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Published: Sunday, 11/14/2010

Risky business

THE Federal Reserve Bank's decision to buy $600 billion in Treasury bonds is well-intended but risky.

What happens, in effect, is that the Fed prints $600 billion and lends it to the federal government. The $600 billion increases the supply of dollars in the market and raises the national debt by an equal amount. The debt stands at nearly $14 trillion now.

Next spring, the new Congress will be asked to approve an increase in the authorized level of the national debt. This will, of course, set off a storm of protest from conservatives, especially the new Tea-Party lawmakers, who will be obliged to oppose such a move.

The Fed decided to buy the bonds to boost the economy, which is still sputtering. Banks and other financial institutions have money to lend. But prospective borrowers are lagging, reluctant to jump into business expansion or new enterprises.

Consumers are hesitant to buy because of the high level of unemployment. The continuing mess in the housing market - foreclosures and reports of mishandling of paperwork - also contributes to general nervousness about borrowing.

The Fed already had cut its benchmark interest rate, used for short-term interbank loans, to zero. It can't do much more with rates to stimulate the economy, its normal recourse when borrowing is sluggish. It is unlikely that Congress will agree to another economic stimulus, which might be used to kick the economy into higher gear.

There are hazards to the Federal Reserve's action. One is inflation, which has not troubled the U.S. economy during the recession. Inflation makes it easier to pay bills if incomes rise and keep pace. Otherwise, inflation annihilates Americans on fixed incomes or no incomes - retirees, unemployed workers, or people whose employers do not feel compelled to raise wages to meet rising prices.

Another problem, expressed at last week's Group of 20 meeting in Seoul, is that the rest of the world economy sees the United States in essence doing what it accuses China of doing: keeping its exchange rate artificially low. Pouring $600 billion into the dollar pool weakens the dollar in relation to other currencies.

That, of course, helps U.S. exports by lowering their prices - the same thing U.S. officials say China is doing, and should stop doing.

In judging the wisdom of the Fed's action, Americans will have to see whether the U.S. economy takes heart and speeds the recovery, or simply digests the $600 billion and says: "So?"

Whatever the final outcome, the Fed's latest approach has big risks, immediately and for the long term.

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