Monthly Archives: April 2011

When Ben Bernanke Faced the Nation

Man, the world has gotten depressing recently.

Every time I read the news or flip on a cable news channel, it’s the same dreary stories day in and day out: Oil prices are skyrocketing, the dollar is plummeting, commodities prices are soaring, and Lady Gaga still wears ridiculous clothing in her music videos. Usually one looks to our President for answers, but he’s been too busy raising money for his re-election campaign to stop and give us any answer that doesn’t involve partisan rants or false promises. So rather than listen to the same old chatter, I decided to listen to another perspective on our current economic woes, one that is rarely heard outside of Congressional hearings, and an individual that is often shrouded in a fog of confusion and frustrating mystery. Today was Federal Reserve chairman Ben Bernanke’s first news conference of his tenure as chairman, a rarity for someone of his position. I was hoping that watching this news conference would shed some light on our fiscal and monetary problems we are suffering from right now. Why is the price of oil so high? What is causing the dollar to fall to such lows? Why are commodities like beef and corn getting more expensive? I thought all of these questions would be at least partially answered by the Fed chairman today, but alas, all I got was more of the same old chatter with no answers or substance.

Up until now, the Federal Reserve’s answer to our fiscal woes has been to print more money. The way the Fed does this is by buying government bonds and securities from banks and the Treasury, or by lowering the amount of money banks are required to keep in reserve, which puts greenbacks into circulation. This strategy, termed “Quantitative Easing”, is intended to make credit easier to come by, and give businesses money to pay their employees and take out loans. A few months ago, Ben Bernanke authorized $600 billion worth of bonds to be bought, which has caused inflation. Essentially, what has happened is that since more dollars are in circulation, they are being devalued, which means goods suppliers want more money for their goods, causing inflation to occur. In addition to these policies, the revolutions throughout the Middle East have caused oil prices to jump to record highs, making transportation of goods more expensive. Since oil prices are determined in US dollars, it makes the dollar look weaker and weaker. Hoping to hear about a new direction from the Fed chairman, I tuned in, but all I got instead was Bernanke saying his policies were going to remain the same.

When asked about the rising gas prices, he admitted that there isn’t much the Fed could do to stem the rise. While I agree that he can’t magically make them go lower, and we shouldn’t expect him to take any drastic action, there are still policies that he could enact that would help consumers at the pump, like selling government bonds to take dollars out of circulation and keep the prices somewhat controlled. Since the United States has an import-driven economy, it is imperative that we have a strong currency so imports, like oil, remain affordable. Bernanke went on to say that he can’t lower the rate of inflation right now because the economy is still fragile, and doing so would cause a second recession. He conveniently forgot to mention that persistent inflation is still not good either, and if the 2% inflation rate (which he has set right now) holds for much longer, it would put American jobs at risk by making goods harder to afford. I know 2% doesn’t seem like much right now, but as time goes on, it has a bigger and bigger impact on the economy than previously.

The press members that were present today did a pretty good job at asking tough, poignant questions regarding the state of the economy, and I only hoped that Bernanke would be able to respond with more than just vague answers that the Federal Reserve is famous for. Since such public statements by a man in his position are rare, I was hoping that he was going to announce some bold new plan of his to keep the economy going, or what he thought would keep the economy going but instead made the dollar weaker and weaker. Unfortunately, the much hyped news conference was just Bernanke telling the nation that he’s continuing the same policies and that he might alter them when the economy gets better and more people become employed. He still deserves some applause for having a big enough pair of moneybags to go in front of the cameras, but I just wish I got some real answers as to why the country is on a slow, depressing decline. 

Back to the depressing drone for me, I suppose.

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Who Won the Government Shutdown Smackdown?

Just before midnight on Friday, April 8th, Congress pulled off the equivalent of a last-minute field goal in the realm of government: they got a long-term spending deal done and are able to fund the government for the rest of the fiscal year. Although there is still no real budget, the spending plan promises to cut a record $39 billion, the largest one-year cut in history. President Obama and John Boehner both claimed victory for this negotiation, and in a rarer moment, the Tea Party praised Boehner rather than criticized him. Democrats and Republicans, in usual partisan fashion, each hit the airwaves trying to claim credit and heap blame on the other side for stalling on the proposal. The tough battles lie ahead, and the battle over the FY2012 budget will be as intense if not more so than the battle to keep the government going. One thing we say about this deal though is that Boehner went toe-to-toe with Obama and Reid, and got what he was elected to the Speakership to do: cut spending.

On numbers alone, Boehner won the poker match. Considering he is dealing with the most spend-happy President and Senate Majority Leader we’ve had, it was an accomplishment to win any sort of spending reduction, especially considering the Democrats didn’t want to cut anything. Yes, $39 billion isn’t going to bring down the deficit at the rates the country needs, and it’s a far cry from the $61 billion some Tea Party leaders were calling for, but it’s more than half that number, a good result in what were some very tough negotiations. It also shows the American people, as I mentioned in my previous article “Countdown to Shutdown”, that the GOP means business when it comes to cutting spending. It also puts the budget fight in Paul Ryan’s court for the next six months, and the promise of $6.3 trillion in cuts will win over some on the fence legislators. It’s unrealistic to think the Ryan budget will get to the President unaltered, after all, Democrats control the Senate and the White House, but it gives Republicans the upper hand in negotiations because they can act with the confidence that they can get serious spending reforms passed, even ones President Obama might not be comfortable with. The downside of the negotiations is that the defunding of Planned Parenthood and NPR and the reining in of the EPA’s extra-legal powers are going to a Senate vote, which will result in certain defeat, but hey, that’s negotiating for you, although these are proposals that should be given serious consideration in the months ahead.

