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February 29, 2008


Dick Lepre

This was sent to me by someone whom I have been email buds with for many years. He sent this before I made the blog posting:

The notion that fiscal policy under control of the President does not have an impact on the economy is not true. It is true that "rapid turnarounds" are best accomplished by the Federal Reserve. However, it stretches credulity (in my opinion) to think that the U.S. economy would not be in a very different situation under a different president. For one thing, if fiscal policy had been left where it was in 2000 our federal deficit would be much, much smaller. This impacts not only the funds available for current expenditure (to which I shall return) but the quantity of debt issued which in turn impacts the value of the dollar. I dare say we've been over-producing debt instruments and that this is one of the causes of the weak dollar. It may well be that the housing crisis would have occurred anyhow. But if it had occurred in the context of less U.S. debt and a higher dollar, we would be in a better place to contemplate low interest rates without the threat of inflation caused by higher import prices.

A more solvent U.S. government could also undertake more ambitious rescue operations. One of the current logjams in liquidity markets is the fact that the bond insurance agencies are bankrupt and it is therefore very difficult to find a credible insurer for bundles of student loans or even municipal bonds. A solvent government might, for example, either loan or provide funds for a restructuring of insurance agencies. It is not clear that the Fed can do this.

Responsible fiscal policy does make a difference, but the difference that it makes is felt more on the 5 to 10 year period than the 9 to 15 month time horizon usually assigned to Fed actions. It really doesn't matter what one's views are about various government programs: so long as they are there, they should be funded; if they are terminated, then taxes can be lowered or the funds used for sometehing else.

I note that we are fighting a war but the government hasn't even seen fit to mount a bond drive to make sure that the funding obligation of the war related debt comes from American citizens.

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