Business Times - 05 Mar 2011
Tea Party serves up a bitter brew for Bernanke
By LEON HADAR
IF anyone still had any doubts that the Tea Party movement had become a powerful force on Capitol Hill, he or she would have had to revise the assessment this week.
First, the contingency of conservative and libertarian lawmakers who were part of the Tea Party insurgency and who were elected to Congress in last year's mid-term election has forced the Republican leadership to continue playing chicken with the White House over this year's federal budget.
Under pressure from the Republicans who now control the House of Representative, the Obama administration and the Democrats had agreed to US$4 billion cuts in spending on a few social and economic programmes in exchange for an agreement by the Republicans to a two-week extension in funding for the federal government.
Now Congress will have until March 18 to come up with a budget deal before the government runs out of money. And the Tea Partiers on Capitol Hill insist that they would allow the federal government to shut down on that date unless President Barack Obama and his Democratic allies agree to their demand for more than US$61 billion in spending cuts this year.
These Republicans who would like to see the federal government cut in size, the income tax eliminated, and the Federal Reserve abolished - and the gold standard brought back to life - have also put on a kind of depressing Tea Party for the head of the US central bank this week.
Indeed, Fed chairman Ben Bernanke who testified before Congress on the central bank's semi-annual report on US monetary policy this week, found himself on the receiving end of a series of attacks by Republican freshmen who belong to the Tea Party and by one of the leading figures of the movement and a possible Republican presidential candidate next year - Ron Paul from Texas.
Mr Paul is also a so-called gold bug who believes that a return to the gold standard would result in a more stable and non-inflationary economy than under the current system of 'paper money' where the Federal Reserve controls money supply.
The Republicans have blamed the financial meltdown and the ensuing Great Recession on the policies of the federal government, and in particular, the Fed's monetary policy - the low interest rates maintained by the US central bank.
'It has been said ever since the crisis hit that one of the causes was that interest rates were kept too low too long,' Mr Paul said when addressing Mr Bernanke during his testimony before the House Financial Services Committee on Wednesday.
And after Mr Bernanke suggested that the higher prices of energy and other commodities would cause only a 'temporary and relatively modest increase' in broader prices, Mr Paul and other Republican lawmakers accused the Fed chairman of trying to play down the threat of inflation. Mr Paul described it as a 'deadly threat' - and blamed it on the monetary policies of the central bank.
Some of the Republicans also seemed to suggest that Mr Bernanke was siding with the Obama administration in the debate over cutting spending by the federal government, after the Fed chairman had criticised the idea that Congress shouldn't raise the federal government's debt ceiling unless the White House agrees with the Republican spending cuts proposals.
Mr Bernanke has argued that a failure to raise the government's debt ceiling could ruin the credibility of US economic policymaking. But Republican David Schweikert from Arizona said that only a threat to not to raise the debt ceiling would force the government to make the necessary cuts in spending.
'This body doesn't move unless there is a crisis,' he said.
The debate between Mr Bernanke and Mr Paul also point to an interesting exchange about the definition of what constitutes money or how one defines the dollar. For Mr Paul, a dollar is equivalent to a quantity of gold. The unit of money, the dollar, is defined by how much units of gold it can purchase. And Mr Paul wanted Mr Bernanke to offer his own definition of a dollar.
'My definition of the dollar is what it can buy,' Mr Bernanke responded. 'Consumers don't want to buy gold; they want to buy food and gasoline and clothes and all the other things that are in the consumer basket,' he said. 'It is the buying power of the dollar in terms of those goods and services that is what is important, and that's what I call price stability.'
But beyond this somewhat academic exchange, there is a more serious and practical debate between the Fed chairman and the Congressional Republicans. It is about, as Mr Bernanke put it in his testimony on Tuesday: 'The most likely outcome is that the recent rise in commodity prices will lead to, at most, a temporary and relatively modest increase in US consumer price inflation,' and that the current high prices reflect temporary cyclical pressures and not long-term structural problems.
Or whether as the Republicans - who point to gold prices reaching new historic highs and crude oil back over US$100 a barrel - see it, inflation has become a real and present danger that could become a major threat to the American economy unless Washington starts putting its fiscal house in order, and as soon as possible.
The debate is not going to end anytime soon.
Copyright © 2010 Singapore Press Holdings Ltd. All rights reserved.