Opinion: Columnists

Central bankers cannot save us

|

With U.S. and global growth slowing, all eyes are on Tuesday's meeting of the Federal Reserve's policy committee.

Will chairman Ben Bernanke lead the Federal Open Market Committee to a decision to buy more bonds, in the hope that a further diminution of already record-low interest rates will have a tonic effect on spending?

Bernanke is like the mythical Atlas. With fiscal stimulus off the table in a divided Congress, the uncertainty of tax hikes next year, and burdensome regulations discouraging investment, the Fed chairman is asked to hold up the U.S. economy, just as Atlas supported the world on his shoulders.

Meanwhile, Congress and the administration are doing nothing to help him. Worse, they are being counterproductive.

Those who lobby the Fed to pump more high-powered dollars into the banking system (money the central bank lawfully creates) fail to recognize that borrowing costs are already at record lows, and that more liquidity is unlikely to impart more impetus to the sluggish recovery.

As columnist Robert Samuelson wrote in Monday's Washington Post, "What good are lower interest rates if lenders impose such tight conditions that credit doesn't flow or potential borrowers won't assume added debt? Rates on 30-year mortgages are already 3.5 percent."

The Fed is charged by law with maintaining price stability. Fed hawks, chiefly presidents of the regional Federal Reserve banks, worry that more liquidity will sow the seeds of faster, future, inflation. On the other hand, some liberals, such as New York Times columnist Paul Krugman, advocate higher inflation.

Congress and the president should not count on the Fed to bail them out of their mistakes. And it's Congress that is responsible for the uncertainty that is hobbling the economy.

If Congress does nothing, federal income taxes on capital and wage and salary earnings will rise on January 1 in all income brackets, from 10 percent to 15 percent in the lowest tax bracket, and from 35 percent to about 42 percent at the top.

Congress has known since the Bush tax cuts were extended for two years in December 2010 that this day was coming. It could have considered the Simpson-Bowles recommendations, or some variation, and passed them. Or it could have considered suggestions from other groups, such as the Debt Reduction Task Force of the Bipartisan Policy Center.

Nevertheless, the Democratic Senate has failed to pass even a budget for the past three years, much less tax reform, cuts in discretionary spending or long-term entitlements. Such bills were passed by the Republican House of Representatives, but without the Senate's cooperation, nothing will be done before Nov. 6.

Congress could extend current tax rates for another year and allow the next Congress to undertake fundamental tax reform. That might stop the economy from going into a recession now. But calling on Bernanke is easier.

Similarly, a European Central Bank meeting is scheduled for Thursday. Last week, Mario Draghi, the ECB's president, said he would do "whatever it takes" to keep the euro from disintegrating. The European Central Bank's refinancing rate is at 0.75 percent, and the deposit rate is at zero.

Policymakers are counting on Draghi to keep the euro from fragmenting and imploding. But they refuse to lower taxes and reform their burdensome labor laws to attract investment.

On two sides of the Atlantic, politicians turn to central banks, hoping that by printing money banks will paper over problems long enough for them to disappear.

But central banks are unable to help in the face of persistently flawed economic policies. Both in the United States and in Europe, we cannot rely on them for economic rescue.

Examiner Columnist Diana Furchtgott-Roth (dfr@manhattan-institute.org), former chief economist at the U.S. Department of Labor, is a senior fellow at the Manhattan Institute for Policy Research.

View article comments Leave a comment