The Bundesbank Is Boss

October 11, 1992

Despite nagging weakness in the U.S. economy, the Federal Reserve was right to resist a further lowering of interest rates last week. Not only did it underscore the political independence of the Fed; it sent a message that this country is waiting for the German Bundesbank to drop its unconscionably high rates so other governments can deal with a recession that threatens to spread worldwide.

So acute is the situation that it is not uncharitable to hope Germany gets a good, hard dose of recession itself to jolt the Frankfurt institution to action. Bundesbank watchers have come the glum conclusion that the plight of other nations concerns its nationalist chairman, Helmut Schlesinger, not at all. He remains so obsessed with the supposed threat of inflation -- it is running at a mere 3.6 percent -- that only a full-scale crisis will induce a stimulative policy in Germany.

Mr. Schlesinger's insistence on a nine percent interest rate, triple the U.S. rate, creates so huge a gap that if the Fed were to act alone in lowering its rates, rather than in tandem with the Bundesbank, it could precipitate a further run on the dollar -- now at record lows against the Japanese yen and near-record lows against the German mark. As painful as the U.S. recession may be, the Fed's first duty is to defend the dollar from a free fall reflecting skyrocketing budget and trade deficits.

The Fed's reluctance to order a further cut in its very low rates must come as a disappointment not only to the financial markets, which have been reeling, but to the Bush administration. Yet earlier Fed reductions did not prevent the recession from going into a triple dip that is devastating to President Bush's re-election chances. There is little to suggest that another quarter- or half-point off the interest rate would turn the economy around.

Twelve years of fiscal profligacy are taking their toll. Neither the Republican president nor the Democratic Congress has many resources to pump-prime the economy. So the burden has been placed on the monetary policy of the Fed, which has never been able to loosen enough to satisfy the White House or Capitol Hill -- the ones chiefly responsible for running up the debt to disaster levels.

Perhaps, after the election, the Fed may ease a little bit if the recession worsens. But it is a sign of U.S. weakness that a far stronger stimulus to this nation's economy would be an interest-rate cut by Germany's central bank rather than the Fed. For American patriots, this may be a sad message. But, alas, it is true -- as the British, the Italians, the Spanish, the Irish and even the French have learned only too well. The Bundesbank is boss.

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