Why is the Obama administration participating in the bailout of Greece, wonders Rep. Cathy McMorris Rodgers (R-WA)? Although it doesn’t get mentioned in this web ad protesting the involvement of the US, Greece belongs to the EU, originally a trading consortium designed in part to allow Europe to compete more effectively against … the US. The failure of Greece should be handled by its EU teammates, not by the US, even in the best of circumstances. However, McMorris Rodgers points out that we are already close to following in Greece’s footsteps, thanks to an explosion of debt that has been amplified by Barack Obama in two years and the Democratic Congress over the last three budget cycles. Instead of bailing out Greece, we should be keeping our cash to rescue ourselves from Greece’s fate:
McMorris Rodgers also blasts the Obama administration for their monetary policy in Forbes. The low-interest policies that the White House has demanded of the Fed have backfired, putting banks in the position of profiting from denying lending rather than incentivizing them to expand credit to worthy borrowers. And that trend has a clear winner, which isn’t the banks:
Since 2008 the Fed has kept short-term interest rates at nearly 0% and bought about $1.4 trillion in mortgage-linked securities and debts. The main reason for these policies is to stimulate borrowing in the private sector, including–whenever necessary–shifting the cost of toxic assets from Wall Street to the taxpayer. This hasn’t worked, however. In the second quarter of 2010, for instance, bank lending dropped by $96 billion, even while bank profits surged by $22 billion. This seems counterintuitive, but there’s a strange logic to it: With the private sector engulfed in so much uncertainty because of the government’s spending, borrowing, and bailouts, banks are reducing credit to businesses, while increasing their purchase of government debt. The banks take in low-cost funds from the Fed and then lend it back to the government at a higher rate. This produces a small profit that–when done on a large enough scale–can become quite lucrative, indeed.
Because of this distortion, the Fed’s low interest rates make it harder–not easier–for the private sector to get credit. Meanwhile, savers and investors–ordinary citizens who are building their nest egg for retirement–are getting little return on their money. Banks are paying 0.97% interest to their depositors–the lowest level since at least 1984, when the FDIC started keeping records. The question is, why is the Fed taking this path which seems so destructive?
This is where things get interesting. As I mentioned earlier, the Fed’s low-interest rate policy does have a clear benefactor: the federal government. In the past two years, Washington D.C.’s appetite for borrowing has grown enormously. Since President Obama took office in January 2009, he has borrowed $2.6 trillion and he expects the government to borrow another $10 trillion over the next ten years. Keeping the costs of that borrowing down isn’t just a luxury; it’s a necessity. That’s where the Fed comes in. By keeping interest rates low, it encourages banks to lend to the government, even at the expense of the private sector.
After all–from the bank’s perspective–Treasuries are “safe” while the private sector–overburdened with higher taxes starting Jan. 1, new health care mandates, and the potential costs of cap and trade is “risky.” A flood of money is pouring into Washington. But how much longer can that continue?
Not forever, at least. Greece taught us that not all government debt is low-risk, and the federal government under Democratic control has been every bit as profligate as Greece and other EU states teetering on the edge of bankruptcy. We need to cut off the spigot that floods Washington with borrowed money and return fiscal sanity back to the US. The window to get that accomplished without a Greece-style collapse is narrow indeed — and there will be no one to rescue us from our own folly when it closes.
Update: By popular demand, let’s release the DefiKraken once more:
This is from the indispensable Nate Beeler of the Washington Examiner.
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