Posted by
on Thursday, January 17, 2008 12:24:12 PM
I have a lot of respect for Federal Reserve Chairman Ben Bernanke, and I think he's probably the most qualified person to run America's central bank. That's why I was disappointed when he lent his support to the idea of an economic stimulus package when he testified before the House Budget Committee this morning. Chairman Bernanke testified that tax rebate checks, probably between $300 and $600 per family, would help to stimulate spending so long as the government issued them quickly. He also testified that the Fed would take further action as needed. The resulting speculation that the Fed would cut the federal funds rate even further from 4.25 percent to 3.75 percent has me even madder than this economic stimulus.
Using interest rates to game the markets and moderate the business cycle is exactly what got us into this mess in the first place. Lowering rates below what they should reasonably have been allowed the housing market to superheat. Houses were incredibly overpriced but people kept buying so long as interest rates were low. The Fed had to raise rates eventually, however, because a superheated economy eventually creates inflation, and inflation can destroy an economy. When rates went up, people stopped buying houses and banks foreclosed on some mortgages, so prices plummeted to offset the huge excess supply. This correction is inevitable and the more we try to delay it, the more we draw out the pain.
Lowering the federal funds rate from 4.25 percent to 3.75 percent, as many economists and analysts on Wall Street seem to think the Fed will do, will only add to the dollar's problems. The European Central Bank's key interest rate currently stands at 4.00 percent, and as our rates decline relative to theirs, the dollar will only slide in value relative to the euro. That may help prop up American manufacturers and exporters in the short term, but in the long term it weakens them because it's an artificial insulation from competition. In the meantime, foreigners will continue gobbling up American assets and inflation will rise. A new report out yesterday shows that inflation in 2007 hit its highest point in 17 years. We're teetering on the brink of a level of inflation that we haven't experienced in my short lifetime, and I'd just as soon avoid it.
This economic stimulus is just as foolish, although probably not as dangerous. As Robert J. Samuelson explains in Newsweek:
"Folks, we have a $14 trillion economy. A one-time stimulus (rebates
aren't permanent tax cuts, and grants to states would probably be
temporary) of $75 billion or $100 billion is too small to do much. If
the economy is in serious trouble, something much larger is needed. But
if the outlook is not so dire, then a modest stimulus plan is mostly
political symbolism."
Actually, I think we need something larger anyway, but something entirely different. This country has a long-term problem that no short-term band-aid will fix, and that's our large deficits and the overall size of our government relative to our GDP. At the end of the third quarter of 2007, data from the Bureau of Economic Analysis showed that the government accounted for nearly 20 percent of GDP. That's too much. The government needs to spend less money so it doesn't need to collect as much money and businesses and individuals can spend more of the money they earn. A stimulus package is foolish because it puts into people's hands money that doesn't really exist. If the government were to reduce spending and pass the savings on to businesses and individuals, then that would really do something. Instead, it's just adding the cost of this stimulus to its tab.Chairman Bernanke probably realizes what refusing to intervene in the economy would do to the markets in the short term. If he were to refuse to cut interest rates and say publicly, abruptly and out of the blue that the Federal Reserve would no longer try to micromanage the business cycle, then there probably would be a panic because the markets have come to expect the Fed to indulge them. They are addicted to it. Chairman Bernanke is trying to avoid precisely that kind of panic, and that is wise. Nevertheless, Chairman Bernanke needs to say publicly and forcefully, albeit gradually and over time, that the only things that will strengthen the American economy over the long term are balanced and shrinking budgets that decrease the tax burden on businesses and individuals. Government needs to shrink relative to GDP, and as it does, the economy will become stronger and more resilient.
Congress is a drunken sailor when it comes to spending, and Chairman Bernanke needs to start taking away the bottle more and more by being more reluctant and then by outright refusing to cut interest rates at the first sign of economic troubles. Congress needs to start taking responsibility for the effects its habits have on the economy.