Committee for a Responsible Federal Budget

One More in the Announcement Effect Club and A So-Close Member

Nov 29, 2010 | Economics

Pete Davis over at Capital Gains and Games joined the Announcement Effect Club over the weekend and FDIC head Sheila Bair came very close.

In a blog post at CG&G, Davis called for a fiscal plan to put our debt on a sustainable trajectory. But how soon?

I wouldn't wait past next summer, HOWEVER, I would delay the effective dates until 2012 or 2013 to get the market benefit of the anticipation of deficit reduction without endangering our fragile recovery.

Classic Announcement Effect.

Bair shook off the turkey to join the So Close Club with an op-ed in Friday's Washington Post. Her comments are important in a broad perspective, as she emphasizes the role of confidence in economic performance. Her remarks are below.

Establishing a comprehensive plan now would demonstrate a firm commitment to the type of long-term budget discipline that will be needed to preserve our nation's credibility in the global financial markets and a stable banking sector at home.

The quiet confidence of the American public in the FDIC's deposit insurance guarantee was one of the bulwarks that helped to stem the tide in the recent crisis and avert even greater economic calamity. But we must never take public or investor confidence for granted. In the end, that confidence is only as great as the resolve shown by our government in identifying emerging risks and taking concerted action to head them off.

Her comments in the first paragraph are almost Announcement Effect Club material, but she doesn't state that taking action now could help the economy in the short term.

But it's the second paragraph that should really make an impression. Bair makes a great point: yes, we may have the confidence of investors right now, with interest rates very low on federal debt, but that is no reason to test the boundaries of our borrowing capacity when we can instead head off the risk of a fiscal crisis. Just because we may have more breathing room than, say, EU countries doesn't mean we should wait to act.