Moneynews - Mishkin: U.S. Is a Spending Train Wreck

Moneynews - Mishkin: U.S. Is a Spending Train Wreck

Former Federal Reserve Board governor Frederic Mishkin said the government’s loose fiscal policy could turn into a disaster.



The recent rise in bond yields is a case of good news and bad news, he told CNBC.

“The good news … is that the economy has been improving,” said Mishkin, a Columbia University economist.

“(Monday) we saw a decline in the stock market, and long-term bond yields went down. This is exactly what you would expect to happen in terms of a stronger economy means higher interest rates," Mishkin said.

"But there's a very bad news aspect to higher interest rates,” he said of the deteriorating fiscal picture.

“There really is an issue that we’re talking about our debt doubling over the next 10 years. There are issues over entitlements,” Mishkin said.

"We're really worried about a fiscal train wreck, and we know that if fiscal policy becomes unsustainable, no central bank in the world can keep inflation under control."

That’s an unlikely scenario, the economist said.

“But unless we see the federal government get serious, Congress and the Obama administration, thinking about long-run fiscal sustainability, that creates a real problem for the Fed.”

What’s that problem? “It weakens the credibility of the Fed to control inflation,” he said.

Mishkin isn’t alone in worrying about fiscal policy.

“These policies are very detrimental to the long-term economic health of the country, even though they may provide a short-term stimulus to growth,” financial author Stephen Moore told Moneynews.