Free the Fed
Testifying before the House Budget Committee two weeks ago, Federal Reserve Board Chairman Ben S. Bernanke said that when the time comes, the Fed will raise interest rates in order to stop inflation from building in the next recovery.
He also asked for “fiscal balance” to sustain financial stability. On the surface — in terms of keeping prices stable and restoring value to the softening U.S. dollar — this is positive. Surely Mr. Bernanke wants to do right for America, and he is giving it his best shot.
But when you talk to traders and economists, the whispered story is that Mr. Bernanke and the Fed are no longer truly independent of the Obama White House and Treasury. As a result, Mr. Bernanke will not be able to slow the printing presses and gradually lift the near-zero target rate in a timely and effective manner. Already the Fed has created more than $1 trillion in new cash, and M2 money-supply growth is the fastest in 25 years.
This monetary explosion explains what’s really driving the dollar down and Treasury rates up (alongside rising gold and oil prices). It’s not huge budget deficits, but the growing fear that a less-than-independent Fed will keep pushing new money into the financial system to fund President Obama’s liberal spending policies.
This week, German Chancellor Angela Merkel launched a broadside against the Fed, saying she views the Fed’s powers “with great skepticism.” It was an important rebuke. Here’s the elected leader of a major country telling a central bank to stop the printing presses and avoid creating yet another inflationary bubble during the next recovery cycle. In other words, it’s the gross domestic product (GDP) at some points. This is because previous Fed Chairmen Paul A. Volcker and Alan Greenspan restrained money-supply growth in a noninflationary manner.
Now surely today’s $2 trillion deficit — which is 13 percent of GDP and likely to remain very high — is a shocking number. But if the Fed refuses to monetize the deficit, inflation will stay low, and long-term interest rates will normalize. Conventional economists and most politicians do not understand that excess money is the
With clear signs of economic recovery on the horizon, some now call for ending the unnecessary stimulus package and deTARPing across the board. Along with a big rise in the money supply, there have been a rebound in commodities, a stabilization in housing, falling unemployment claims, a booming stock market, narrowing credit spreads and rising Institute for Supply Management manufacturing reports. All this tells us additional stimulus is unnecessary.
Economic blogger Scott Gran- we need more?
Policy analyst Dan Clifton tells me the $200 billion spending increase scheduled for 201119 definitely should be rolled back from the Obama stimulus package before it is built into the current-services spending base line. And let’s not forget that the Obama Democrats already have passed a $400 billion omnibus spending bill for 2009. So anybody in Washington who is serious about spending and deficits can save hundreds of billions of dollars by rolling back the stimulus package and TARP. The financial system is healing, and banks want to pay TARP down anyway.
Here’s the moral of this story: Excessive Fed pump-priming and over-the-top federal spending is what matters, not the budget deficit. If we keep paying people not to work by piling on more transfer payments and government subsidies, economic growth will suffer mightily. And if the Fed continues buying bonds issued by Uncle Sam, inflation will ratchet higher.
Republicans, are you listening? Roll back the unnecessary stimulus and restore the Fed’s independence.
Lawrence Kudlow is a nationally syndicated columnist.