What role does the Federal Reserve have to play in the current US debt crisis? This is a simple question with a simple answer…if the US Treasury cannot pay bondholders then the Fed must pick up the tab!
Forget about Central Bank independence. The Fed reports into Congress via the US Treasury so they are part of the US Government’s financing arm. If Congress neither cuts spending nor raises taxes then printing money to pay bondholders is the next option.
So why has Chairman Bernanke been so silent? Sure, he doesn’t want to give the warring political parties an easy excuse to delay a settlement. However, he has an obligation to the financial markets to ensure stability by reassuring them that the Fed’s monetary powers will be invoked to pay the US Government’s obligations.
Either Bernanke has judged that there will be a political settlement at the 11th hour, or he has adopted an ivory towered stance. Let’s hope its not the latter.