Photo: Bloomberg TV
Great paragraph here from Ben Bernanke from his speech this afternoon. In it, he takes on the myth that Fed policy somehow affects fiscal policy:Even though our activities are likely to result in a lower national debt over the long term, I sometimes hear the complaint that the Federal Reserve is enabling bad fiscal policy by keeping interest rates very low and thereby making it cheaper for the federal government to borrow. I find this argument unpersuasive. The responsibility for fiscal policy lies squarely with the Administration and the Congress. At the Federal Reserve, we implement policy to promote maximum employment and price stability, as the law under which we operate requires. Using monetary policy to try to influence the political debate on the budget would be highly inappropriate. For what it’s worth, I think the strategy would also likely be ineffective: Suppose, notwithstanding our legal mandate, the Federal Reserve were to raise interest rates for the purpose of making it more expensive for the government to borrow. Such an action would substantially increase the deficit, not only because of higher interest rates, but also because the weaker recovery that would result from premature monetary tightening would further widen the gap between spending and revenues. Would such a step lead to better fiscal outcomes? It seems likely that a significant widening of the deficit–which would make the needed fiscal actions even more difficult and painful–would worsen rather than improve the prospects for a comprehensive fiscal solution.
The one red-bolded line is huge.
The ECB is explicitly using monetary policy (the promise of bond purchase) to influence the political debate and fiscal policy (no bond purchases for countries that don’t have outside oversight of their budgets).
The Fed and the ECB are engaged in totally different projects.
The Fed is trying to boos the economy my easy money.
The ECB is trying to backstop governments, but can only do so if the governments make commitments to “good behaviour.” The two central banks get lumped in with each other, but are not in the same boat right now.