The Fed Cannot Control Congress

While I don’t view Greenspan or Bernanke as the best chiefs ever, I also don’t lump massive amounts of blame on them.  The Fed Chairman has some very powerful tools but the Fed does not control the annual budget deficits.  Last week’s exchange between Ron Paul and Ben Bernanke makes for good theatre.  (View Here)  Ben is only using the tools available to him and the largest issue causing problems and limiting our ability to recover he has zero oversight: spending in DC.

Debate continues about the level of our national debt, the relative safety of the US dollar and whether or not a full blown crisis of confidence will strike the US treasury market, dollar or both.  There is certainly plenty of blame to go around for our current predicament.  Congress, the Fed, Freddie and Fannie, Wall Street and the banks; take your pick and morale hazard plays a large role.

Over the past few weeks, the Fed has become more vocal in expressing its concern about the seemingly uncontrollable spending coming from DC.  But at the same time, the Fed warns about risks associated with not increasing the debt limit.   The Fed is hoping the US threads the needle meaning we delay a crisis in the dollar and/or treasury markets long enough to get the economy and job creation going so tax revenue starts to pick up.  They don’t want a short term decrease in the levels of US Gov’t spending but they want longer-term assurances from Congress that spending growth stay in check.  More simply put, they hope our economy grows and leads us out of the current debt mess with limits on futures Debt and Deficit to GDP ratios.

Liquidity and Safety

The US $, for now, is still the world’s reserve currency.  This alone has allowed us to live our lifestyle over the last 3 decades as Foreign Governments, Foreign Nationals, US citizens, money market funds, and even various US Gov’t Agencies and Bureaucracies have all demanded and purchased US Gov’t Debt.  Many do this not to receive the paltry returns but because our debt and debt markets give them (perceived) safety and more importantly, liquidity.  No other vehicle on the planet offers the combination of safety and liquidity for governments and institutions that have operational budgets and reserves in the tens of billions to trillion dollar range.  How long will America be afforded this premium?  Until the marginal buyers of our debt have an alternative that offers safety and liquidity of the same magnitude.


About Matthew Kolesky

Matthew Kolesky is a Principal at ACM, Inc. and joined the firm in 2004. Matthew Kolesky was born and raised in Alaska and has served on many Anchorage area non-profit boards.