Opinion: Columnists

Diana Furchtgott-Roth: Fed's easy money policies can't go on forever

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Opinion,Diana Furchtgott Roth,Columnists

Four years into the recovery, Federal Reserve Chairman Ben Bernanke reports that the Fed will continue its rock-bottom interest rates and accommodative monetary policy.

In testimony last week before the Joint Economic Committee, Bernanke said, "a premature tightening of monetary policy could lead interest rates to rise temporarily but would also carry a substantial risk of slowing or ending the economic recovery and causing inflation to fall further."

If countries could devalue their way to prosperity, then all countries would have to do to become rich would be to print money. But this doesn't happen. Rather, weak currencies drive up prices of commodities and discourage saving and investment.

The Fed spends $85 billion a month purchasing Treasury bonds and mortgage-backed securities. The resulting record-low interest rates encourage investors to take risks to get higher yields.

Older people, many of whom rely on income from savings and investments, have no choice but to move into riskier assets in order to maintain their standards of living. One 87-year-old man told me recently that "we have moved into high-yield bonds, known as 'junk' bonds. We hope they are not junk, but we are taking extra risk to maintain our income."

This is a bubble waiting to burst, and it will burst when interest rates rise to more normal levels. At that point, the value of these risky investments will decline, and these older investors will be hurt. Plus, interest payments on the public debt will rise, increasing the budget deficit, which has been $1 trillion a year for the past four years.

Governments by nature are more concerned about what happens today than what happens in the future. So there is little pressure on the Fed to unwind its positions and raise rates. When rates are low, no one will blame Bernanke because he appears to be doing all he can.

Perhaps Bernanke is waiting for Congress and President Obama to make some sensible pro-growth decisions that will allow him to raise rates.

First, House Ways and Means Committee Chairman Dave Camp, R-Mich., and Senate Finance Committee Max Baucus, D-Mont., could come together and craft a corporate tax reform bill. America's corporate tax rate, at 35 percent, is the highest in the industrialized world. America is one of the few countries that taxes corporations on worldwide income. Camp and Baucus could craft a bill to fix that -- which President Obama would likely sign. This would enable some $1.7 trillion in earnings held by multinationals offshore to return. As Senate hearings showed last week, corporations such as Apple can legally avoid paying taxes by keeping funds out of the country.

Second, Obama could approve the Keystone XL pipeline, signaling that he supports America's new energy revolution. Not only would the pipeline's approval create construction jobs, but Canadian oil would flow to refineries in the Gulf of Mexico, increasing economic activity in that region.

Third, with evidence that the Affordable Care Act is causing employers to reduce employment and substitute part-time for full-time workers, Congress could eliminate the act's employer requirement to offer health insurance and fund the program out of general revenues.

Employers do not have to provide employees with food, housing and clothing, all arguably more important than health insurance. There is no reason that they should be forced to offer health insurance, nor should we be surprised when this requirement lowers hiring. Bernanke needs to gradually raise interest rates to historical norms. Some positive policy action by Congress and the Obama administration would improve the economy and nudge him in the right direction.

Washington 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.

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