeth R’
- Former Ligonier Township supervisor accused of abusing position, viewing porn on the job
- House has Pitt defense trending in right direction
- Man shot, killed after leaving Elliott bar early Friday
- Steelers notebook: Young players provide big challenge for special teams coach