The U.S failed to take advantage of three great opportunities during a period of "unprecedented liquidity and low interest," by not reforming Social Security and Medicare, not passing strong regulatory reforms, and by not restructuring government debt, Federal Reserve Bank of Dallas President Richard Fisher said Wednesday.
Entitlement programs, including Social Security and Medicare, need to be balanced to "prevent future liabilities from spiraling out of control," Fisher told the Association of Mexican Banks, according to prepared text released by the Fed.
He added, the U.S. failed "to pass regulatory reforms to lessen the risk of future financial-market crises and ensure too-big-to-fail entities never again place the U.S. in a position where taxpayer funds must be used to bail out bad private-sector actors."
Finally, with 58% of government debt maturing in the next four year, the U.S. should have refinanced while short-term rates were historically low. "And though short-term rates are low now, they won't be low forever. When the existing debt matures, rates are sure to be higher and servicing the debt will take a bigger share out of the budget, leaving less to spend on everything else."
Net interest payments on U.S. debt will nearly triple by the end of the decade, he noted.
"I would say that this era of cheap money is one of missed opportunities on all three of these fronts," Fisher said. "To add insult to injury, there are increasing signs quantitative easing has overstayed its welcome: Market distortions and acting on bad incentives are becoming more pervasive."
Fisher repeated that uncertainty, especially regarding taxes and future spending, "have regularly constrained the recovery."
While "the Fed has bought time for fiscal authorities to get their house in order four years later I am not sure we are much closer to that goal." While a budget was passed in December, the first budget in four years, and the projected budget deficit is dropping, in terms of its percentage of GDP, the debt ceiling remains an obstacle.
On a positive note, Fisher said, "Nevertheless, I believe that the FOMC will find practicable ways to normalize the Fed's balance sheet. I believe that practicable ways will be found to avoid inflationary pressures once the velocity of money returns to precrisis levels. I certainly believe that continuing to pare back on the amount of the Fed's large-scale asset purchases is a good start and should be continued at a measured pace that leads to their complete elimination as soon as is practicable."
