The United States is only delaying its day of reckoning by relying on the Federal Reserve to support its economy and passing short-term budget deals, said Axel Weber, chairman of UBS.
The Fed’s quantitative easing program may have been the right move from 2007 to 2010 following the financial crisis, said Weber, a former president of Germany’s Bundesbank, at the World Economic Forum in Davos, Switzerland, CNNMoney reported.
However, it helped create the impression that central banks are “the only game in town,” he said. “Central banks can only do certain things. Deeper issues are still there.”
Video: Economist Predicts 'Unthinkable' for 2013
The House of Representatives is expected vote next week to raise the debt limit for three months.
“This is just buying time,” Weber said, according to CNNMoney. “We are now living at the expense of future generations. That’s not a long-term sustainable solution.”
The Fed’s has accumulated $2 trillion in Treasuries and mortgage bonds since 2008. Critics have long warned that the bond-buying program could lead to a dangerously bloated Fed balance sheet.
“There is a debate within the [Federal Open Market Committee] on the Fed’s balance sheet,” Quincy Krosby, investment strategist at Prudential Financial, told Fortune. “And it’s not just a debate of the hawks versus the doves, it’s very much a debate on how much can the Fed take on, and what kind of dislocation will there be when the Fed begins to exit.”
The Fed sends interest payments on its bonds to the federal government. The sum was a record $88.9 billion last year.
If interest rates rise significantly, the Fed might have to reduce or eliminate those remittances. “I worry that if we were to get in that situation then we might have more efforts to politically interfere with our independence,” said Dallas Federal Reserve President Richard Fisher, according to Fortune.
The Congressional Budget Office has warned that the government may become dependent on remittances from the Fed.
Video: Economist Predicts 'Unthinkable' for 2013
© 2013 Moneynews. All rights reserved.