The Fed steps up
Federal Reserve Board Chairman Ben Bernanke testifies during a hearing before the House Financial Services Committee July 13, 2011 on Capitol Hill in Washington, D.C.
Kai Ryssdal: A reasonable question right about here might be: So, if our political system can't run our economy anymore, who can?
Our Washington bureau chief John Dimsdale has that part of the story.
John Dimsdale: Fed Chairman Ben Bernanke only has two tools left in his belt, but he's been using both a lot lately. He's hammered interest rates down to zero, and ratcheted up the printing presses several times. Some say it's time to crank 'em up again and print more money.
Todd Zywicki: The theory is that what we already owe on the debt would become easier to pay back because each dollar would be worth less.
You heard right. George Mason University professor Todd Zywicki says the Fed may be considering a little inflation. That way, the government could re-pay the expensive dollars it borrowed with cheaper ones. It would help underwater homebuyers, too.
Former White House economic adviser Jared Bernstein says there's something to this idea.
Jared Bernstein: And I would be an advocate of going a small part of the way there -- but not too far. And by the way, the Fed has followed this route by injecting more credit into our financial system, and it's actually helped quite a bit.
But for Prof. Zywicki, any more cheap money from the Fed would be like burning a fire break to contain a forest fire.
Zywicki: What history teaches us is that once you get a little bit of inflation, you get an upward spiral and it starts to accelerate after that. The controlled burn may not work and you may end up with a forest fire.
Runaway inflation would do even more harm to the economy, he says. So despite the Fed's ability to tinker at the edges of the economy's problems, both Zywicki and Bernstein say there's no getting around the tough political decisions on spending and taxes.
Bernstein: Since the Fed is an independent agency, they can engage in monetary policy without Congress and a bunch of Tea Party folks jumping up and down and rending their garments. But fiscal policy -- which I believe would be much more effective right now -- involves Congress and that's a very heavy lift.
So heavy that rating agencies -- and many investors -- question whether we've got the political muscle to pull it off. Should the Fed want to lend a hand, its interest rate-setting committee meets tomorrow.
In Washington, I'm John Dimsdale for Marketplace.