Breakout

Consumers Could Get Smacked in the Face by Fiscal Cliff: Girard

Breakout

The Federal Reserve is an apolitical committee with a dual mandate to minimize inflation while fostering an environment conducive to high employment. That's the idea, anyway. The reality is the Fed is all about politics and always has been. It's only a question of degree.

Under Bernanke, the Fed is overtly political in the sense that every statement includes a section beseeching the government to do something, anything, to help the economic recovery. "As I have often stressed, however, monetary policy has it's limits," the Fed Chair said in his closing remarks on December 12th, adding that it will be critical for policy makers to come together soon to create a constructive fiscal plan.

Is Bernanke overstepping his bounds and adding to the din of fiscal cliff hype?

Michelle Girard, senior economist at RBS doesn't think so. The Fed can print money as fast as they want but it's not the medicine to cure what ails us. The problem for the economy is a general lack of confidence in the government getting anything done. "As long as that uncertainty remains it's just not going to gain traction," she says.

Related: New Metrics, QE4 Won't Cure the U.S. Economy Says Girard

Like many, Girard says the answer to the fiscal cliff issue is obvious. "There's got to be shared pain." But we're not a sharing society in general, and politically we've voted in favor of simple minded demagoguery over the compromise which has characterized every successful leader in American history.

The fiscal cliff is a threat of our own creation and avoiding it would be as easy as trading tax increases for spending cuts. The fact that we're too stubborn to pull it off isn't lost on foreign investors who Girard says are beginning to doubt our ability to govern.

Which brings us back to Bernanke injecting himself into politics. The easiest explanation for why he would do so is that he can and he must. Girard says the fiscal cliff debates are, if anything, understated. Spending is already being cut by corporations and tax cuts are likely to expire across the board come the beginning of 2013. It may not be an issue for the populous yet but it will be.

"I do think consumers would be smacked in the face in January if in fact we go over the cliff," Girard concludes ominously. If and when it happens no one will be able to claim Ben Bernanke didn't warn us.

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