According to The New York Times, “At their first meeting of the year, Federal Reserve policy makers voted unanimously … to continue the central bank’s controversial $600 billion plan to spur the recovery by buying government bonds.”[1] In other words, the central bank would continue to “print money” to buy up U.S. Government debt, allowing that government to go into more debt without putting pressure on the interest rate to go up (which would cost the government more in interest payments to bondholders).
Theoretically, the Federal Reserve can buy an unlimited amount of bonds because the central bank can create money. Of course, creating money relative to GNP growth can spark inflation, but the central bankers are not worries. “The Fed did note that commodity prices had risen, but cautioned that long-term inflation expectations had been stable and that measures of underlying inflation had continued to trend downward.” Even so, “skeptics fear that the bond-buying — which has the effect of further expanding the Fed’s already large balance sheet — could lead to destabilizing asset bubbles or touch off inflation.”[2] I contend that this is a rather narrow (though certainly valid) concern; equally or more troubling for the long term is the asymetry in the Fed’s treatment of debt issued by the U.S. Government and that of the state governments.
For instance, in 2010 Illinois issued $16 billion in additional debt. Whereas the U.S.Government could fall back on the Federal Reserve, the latter has refused to purchase debt from states like Illinois. Aside from the unfairness inherent in the Federal Reserve’s proclivity, the asymetry subtly undercuts federalism. In other words, the U.S. Government having an unlimited ability to have its central bank purchase its debt gives that government still another edge over the state governments, which one can expect will be even more compromised in being able to check encroachments by the U.S. Government. The resulting enervation of federalism means that consolidation may reach us sooner rather than later, at the expense of our governments being able to act as mutual checks on eachother.
Another way of making this point is to charge that the Federal Reserve’s refusal to do for the state governments what the central bank is doing for the U.S. Government evinces a structural bias in our system of federalism. The lack of balance (and the underlying unfairness) ought to be of concern to the citizenry. The result may well be that the U.S. Government will be enabled to get into unsustainable debt such that the empire itself may one day collapse under its own weight at the center.
1. Sewell Chan, "Fed to Continue Bond Buying Program," The New York Times, January 26, 2011.
2. Ibid.
