By Steven K. Beckner

(MNI) - Dallas Federal Reserve Bank President Richard Fisher said the U.S. economy faces "many roadblocks" to full recovery, as well as two "obstacles" to removing those roadblocks.

Those obstacles are the nation's "fiscal predicament" and congressional threats to "politicize" the Fed, said Fisher, who warned that the latter could lead the United States down a road to "ruin."

Fisher did not talk about current monetary policy in remarks prepared for delivery to the Waco, Texas Business League -- instead focusing on future policy. He warned that if Congress takes away the Fed's independence, it will inevitably lead to inflationary policies of the likes of Weimar Germany or Argentina.

Contrary to Fed Chairman Ben Bernanke's recent assertions that past monetary policy had little to do with the financial crisis, Fisher said the Fed had contributed to the crisis by keeping interest rates "too low, too long." But he said that does not justify subordinating policy to more congressional control.

Although the United States has begun "a palpable, if tepid, recovery," Fisher said, "we are not yet out of the woods."

"There are many roadblocks we must overcome to get our economic engine running full steam again," Fisher said. "Businesses must develop sufficient confidence in the future to begin expanding their order books and payrolls. Banks must be willing and able to lend again. Consumers must regain the wherewithal and the confidence to open their pocketbooks."

Not only are there these roadblocks, but there are "two obstacles ... that are threatening the removal of these roadblocks," Fisher said. "The first is widespread concern about our nation's fiscal predicament. The second is the risk that Congress will seek to politicize the Federal Reserve."

Pointing to last year's $1.4 trillion federal budget deficit and to the projected 8.2% increase in discretionary spending for fiscal 2010, Fisher warned, "an economy cannot sustain long-term growth under the weight of significant fiscal burdens. At some point, what is considered a temporary economic prosthesis becomes a hindrance to the workings of the private sector."

Fisher said "fiscal profligacy today hinders our ability to address fiscal challenges tomorrow." Rather than deal with those challenges, he said Congress and the White House have chosen the "most agreeable but unsound path of kicking the fiscal can down the road."

As bad as the fiscal situation is, Fisher said there is "one thing ... that would make this predicament worse, and that is if the Congress decided to turn to the Fed to print its way out of the fiduciary cul de sac it has driven itself into."

"We know from history that when fiscal authorities turn to the monetary authority to monetize their debts, the result is inevitably inflation and financial ruin," he added.

Fisher vigorously attacked proposed legislation that he said "would result in putting the Federal Reserve under direct command of the fiscal authorities." He cited legislation that, if enacted, would subject monetary policy to audit by the General Accountability Office and make Federal Reserve Bank presidents subject to Presidential appointment and Senate confirmation.

He said "making the discussions held by me and my colleagues at the FOMC subject to congressional second-guessing or creating a process where bank presidents and their politically independent boards have to worry about satisfying Washington powers rather than representing their districts' views -- thus upsetting the delicate balance that prevails at FOMC deliberations -- can only lead us straight to the fate that was suffered by once great economies like pre-Weimar Germany and pre-Peron Argentina."

Quoting Argentine central bank governor Martin Redrado's lamenting that the Argentine system is "unstable," Fisher said, "I would hate to see some future Federal Reserve chairman utter those very same words about the United States of America."

"A great and powerful economy cannot create the conditions for sustainable noninflationary growth if its central bank is governed by a politicized monetary authority," he said.

In contrast to Bernanke, who made a lengthy apologia for the Fed's handling of monetary policy earlier in the decade on Jan. 3, Fisher said, "I do not believe the Fed to be blameless in the run-up to our current crisis. For quite some time I've said that I felt the Fed held interest rates too low for too long in the early half of the 2000s, thus fueling reckless speculation in housing and other sectors."

"And I have freely admitted that a host of regulators, including those at the Federal Reserve, were caught unawares by the risk being taken by large financial institutions that later came a cropper," he added.

However, "this does not mean that those who dwell in the political realm should try to 'fix' the problem by throwing themselves into the monetary mix," Fisher went on. "We should not now politicize an institution that, in the turbulence of this period, pulled our economy back from the brink of the abyss and has taken significant steps to repair the holes in its regulatory and supervisory apparatus ... .

"I want to be on record here tonight in reminding these good people that if the Congress is not careful and ends up where it is going in tampering with the independence of the Federal Reserve, it will indeed lead us down the path to the politicization of the central bank of the world.s greatest economy, putting the United States on a road that leads directly to economic ruin."

** Market News International **