Round one of what might be the biggest spending battle in American history has been decided, and the result was a $39 billion cut that may be miniscule in the face of a $1.6 trillion deficit, but it was a strong first step in the quest to rein in government spending. The next round will feature a real budget that may very well determine the 2012 presidential elections, as well as who controls Congress come 2013.

Fasten your seat belts, kids, it’s going to be a wild ride.

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Countdown to Shutdown

The standoff of a century is currently taking place in Washington, DC right now (even though the century is only 11 years old). If Congress can’t come to a spending agreement by Friday, the government will shut down for the first time since 1995. This moment has been staved off the past couple of months through continuing resolutions and stopgap measures that pay to keep government operating, but they’re temporary solutions that merely kick the can down the road.  Now it appears we’re at the end of the road, and the clock has run out on Congress. We’re down to two options: get a long-term spending bill finalized, or shut down the government.

First let’s look at Option A: a long-term spending bill. With the arrival of the Tea Party in Washington, the attitude towards spending and budgets has changed dramatically, and it’s for the better. Rather than discussing how much will be spent and where it will be spent, the focus is now what to cut and by how much. It’s a welcome breath of fresh air, but it comes with the same old arguments. Both parties have proposed bills that cut spending, but in different amounts. Democrats, feeling the pressure of mounting deficits for the first time in two and a half years, proposed $33 billion in cuts, whereas Republicans, pressured by the Tea Party-backed members of Congress, are thinking more towards $40 billion at this stage of the game, according to Speaker John Boehner. While on paper these cuts seem pretty hefty, they barely make a dent in the nearly $1.3 trillion deficit. If one does the math, $33 billion in cut spending would represent, at most, a 2.6% reduction in the budget. $40 billion in cuts would be better, but still only roughly 3.1% of the budget. It’s a start, but such miniscule cuts will not do much in the long run to get our country back in fiscal order.

On the budgeting side, House Budget Committee chairman Paul Ryan just announced the GOP budget for the upcoming fiscal year. In it, he claims spending would be reduced by $6.3 trillion over ten years, while adding one million net jobs next year. The savings would come from a reorganization of Medicare and Medicaid, which would turn these programs into a system of insurance premium payments that would allow seniors on Medicare more flexibility in choosing their health care providers in the open market, as well as helping poor people pick better plans for themselves as well. The bill would also defund ObamaCare, lower the corporate the tax rate to 25% while closing major tax loopholes and government giveaways à la General Electric, and make cuts in defense spending. The budget has been widely praised by budget experts from both parties (Alice Rivlin, a Democrat budget analyst from the non-partisan Brookings Institute, was Ryan’s key partner in crafting the budget). These proposals would cut the deficit in half as well as bring unemployment down to 4% by 2015. Democrats were quick to skewer this bill as taking food out of seniors mouths (Nancy Pelosi’s claim), and leaving the poor at the “mercy” of the private health insurance industry, but it’s just their same old schtick they’ve been playing for the last four months: cut spending, but don’t cut that spending. Sadly, the Senate Democrats, who hold a majority, won’t pass the budget without changes, but it does serve notice that the GOP is keeping its pledge to cut government spending and is serious about getting rid of the deficit while creating jobs and making America a more business friendly environment for corporations. It’s an ambitious and risky budget proposal, but given the financial state our country is in, ambition is sorely needed.

If both sides can’t agree on a budget, then we are faced with Option B: a government shut-down. Regardless of what some will have you believe, the “shut down” is not a complete shut-down. Essential services like entitlement checks and unemployment insurance will still be sent out, and you will still get your mail. Also, passports and document processing will still occur, though at a slower rate. However, national parks and DC museums like the Smithsonian would close, and federal funding for state programs would end, meaning states would have a lot less to work with for a period of time. Federal employees may also be furloughed, and non-essential military personnel might be working without pay. The IRS would close as well, so tax refund checks won’t go out (hold the hallelujah). Strangely enough, this prospect intrigues me. States would now have to run without many federal funds, so governors and legislators could act more independently of federal whims. This would mean a sink-or-swim situation for supposedly conservative state officials, and seeing how they react to the situation will tell us who is committed to more state sovereignty, or is just another big government suck up.

Probably the worst aspect of a government shutdown though would be the non-stop finger-pointing we’d hear on the television during the shutdown period. Be prepared for all day tit-for-tat blame fests between Democrats and Republicans over who caused the shutdown. As it stands right now, Democrats might be on the hook for the shutdown more than the GOP. I’m not saying that to point fingers, but rather an analysis regarding facts. Spending proposals have flown out of the House this session due to an unexpectedly united House GOP, but Senate Democrats have shot them down once they reached the upper chamber. Also, Democrats have been shaky regarding cuts to entitlement programs and education funding, which are both due for serious spending reforms. Democrats, to their credit, are beginning to see the need for cuts, and are starting to talk to the Republicans on this issue, but their numbers are still too small to make any real impact, and much of the “cut” spending comes from the transfer of domestic spending to mandatory spending, which can’t be cut unless a law is changed.  However, Democratic leaders will still spin the story to make it seem like the GOP is making unreasonable spending demands and robbing Joe Smith of Somewhere, USA of his health care or government-funded job. It’s the same tired attacks that nobody subscribes to anymore, and that Democrats continue to use for the purposes of grandstanding and electioneering.

The two sides continue to talk, and budget debates are occurring as they should. This might be the moment when a long-term spending bill aiming at the staggering deficit goes to the President for his signature. We might even see a budget for the first time in nearly two years. We might finally see unemployment numbers decreasing at a much faster rate as more businesses hire without unnecessary red tape and confusing tax codes weighing them down.

Or Congress just keeps kicking the can down the road.

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