Mr. Two-faced, Fed Head Alan Greenspan, was up to his old tricks when he gave a speech, “Budget Policy,” before the Federal Reserve Bank of Philadelphia Policy Forum (December 2, 2005) and sounded the alarm about the ballooning budget deficit. His solution is to cut entitlements: "[I]f at all possible, to close the fiscal gap primarily, if not wholly, from the outlay side."
An Opportunity to Turn the Tide
While this may be old hat to Fed Watchers with Ben Bernanke slated to take over the reins of the Federal Reserve on February 1, 2006, it presents an interesting challenge. Does Bernanke agree that cuts in entitlements are necessary to reduce the budget deficit? Or does he think that repealing Bush’s tax cuts, that were passed with Greenspan’s blessings, is the way to reduce the deficit?
This is a critical question for anyone concerned about the state of those less fortunate in our country today. The USA’s twin imbalances, the budget deficit and current account deficit, have reached levels that Chairman Greenspan himself said have historically brought rapid and painful adjustments. There is no end in sight. So the deficit(s) debate is going to become an increasingly dominant subject in the political discourse in the years ahead.
Holding much sway over this debate will be the Fed Head. The Chairman of the Federal Reserve is supposed to put him/herself above politics. That all changed with Greenspan. Greenspan assumed God-like stature among politicians. Senator McCain said that if Greenspan died, he would prop him up in his seat to maintain order. Several have argued that President Bush would never have been able to pass tax cuts if Greenspan had not endorsed them. Can we assume that Bernanke, who maintains he will be above board, will do so?
With a new Fed Head slated to take office there is a new opportunity to set things straight. Greenspan has consistently argued for less government meddling and lower taxes. In his in Philadelphia speech Greenspan dismissed tax hikes to balance the budget as being counter productive: "Addressing the government's own imbalances will require scrutiny of both spending and taxes. However, tax increases of sufficient dimension to deal with our looming fiscal problems arguably pose significant risks to economic growth and the revenue base."
Does Bernanke similarly believe that tax hikes would be counter productive?
So far Bernanke has been diplomatic stating that fiscal policy is not his bailiwick: "I'm going to begin now, I think, the practice of not making recommendations on specific tax or spending proposals."
There are reasons to believe that Bernanke, like Greenspan, believes that lower taxes is always the solution. As the Chairman of Bush’s CEA (Council of Economic Advisors) he promoted Bush’s tax plan. Some have dismissed such comments as part of the job because it was a political appointment. Recent comments during testimony would argue that Bernanke is in fact in favor of Bush’s tax cuts: "I think it's important that we make the tax cuts permanent."
While Bernanke may remain above the political fray the Fed’s policy decisions will interact with other government policies. Also the stature and power of the Federal Reserve, that controls monetary policy, has increased geometrically over the last thirty years as the country has shifted decision making to the market by default. A lot of what government used to do has been privatized and the role of fiscal policy has been reduced. In some ways Congress and the President are at the mercy of the Fed because it can counter whatever they decide to do through its policy actions.
When a crisis is precipitated it will have international investors running away scared. What little confidence they have in politicians will be eroded. They will instead look to Federal Reserve for direction. Rapid adjustment will mean balancing the books to make ends meet. In such an environment stringent IMF like policies may have to be set in place. Clearly all will suffer, but what policy choices will be made will determine who suffers more? Will the burden placed primarily on the revenue side with increased taxes, or will the spending side bear the brunt with massive cuts in programs and entitlements?
Congress has already indicated that it will act to cut outlays when trouble hits. When faced with having to pay for the relief of Katrina it voted to keep the occupation of Iraq going and cut spending. Any cuts we have seen so far will pale in comparison to what a crisis might call for.
The Powerful Fed
Progressives get in huff over Supreme Court nominations, as they should. Yet they ignore the appointment to the Federal Reserve as just a financial markets and economy thing. The Greenspan legacy, like the Rehnquist record, is very clear. The rich have benefited and the poor have suffered as we have lost control of government to money. Wealth and income inequality have mushroomed to record levels. Credit card debt has tripled. Bankruptcies have also tripled. The booming stock market has made corporations and right wing initiatives/think tanks flush with cash. A new financial industry catering to the poor, fringe banking (payday loans/rent to own stores/pawn shops/etc), has come into existence whose outlets now outnumber the number of banks in America. A “plutocracy” of wealth and power, as Kevin Phillips notes, has taken over Washington in a way hereto not seen before. All of this and much more were wrought by Fed Head Alan Greenspan!
Can we afford another Greenspan? Especially at a time when a financial crisis appears imminent? Should a crisis be precipitated, how it is resolved and dealt with will reverberate for generations to come. The last time a major storm hit America, progressivism was strong and FDR was the President. That led to the New Deal and the advance of many progressive issues. What if there had been a turn in the other direction?
Unless we are more diligent in scrutinizing Federal Reserve appointments we will continue to pay the price by having money and special interests increase their hold on government. Arguably if we had been more diligent in the past we would not have to be battling the agenda of special interests: Iraq, Alito, environmental concerns...
It is time we give Bernanke the same scrutiny that we have given Alito, Roberts, Bork and all the other Supreme Court nominees lest we fall further under the influence of money.
Madis Senner, CPA, is author of Japanese Euroderivatives. He is an ex global money manager turned faith-based activist. His causes include protesting the Federal Reserve (www.fedhead.org/) and supporting a Muslim doctor, Rafil Dhafir (www.jubileeinitiative.org/FreeDhafir.htm) convicted of breaking the sanctions against Iraq.
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