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Buy Bonds Or Go Broke

Dennis LockhartAdd Cyprus to the list of debt-trashed economies in the Eurozone, joining Greece, Italy, Spain, and the rest to create a cautionary tale for the United States’ own debt and spending challenges.

The U.S. federal debt is nearing $17 trillion now and there are about as many suggestions to solve the over-spending problem as there are dollars on the debit sheet: raise taxes, cut taxes, cut government spending, lower interest rates, print more money, even half-serious suggestions to mint a $1 trillion coin.

A few of those ideas—though not the coin—will be discussed on Saturday, April 13 at a University of Iowa College of Law conference, and Dennis Lockhart, president of the Atlanta Federal Reserve will be among the participants. “Fiscal Reform, Monetization, or Default: How Will the United States Solve the Problem of its National Debt?” will examine recent U.S. monetary policy and starts at 1 p.m. in Buchanan Auditorium in the Pappajohn Business Building. Admission is free and open to the public.

The Fed’s current policy has been to buy large numbers of Treasury bonds and asset backed securities to keep interest rates low. Miller says that, after buying $1.25 trillion in asset-backed securities following the 2008 financial crisis, last year the Fed announced that it would buy government securities at a rate of $40 billion per month, or almost half a trillion dollars per year. This increases the money supply and may keep interest rates low, Miller notes, but it also helps the federal debt to continue to grow at an unsustainable rate. Robert Miller, the UI law professor organizing the conference, says one question the speakers may address is how long the current Federal Reserve policy of buying government bonds can be sustained before it leads to inflation.

Federal Reserve Chairman Ben Bernanke has assured investors and the public that this policy is only temporary, and that the Fed will eventually resell the bonds back on the open market, thus reducing the money supply and avoiding inflation once the economy strengthens.

Miller says some analysts believe the Fed’s strategy is essentially a form of debt monetization and will inevitably lead to inflation. Others argue that it can be managed in such a way to keep inflationary pressures minimized while not endangering the economic recovery.

He says Dennis Lockhart, the Atlanta Fed president, voted in favor of the Fed’s current monetary policies when he was a member of the Federal Reserve’s policy-making Federal Open Market Committee during 2012. Allan Meltzer, one of the world’s leading economists and a professor at Carnegie Mellon University, has been a persistent critic of these and other policies of the Federal Reserve and has written that they will inevitably lead to inflation.

Miller says the most sensible solution is fiscal reform—some combination of cutting spending overall, entitlement spending in particular, and rationalization of the tax code. The goal, he says, is reducing and eventually eliminating the annual budget deficit and making it possible to start paying down the accumulated debt as happened during the final years of the Clinton Administration. But such a solution is also the most politically fraught, because voters don’t like their taxes going up and they don’t like their government services or entitlements taken away.

Other speakers scheduled to appear at the conference include Steve Schwarcz, professor of law at Duke University and a pioneer in the field of asset securitization; and Charles Himmelberg, head of Global Credit Strategy at Goldman Sachs.

Individuals with disabilities are encouraged to attend all UI-sponsored events. If you are a person with a disability who requires a reasonable accommodation in order to participate in this program, please contact Janey Piersall in advance at 319-335-9158 or janey-piersall@uiowa.edu.


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