- The Washington Times - Thursday, October 28, 2010


As a member of Congress, I know firsthand how dangerous it would be to give us the opportunity to “paper over” our complete lack of fiscal discipline, a practice also known as “quantitative easing.”

However, recent comments by some of the world’s leading economists, including Paul Krugman, Kenneth Rogoff and, of course, Federal Reserve Chairman Ben S. Bernanke encouraging a policy of inflation targeting leave me concerned. These policies, which could result in an expansion of our monetary base by 400 percent to 700 percent from its 2008 level, have me wondering whether Congress needs to protect the Fed from itself.

The term “inflation targeting” sounds deceptively benign, like “quantitative easing.” While printing money sounds offensive to most Americans, quantitative easing sounds like a spa treatment. Inflation targeting does not sound as vulgar as “We are going to print money indiscriminately until inflation reaches a target level, no matter how much it takes.”

One thing I have appreciated about the economic establishment as they have pushed for inflation targeting is their honesty that they don’t know whether they can print us into prosperity and what the unintended consequences will be even if they do. It is important that the public knows that inflation targeting is based on a theory - a theory that has not worked in Japan, which has printed a half-quadrillion yen without achieving any of the inflation sought. It also has not worked in the United States after we doubled our monetary base with the printing of $1.75 trillion in 2009 and 2010.

For me, the lessons of Japan and the U.S. so far are the need for an overleveraged economy to deleverage. Others may disagree with my position, but I am not ready to print five to 10 trillion dollars without a serious debate on what that means for the American people in both the short term and long term.

One of my biggest concerns is what this policy would do to the “savers” in our economy who, during their lives, have not overconsumed and thoughtfully have put away money for their retirement. Their capital accumulation is the fuel for our economy, but under this policy, the Fed forcefully drives the real rates of return for the savers (many who are retired or approaching retirement) to zero or negative. Many of the retirees in my district are facing a new financial crisis as the income on their savings has fallen as much as 70 percent over the past few years. This is a direct result of a Fed policy that rewards debtors with increasingly lower interest rates - most recently funded by a doubling of the monetary base - while punishing those who lived within their means and planned for the future. Our nation needs more saving, not less, but the Fed appears to be rewarding behavior that is not in our economic interests.

Under mounting pressure, savers, especially retirees, are confronting the difficult choice of taking on greater amounts of risk in search of increased returns or experiencing a dramatic reduction in lifestyle. It is no accident that you see more and more seniors working at places like Wal-Mart and thus crowding out employment for the young adults looking to get a start in our economy.

There is also no doubt that this policy over a long period of time will wreak havoc on our nation’s already underfunded pension system. The rate-of-return assumptions made by our nation’s pension funds typically range from 6 percent to 9 percent. These assumptions are no longer valid, given the price controls the Fed has placed on the cost of money. With the cost of money so low, stewards of these pensions, like retirees, are perversely incentivized to take on more risk in order to fund the retirements of their beneficiaries. This has the potential to become disastrous. The bottom line is that there is not an accountant creative enough (even in Washington) to argue that the pension system can survive long under this policy.

My bet is the economic elite and their policies will fail to jump-start the private-sector economy and the velocity of money. Several surveys recently found that small-business owners would not borrow even if nominal rates went below zero. This demonstrates that the Fed fails to recognize how its economic experiments are perceived in the private sector. Job creators are looking for high after-tax real returns.

How does a policy of unprecedented printing make providers of capital and entrepreneurs think they will generate real returns? How does a policy that artificially lowers interest rates make them feel confident about asset prices in the future? How does a policy that encourages large deficits and therefore higher taxes and interest rates in the future make them feel confident that they will be compensated for the risk they need to take to resurrect our economy?

While these economic thinkers view themselves as the solution, job creators view them as one of the biggest risks to generating long-term real returns. As a result, their economic models inevitably fail to predict the influence their actions have on long-term investment and job creation.

My hope is that we can have a thoughtful conversation about this issue not based on politics or ideology, but on what is in the long-term interest of the country. This cannot be accomplished the way we currently interact with the Fed, with Congress grandstanding and the chairman saying as little as possible.

Leaders in both parties and in both houses should select members who are serious about solving these challenges. This is just too big and too uncertain a step for the Fed to take without a researched, thoughtful buy-in from the all the people’s representatives.

Rep. Randy Neugebauer is a Republican member of Congress from Texas and is senior member of the House Financial Services Committee.

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