The Federal Reserve Gets an Assist on the Blaming of Republicans

Bruce Johnson
Oh, for a free market. 

We didn't hear much from the Federal Reserve head Ben Bernanke during the debt ceiling fiasco, did we?  The Fed is an "apolitical" entity kept at arms length from Congress and the Executive Branch.  Right?  Yet Mr. Bernanke was hip deep in this mess -- a mess partly of his own creation.

There are ramifications for fiscal irresponsibility.  But Ben's ZIRP (zero interest rate policy) has taken the market discipline consequences out of the equation of an ever-increasing debt situation.  He has enabled the profligate.  Supply of debt once depressed bond and bill prices, thus raising interest rates.  The machinations of the market and the law of economics were free to work.

During an era long ago and in a land far away, bond traders would take careful note of monthly and even weekly debt supply data from the federal government.  More debt would typically result in higher rates.  Supply and demand.  Markets would seek levels of equilibrium. Those days are gone.

Higher rates were unwanted because the cost (interest payments) of servicing the new debt and also the outstanding debt would rise.  This cost was the primary reason for encouraging the maintenance of a manageable debt load and controls on spending. 

Obama gets before the microphone and declares that the Republicans have hurt the economy in what was their effort to re-establish spending sanity.  Meanwhile, the real and mounting damage to the economic system of our country is hidden by current Fed policies.  The impact of borrowing 1 trillion dollars more each year is temporarily disguised, even though it races the debt clock to an unhappy ending.  This arrangement gives great cover to this administration and the Democratic Party.

In a free market, it would have been clear that it was the Democrats who harmed the economy by not reining in spending.  The president never would have been able to make such an accusation of blame upon the Republicans.  The connection between unbridled spending and the result of more debt and higher interest rates would have been instantaneous.  To lay blame, as the president did, on those who attempted to halt the irresponsibly destructive event is ludicrous.

The Federal Reserve is complicit in the ramping up of our nation's debt.  Their ZIRP policy, instituted to create employment via the outdated Phillips Curve theory, is masking the inevitable economic damage of current policy to the political advantage of the Democrats.

The government was shut down for 16 days.  Well, not shut down, but slowed down.  And because GDP is calculated with a heavy reliance on government spending, the coming economic readings will suffer from the federal slowdown.

So the Federal Reserve will have more reason to keep rates at zero.  They will point to a feeble GDP number in the coming quarterly report.  The circular idiocy is evident.

  • The Fed removes market discipline from the debt expansion, thereby enabling this Democrat fiscal irresponsibility.
  • The Republicans, attempting to stop the fiscal insanity, are blamed for the economic slowdown.
  • The GDP numbers soften, and therefore the economy needs more quantitative easing. Finally, the false reasoning to continue with zero interest rates continues, thus furthering masking the consequences of mounting debt.
  • Round and round we go in a cul du sac of economic mismanagement.

The Federal Reserve, that creature hatched at Jekyll Island 100 years ago, by New York bankers and for their convenience, has now risen, by their own power-expanding mandates, to a point of nanny-sitting and helicopter-parenting the economy and markets.  Newly sworn to smooth out the cycles that once flushed out excesses, created caution, and curbed speculation, the fed now maintains a zero-interest-rate policy and engages in daily market-tweaking.

"The Republicans have unnecessarily hurt our economy by forcing this shutdown" the president says.  As far as weakening the GDP for the next cycle, yes.  But what of the damage to the future of this country created by the Democrats and their irresponsible fiscal policies?  The magnitude and destructive nature of the two cannot be compared.  Realization is likely to dawn all at once, and way too late.

Oh, for a free market. 

We didn't hear much from the Federal Reserve head Ben Bernanke during the debt ceiling fiasco, did we?  The Fed is an "apolitical" entity kept at arms length from Congress and the Executive Branch.  Right?  Yet Mr. Bernanke was hip deep in this mess -- a mess partly of his own creation.

There are ramifications for fiscal irresponsibility.  But Ben's ZIRP (zero interest rate policy) has taken the market discipline consequences out of the equation of an ever-increasing debt situation.  He has enabled the profligate.  Supply of debt once depressed bond and bill prices, thus raising interest rates.  The machinations of the market and the law of economics were free to work.

During an era long ago and in a land far away, bond traders would take careful note of monthly and even weekly debt supply data from the federal government.  More debt would typically result in higher rates.  Supply and demand.  Markets would seek levels of equilibrium. Those days are gone.

Higher rates were unwanted because the cost (interest payments) of servicing the new debt and also the outstanding debt would rise.  This cost was the primary reason for encouraging the maintenance of a manageable debt load and controls on spending. 

Obama gets before the microphone and declares that the Republicans have hurt the economy in what was their effort to re-establish spending sanity.  Meanwhile, the real and mounting damage to the economic system of our country is hidden by current Fed policies.  The impact of borrowing 1 trillion dollars more each year is temporarily disguised, even though it races the debt clock to an unhappy ending.  This arrangement gives great cover to this administration and the Democratic Party.

In a free market, it would have been clear that it was the Democrats who harmed the economy by not reining in spending.  The president never would have been able to make such an accusation of blame upon the Republicans.  The connection between unbridled spending and the result of more debt and higher interest rates would have been instantaneous.  To lay blame, as the president did, on those who attempted to halt the irresponsibly destructive event is ludicrous.

The Federal Reserve is complicit in the ramping up of our nation's debt.  Their ZIRP policy, instituted to create employment via the outdated Phillips Curve theory, is masking the inevitable economic damage of current policy to the political advantage of the Democrats.

The government was shut down for 16 days.  Well, not shut down, but slowed down.  And because GDP is calculated with a heavy reliance on government spending, the coming economic readings will suffer from the federal slowdown.

So the Federal Reserve will have more reason to keep rates at zero.  They will point to a feeble GDP number in the coming quarterly report.  The circular idiocy is evident.

  • The Fed removes market discipline from the debt expansion, thereby enabling this Democrat fiscal irresponsibility.
  • The Republicans, attempting to stop the fiscal insanity, are blamed for the economic slowdown.
  • The GDP numbers soften, and therefore the economy needs more quantitative easing. Finally, the false reasoning to continue with zero interest rates continues, thus furthering masking the consequences of mounting debt.
  • Round and round we go in a cul du sac of economic mismanagement.

The Federal Reserve, that creature hatched at Jekyll Island 100 years ago, by New York bankers and for their convenience, has now risen, by their own power-expanding mandates, to a point of nanny-sitting and helicopter-parenting the economy and markets.  Newly sworn to smooth out the cycles that once flushed out excesses, created caution, and curbed speculation, the fed now maintains a zero-interest-rate policy and engages in daily market-tweaking.

"The Republicans have unnecessarily hurt our economy by forcing this shutdown" the president says.  As far as weakening the GDP for the next cycle, yes.  But what of the damage to the future of this country created by the Democrats and their irresponsible fiscal policies?  The magnitude and destructive nature of the two cannot be compared.  Realization is likely to dawn all at once, and way too late.