Economic woes grow with Fed

The News Virginian
Published: July 17, 2008

Federal Reserve Chairman Ben Bernanke made a startling observation Wednesday, startling because he seemed so freshly aware of something acutely known by those of us among the rabble who, paraphrasing George Bailey, do most of the working and paying and living and dying in this country. Inflation, Bernanke mused, “is too high.” Gosh, do you really think so?
Well, it’s all right there in the Labor Department statistics. Consumer prices soared by 1.1 percent in June, the second largest monthly jump since 1982, and by 5 percent over the last year, that increase the largest in 17 years. Bernanke might have noticed that gas costs more. As a result, so too does food. Some service costs also are inching upward. Inflation combined with slow growth produces what economists call stagflation; current conditions in those terms could be the worst in 30 years.
These developments and Bernanke’s understatement are disturbing for two reasons.
First: The Fed, at the behest of Congress and the Bush administration, for the past year has been seeking to rescue the economy from perceived recessionary doom. That effort, combined with others by Congress, has included bailouts and rebates among other evidences of government’s heavy hand. Somehow, inflation’s loom and subsequent rearing of head escaped Washington’s wonks to the point of Bernanke’s apparent awakening.
Second: Against the backdrop of current failures, Congress and the Bush administration are considering expanding the Fed’s responsibilities to include ensuring U.S. and global financial stability. The Fed already is tasked with holding down prices and unemployment. The latter has remained low while the Fed has helped take the former higher.
Examples of the Fed’s enlarging role include setting capital requirements for troubled government-sponsored home lenders Fannie Mae and Freddie Mac as well as coordinating the Bear Stearns buyout and bailouts of investment banks.
Requirements increasingly are misnomers in some regards for Fannie and Freddie. A pending House bill would permanently boost the lenders’ cap for a single-family home from $417,000 before the subprime collapse to $730,000 in high-cost areas. This is aimed at reviving the market, but the swelled cap ignores the lenders’ mission to provide affordable housing, pulling pricey homes into the mix and thereby increasing potential risk for two institutions already struggling.
As is frequently the case these days, the argument over the roles of the Fed and Fannie and Freddie is one about trust in the free market.
One side recognizes the market invariably will stumble but believes in its capacity to right itself. In the area of housing, this necessitates rather than resists a fall in prices which most agree were exorbitant at the boom’s peak anyway. On energy, it means government facilitating rather than hindering exploration and recovery of untapped fuel supplies. The other side believes the market must be steeled against itself by way of government intervention aimed at circumventing the inevitable ebbs. Further, the people must be protected from those nefarious forces in the market who unchecked would ravage land and plunder consumers in shameless pursuit of profits. The expression of this view in action — overreaching by the Fed and restrictions on oil drilling — has produced a floundering economy and devastated dollar.
We wonder if either of the presidential candidates has noticed. It is difficult to conceive of Democrat Barack Obama altering the current state of things, but perhaps to expand rather than reduce government. Republican John McCain, who admits to a want of knowledge on the economy, might educate himself and Americans on these points and draw a distinction between himself and his opponent worthy of notice and of votes.