Republicans are Playing Politics with the Economy
Wednesday, September 21, 2011 - 4:00pm
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Congressional Republicans are intent, for purely political reasons, on making sure as little as possible is done to improve the sorely troubled U.S. economy before the 2012 elections.

Under the guise of dealing with the government’s long-term debt problems, they have denounced all efforts to use fiscal policy—-aside from tax cuts-—on the grounds that President Obama’s 2009 $770 billion stimulus program failed because it didn’t bring the nation’s unemployment rate down to 8 percent as forecast. Texas Gov. Rick Perry claims it didn’t create a single job.

Never mind that the non-partisan Congressional Budget Office concluded that the program led to several million jobs being created or saved.

On Tuesday, the monetary policy shoe dropped. GOP leaders in the House and Senate sent an unprecedented letter to Federal Reserve Chairman Ben S. Bernanke telling him to stop trying to lower long-term interest rates in an effort to stimulate the economy. “Such steps may erode the already weakened U.S. dollar or promote more borrowing by overleveraged consumers,” the letter said.

But it’s not just consumers who borrow money. What about all those “job creators” the Republicans love to talk about, the small business executives? Aren’t they perhaps more likely to borrow, invest and create jobs when interest rates are low?

The letter also questions whether the Fed’s purchase of $600 billion worth of Treasury securities—a process known as quantitative easing—“has facilitated economic growth or reduced the unemployment rate.” Certainly that program didn’t generate a surge in economic growth, but it did help. For instance, there’s clear evidence that it did lower long-term rates, including those on home mortgages, and it probably helped boost stock prices.

If neither fiscal nor monetary stimulus can help, what will? Apparently the Republican leaders are content to do nothing except cut federal spending even for disaster assistance in the wake of devastating hurricanes. No, there’s nothing government can or should do. After all, the letter said, “Ultimately, the American economy is driven by the confidence of consumers and investors and the innovations of its workers.”

There’s a great deal of truth in that. But before the country had a central bank-—the Fed is still a couple of years away from its 100th birthday—-there were recurring financial panics in which banks failed, depositors lost their money and businesses and farms went bankrupt because of shortages of money. Only three years ago, had the Fed not taken a host of extraordinary measures, the same thing would have happened in the United States and much of the rest of the world.

Now, in pursuit of defeating Obama’s reelection effort, congressional Republicans have carelessly undermined the independence of the Fed. They speak of “confidence of consumers and investors,” and ignore how those consumers and investors were affected by Republicans’ refusal to raise the federal debt limit in a timely way. Trying to force their will on Bernanke and other central bank officials isn’t going to help confidence either. 

At the end of a two-day meeting this afternoon, Bernanke and a majority of the policy-making Federal Open Market Committee did as they should do. They ignored the Republican letter as nothing more than a political ploy and announced they would over time shift the composition of the Fed’s portfolio of Treasury securities toward longer maturities. That should put some additional downward pressure on long-term rates and provide more liquidity in the short-end of the market.

This is what many investors expected before the letter was sent. The action won’t miraculously trigger a huge spurt of growth, but it should help a bit. And it sure won’t hurt.

covered the Federal Reserve and the economy for 25 years at the Washington Post before joining Bloomberg News in 2004. In 2009 he began writing freelance pieces for, among others, Thomson Reuters, and is widely recognized for his ability to interpret the Fed.