The Worst Possible Thing the Fed Can Do

Apologies to Stormy for essentially co-opting his post, but when I read what he posted I got really worried.

Stormy quotes Greg Ip at the Wall Street Journal:

The Federal Reserve is considering contingency plans for expanding its lending power in the event its recent steps to unfreeze credit markets fail.

Among the options: Having the Treasury borrow more money than it needs to fund the government and leave the proceeds on deposit at the Fed; issuing debt under the Fed’s name rather than the Treasury’s; and asking Congress for immediate authority for the Fed to pay interest on commercial-bank reserves instead of waiting until a previously enacted law permits it in 2011.

Our current president is one for, shall we say, creating new precedents, and once those new precedents are up and running, expanding them. My favorite is how, seven years after 9/11, the government is still funding two wars using emergency supplementals, and has since begun funding initiatives to modernize the military through those emergency supplementals as well. Furthermore, GW has certainly felt no compunction about strong-arming the Fed. But, even he never thought of having debt issued under the Fed’s name rather than the Treasury. This is not a precedent you want to set. Having created the precedent of ignoring precedents, GW won’t be the last president to behave this way.

In fact, while I’m not an alarmist, this, in my opinion, is just about the worst possible thing the Fed can do. This is the kind of thing that creates an Argentina. The point of an independent Fed is to ensure that the government not find itself with the ability to print money. If the Treasury begins issuing debt in the Fed’s name (for what purpose?), this time its at the Fed’s behest. And next time?
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