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Please give me more detail on the issue discussed in the article about the Federal...

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user100400 | (Level 2) Honors

Posted April 2, 2013 at 4:29 PM via web

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Please give me more detail on the issue discussed in the article about the Federal Reserve that is posted below.

http://www.usnews.com/news/blogs/rick-newman/2013/03/21/how-ben-bernanke-is-enabling-congress

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pohnpei397 | College Teacher | (Level 3) Distinguished Educator

Posted April 2, 2013 at 5:27 PM (Answer #1)

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Macroeconomists say that there are two kinds of policies that governments can use to keep economies growing.  These are fiscal policy and monetary policy.  Fiscal policy includes taxing and government spending and is carried out in the US by Congress.  Monetary policy involves manipulating the money supply through such things as interest rates and buying government securities.  This is carried out by the Federal Reserve.

In this article, the author is arguing that the Fed’s monetary policy is allowing Congress to create bad fiscal policy.  The bad fiscal policy harms the economy, but the good monetary policy saves the economy from the full effects of that harm.  The author argues that if the Fed would stop saving the economy with monetary policy, Congress would be forced to make better fiscal policy.

Right now, we have a terrible problem with government deficits.  This problem will only get worse as Medicare (and, to a lesser extent, Social Security) costs increase.  Therefore, we need to raise taxes and cut spending.  However, if we do that too quickly, or in bad ways, our economy could go back into a recession.  Right now, the government “sequester” is simply chopping all kinds of spending without doing so in what the article calls “an intelligent” way.  This is not good for our long-term economic outlook.  We need Congress to come up with a gradual plan for fixing our finances.  However, Congress does not want to do this for political reasons.

The article argues that the Fed is saving us from the consequences of Congress’s actions.  It argues that it might be better if the Fed stops bailing Congress out so that Congress will be forced to come up with better fiscal policy. 

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