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Storms on the Horizon
Remarks before the Commonwealth Club of California
by Richard W. Fisher
San Francisco, California
May 28, 2008
Richard W. Fisher is the President and CEO of the Federal Reserve Bank of Dallas, one of the twelve Federal Reserve Banks of the Federal Reserve System. Mr. Fisher currently serves as a member of the Federal Open Market Committee, which is the most important monetary policymaking body of the Federal Reserve System. It is responsible for formulation of a policy designed to promote economic growth, full employment, stable prices, and a sustainable pattern of international trade and payments. In this presentation, Mr. Fisher steps outside his role as a central banker to focus on fiscal policy.
An excerpt of the speech is set forth below. For the complete speech, click here.
I see a frightful storm brewing in the form of untethered government debt. I choose the words—“frightful storm”—deliberately to avoid hyperbole. Unless we take steps to deal with it, the long-term fiscal situation of the federal government will be unimaginably more devastating to our economic prosperity than the subprime debacle and the recent debauching of credit markets that we are now working so hard to correct.
You might wonder why a central banker would be concerned with fiscal matters. Fiscal policy is, after all, the responsibility of the Congress, not the Federal Reserve. Congress, and Congress alone, has the power to tax and spend. From this monetary policymaker’s point of view, though, deficits matter for what we do at the Fed. There are many reasons why. Economists have found that structural deficits raise long-run interest rates, complicating the Fed’s dual mandate to develop a monetary policy that promotes sustainable, noninflationary growth. The even more disturbing dark and dirty secret about deficits—especially when they careen out of control—is that they create political pressure on central bankers to adopt looser monetary policy down the road.
57 Responses to “Storms on the Horizon”
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July 13th, 2008 at 4:28 am
I’m honestly confused. A huge national debt could raise interest rates, lower savings that can hurt our long-term economic situation, but other than that, exactly how is the country going to end up “bankrupt?” I read the book “Running on Empty” and I don’t believe I got the explanation about just how could the economy end up completely bankrupt or in Pete’s words “shatters”. About the rising interest rates, why can’t we just force banks to freeze interest rates from going too high?
July 23rd, 2008 at 10:53 pm
I’m not a college boy, but even I can see the obvious. As long as Congress and our government doesn’t see that you can’t spend more than you make, we are on a long slide to the bottom with a hell of a hard stop at the bottom. If I ran my house and business like the federal government runs, they would make me declare bankruptcy. The only way to straighten it out is to either elect or teach politicians that you can’t spend what you don’t earn, and we the taxpayers are the earners. I believe it was Cicero who said the only problem with government by the people was that once they discover they can vote themselves largess from the treasury they will. Time to change the system to more like some states have–enact a balanced budget amendment.