Second in a series.
New York-President Obama should strengthen the financial condition of the Federal Reserve System soon, as a matter of urgency.
Rather than learning about looming challenges watching television while on vacation, our president actually should use his phone, his best financial minds and his pen to act decisively before the next phase in the debt crisis hits, not afterward, when solutions will be more difficult to implement and far more costly.
America faces ever more vexing dangers
In 2014, because American households, corporations, governments and financial institutions can borrow at interest rates that have been too low for too long, our nation remains addicted to debt, more than five years into a structural economic crisis that brings long-simmering geopolitical tensions to the boil.
At year-end 2013, America’s debt totaled $56 trillion, up 8 percent from $51.8 trillion at year-end 2008. This towering level hurts us less than it should because our central bank has been able to keep U.S. dollar-based interest rates artificially low.
Rising nations and resource-rich states understand mounting dangers of excess financial leverage and of Fed initiatives since 2008 that suppressed key U.S. dollar interest rates in hope of re-igniting global growth.
Many believe these policies actually compounded economic challenges inside and outside America, that no central bank or government can effectively manage.
For many reasons, America must now be fully prepared to defend the value of our currency as rivals and enemies force an end to the post-World War II status quo, when the U.S. government and currency reigned supreme.
But are we truly prepared for what likely comes next?
The biggest unresolved financial problem in America
While U.S. regulators and legislators roundly criticize 11 large American banks for their failure to plan adequately for looming disaster scenarios, America’s largest financial institution, the Federal Reserve System, seems the most vulnerable.
Since 1981, the Fed has been able keep key U.S. dollar-based interest rates on a downward trajectory — a path that inflated the recorded values of dollar-based assets.
At this moment, the U.S. dollar remains strong compared to most widely traded currencies — but conditions can change swiftly as we see in Russia, where the ruble is down 5 percent in one month and in Ukraine, where the hryvnia is down 7 percent during the same period.
Does the Fed have a large enough cushion to absorb inevitable losses when U.S. dollar-based interest rates get forced upwards?