Today’s announcement by the Fed that it will continue the “twist” to lower long term interest rates, since it can’t reduce short term interest rates below zero, shows how isolated the Fed is because the Congress can’t or won’t do anything. We still have no fiscal policy, only a monetary policy. Monetary policy can’t do everything. The Republicans complain that the Fed should not have an employment mandate in its duties, but Congress is doing nothing about unemployment.
The Republicans complain that the US looks like Greece in terms of incurring too much debt, and they have a point, but the US also looks like Greece because it has a dysfunctional government, in that our Parliament, Congress, does nothing.
One of the main reasons for a do-nothing Congress has been the introduction of the requirement of a 60% majority to pass any legislation, rather than 51%. I don’t think the founders of the United States anticipated this outcome, although when talking about the Supreme Court, the Republicans always say we should adhere to what the founders were thinking in the 1700s. Until recently, the 60 vote requirement for cloture was only used for very important legislation where there was an actual filibuster. The Democrats are partly to blame for not forcing the Republicans to conduct an actual filibuster speaking for hours like Jimmy Steward in “Mr. Smith Goes to Washington,” not just saying they are conducting a virtual filibuster.
I don’t think the Fed should take actions to prop up the stock market unless there is a crisis. I guess there could be debate about whether we are currently in a crisis, but I don’t think we are. Bernanke could let the Dow drop at least 1,000 points before acting as if there were a crisis. There is a crisis in Europe, but to some extent that is a good thing for US markets. The Fed should work with the IMF and its European counterparts to assure liquidity, minimize bank failures, etc., but that doesn’t necessarily include propping up the stock market.