Sept. 27, 2011, 12:01 a.m. EDT
shouts for Operation Twist
By Irwin Kellner,
PORT WASHINGTON, N.Y. (MarketWatch) — The
Federal Reserve’s latest gambit to stimulate the economy by twisting
long-term interest rates lower will not accomplish its objective.
Using monetary policy alone, without the aid of fiscal policy
to jump-start the economy, is like trying to push on a string. In
today’s context, it makes even less sense.
Long rates are already at multi-decade lows, so
pushing them even lower is not going to make much difference.
Most people are so worried about their jobs that they
are trying to reduce their debts and increase their savings. Those that
want to borrow to buy a home are finding that the banks are reluctant to
give them a mortgage.
For their part, many businesses have little or no
reason to borrow, since they are not seeing enough sales to justify
expanding. Besides, a number of firms have socked away big chunks of cash
which they will probably draw down first, since in today’s
low-interest-rate environment, these liquid funds are earning next to
What the Fed should have done was to stop paying the
banks for keeping excess funds with the central bank and begin charging
them instead. Another way to encourage the banks to lend would be to relax
the Fed’s new-found scrutiny over bank loans and capital.
At any rate, monetary policy alone is not able to
create jobs — much less boost the economy at large. Easy money is a
necessary but not a sufficient condition when you want to bolster economic
To ensure a growing economy requires fiscal policy to
work in tandem with easy money. In other words, the government should
spend more and tax less to boost aggregate purchasing power.
The problem is that fiscal policy is heading in the
wrong direction. Instead of loosening, it is tightening; instead of being
supportive, it is being restrictive.
Some tax cuts are set to expire next year while the
president wants to raise taxes on the “wealthy.” Meanwhile,
Washington has already cut spending, forcing many states and local
governments, as well as their contractors, to cut staff and thus
exacerbate today’s high anxiety over jobs.
Why is the government pursuing such a blatantly wrong-headed policy? It is
all in the name of reducing Washington’s budget deficit and its
This is all well and good, except that the pols have
our nation’s priorities mixed up. There is a better way to reduce
the government’s budget deficit besides the draconian method of
cutting spending and/or raising taxes now in vogue.
A growing, healthy economy will achieve this
objective too, by producing more tax revenues and requiring less spending
on unemployment and other social welfare programs. And I guarantee you
that this is a much more satisfactory way to do this for the average
worker or business.
Once the economy is on a sound footing, policy makers
can then turn to deficit and debt concerns. If needed, spending could be
held down while the tax structure can be adjusted in a number of ways to
generate more revenues.
It has been done before. A huge deficit in the early
1990s morphed into an even bigger surplus at the end of that decade
— thanks to a combination of prolonged growth and the right tax
There is no reason why this can’t be repeated
in this decade.
Irwin Kellner is MarketWatch's