Free the Fed

The Washington Times Weekly - - Commentary -

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.

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