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Progressives, led by Paul Krugman, believe that we can fix oureconomic woes with more consumer debt and higher inflation. Thereality is that near zero interest rates encourage speculation,discourage savings, weaken pension funds, and put millions of babyboomers at risk. By Sheila Bair FORTUNE -- In the late 1800's, coal mine barons found no shortageof ways to maximize profits at the expense of their workers. Minerswere paid subsistence wages then required to shop at the notorious"company stores" where they were sold over-priced goods on abusivecredit terms. As time passed, coal-mining families would findthemselves "another day older and deeper in debt" as TennesseeErnie Ford lamented in the popular 1950's song "Sixteen Tons." Much attention has been paid to rising income inequality in theU.S. over the past several decades. Less attention has been paid torising disparities in debt between the haves and have-nots.According to a recent IMF report, debt to income ratios for thebottom 95% of income earners in the U.S. skyrocketed from 60% in1983 to a whopping 140% in 2007. For the top 5%, the debt loadactually decreased from 80% in 1983 to 65% in 2007. At the sametime, real wages for the working classes stagnated. Our economyfollowed a business model akin to the company store. Americanworkers experienced little real wage growth, but instead were givenready access to credit to buy over-priced houses, imported goods,and other things they could not otherwise afford. Now comes a group of progressives, led by Nobel Laureate economist Paul Krugman , who propose, you guessed it, more consumer borrowing and spendingas the main solution to our economic woes. They advocate aggressiveaction by the Fed to keep interest rates near zero, as well as toraise the inflation target to 4%-5%. They argue that consumers,enticed by low interest rates, will borrow and spend more whilethose of us who have built up savings will start spending thosesavings rather than let higher inflation erode their value. All ofthis new consumer spending will create jobs and get us out of oureconomic doldrums, or so their theory goes. MORE: Watch out! Is the Fed pushing us into another bubble? Here is my question: Once we've all borrowed as much as we can andspent down our savings, then what? Their arguments assume that ourproblems are cyclical, not structural, and that we can somehowsuccessfully return to the pre-crisis good times if we can juststimulate enough consumer demand. But if we learned anything in2008, it is that credit-infused consumer spending based onaccommodative monetary policy is not a sustainable model. The Fedcan print lots of money, but it cannot control what is done withit. Instead of supporting new lending for healthy, sustainableeconomic growth, those newly minted trillions can just as easilysupport asset bubbles and irresponsible lending and risk taking byyield hungry financial institutions and investors. Near zerointerest rates discourage savings and weaken pension funds. At thesame time, they encourage highly leveraged speculative investmentsbased on short-term price fluctuations, not long term economicfundamentals. Given the millions of baby boomers at or near the cusp ofretirement, and the dwindling resources of Social Security andMedicare to support them, the last thing we should be doing ispursuing policies to erode private savings. And with overburdenedconsumers only midway through the process of de-leveraging, now ishardly the time to try to entice them to take on new debt. To besure, the ability to refinance mortgages into much lower rates hasbeen a positive outcome of the Fed's near zero interest ratepolicies. But mortgage refinancings will eventually run theircourse. Krugman and his allies want to increase the target inflation rateas a way to manipulate consumers into spending more with today'shigher-valued dollars. They downplay inflation's harmful effects onthose whose incomes do not keep pace with the cost of living.History has shown that once inflation starts to accelerate, it canbe hard to control. Moreover, it is unclear whether even themighty Fed can keep rates low while explicitly raising targetinflation. This may simply lead bond investors to demand higherinterest on their investments to compensate for inflation risk. Inaddition, it is unlikely that the Fed could generate inflation inthe one area where it might be helpful – housing –given the huge amounts of inventory projected to come on the marketover the next several years which will put countervailing downwardpressure on home prices. MORE: FDIC says it's prepared for the next Lehman The harsh reality is that the solution to our problems lies withfiscal policy, not monetary policy. Unfortunately, it is easier tocall on the Fed to keep printing money than it is to convince ourpolitical leaders to start doing their jobs. The major road blocksto America's economic future lie with inefficiencies in the taxcode, unsustainable defense and entitlement spending, and mostimportantly, massive uncertainty on the part of both businesses andhouseholds over how or even whether these core issues will beresolved. Progressives would be better served by focusing on how wecan get more bang out of our social spending bucks, given our highper capita expenditures on health care and education and subparresults. Similarly, conservatives need to face up to the fact thatwe need more tax revenues, with the real question being whether wedo so by raising rates, imposing new consumption taxes, or,dramatically cutting back on tax loopholes (my preference). Those who favor fiscal responsibility over lax monetary policyshould not be branded with the scarlet A of austerity. Unlike manyEuropean countries which have tightened too rapidly (though somehave little choice, given their dire fiscal situations), we can andshould phase-in tax and spending reforms over time. What's more, insome areas, additional spending makes sense. I agree with Krugmanthat even with current budget constraints, we should undertakewell-designed and administered programs to repair infrastructure.That type of "stimulus" will create construction jobs whileproviding long-term benefits to our economy through more efficienttransportation systems, uninterrupted water supplies, and saferbuildings for our kids' schools. Structural fiscal reforms will give our economy real, lastingbenefits. On the other hand, too much easy money from the Fed,while well-intentioned, contributed to asset bubbles, excessiverisk taking, and a populace over-burdened by debt who, like thecoal miners of yore, will be taking years to dig out. We are high quality suppliers, our products such as China LED Inground Lights , China Underwater LED Lights for oversee buyer. To know more, please visits LED Swimming Pool Lights.
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