• Long-Run Debt and The Intersection of Fiscal and Monetary Policy

    Mark Thoma thinks Alan Greenspan and Ben Bernanke were wrong to give their opinions about fiscal policy during Congressional testimony. But he does think that the Fed chair should address the effect of fiscal policy on monetary policy: That is, while I don’t think the Fed chair should give advice on the specifics of fiscal policy, the chair should make clear how fiscal policy choices will affect or constrain monetary policy. Let me try to explain how monetary and fiscal policy are connected through the budget deficit. There are two different government budget issues to think about. The first concerns the long-run trajectory for the debt, and the projections are that the debt will expand to unsustainable levels if we don’t do something to stop it. That means, above all else, reducing the growth in health care costs. The second issue concerns the short-run debt created in an attempt to stimulate the economy. This is a small amount compared to the long-run debt problem, but it is still a lot of money and we will need to pay this back when things are back to normal (but not before then, since paying it back too soon could undermine a recovery). And Thoma goes on, in his Money Watch column, to look at "the long-run debt problems" as a way of exploring the potential challenges of the Fed moving forward. Read The Relationship Between Budget Deficits, Fed Independence, and Inflation .

  • Bernanke and the Fed's Independence

    Ben Bernanke delivered his Semiannual Monetary Policy Report to the Congress yesterday before the House Financial Services Committee , and he expressed a relatively upbeat view of the economy . He also defended the need for the Federal Reserve to hold onto independence in the face of proposals to give the General Accounting Office more auditing powers, saying "a perceived loss of monetary policy independence could raise fears about future inflation, leading to higher long-term interest rates and reduced economic and financial stability." Here is his opening statement, from Bloomberg : Bernanke will continue his testimony later today. Mark Thoma 's concern with the Fed these days has less to do with its independence as a whole, and more, it seems, with the independence of the district banks as currently structured: As it stands, the Board of Governors in Washington has considerable influence over who is appointed to key positions such as the President of the district banks, and those Presidents represent five of the twelve votes at the meetings where monetary policy is set. More independence of the district bank Presidents and other district bank personnel from the Board of Governors would be a healthy change (there is also a question of whether geographic representation through district banks is the best way to capture the public interest, but I'll leave that aside for now). Read Fed Independence here .