I posted this t-shirt about Bernanke’s easy-money approach a couple of days ago, but I should have waited ’til today since it would be a perfect accompaniment to any analysis of the Fed Chairman’s unveiling of QE3.
But given the potential economic consequences, I suppose this isn’t a time for jokes. Let’s look at some of what the Wall Street Journal wrote this morning.
This is the Fed’s third round of quantitative easing (QE3) since the 2008 panic, and the difference this time is that Ben is unbounded. The Fed said it will keep interest rates at near-zero “at least through mid-2015,” which is six months longer than its previous vow. The bigger news is that the Fed announced another round of asset purchases—only this time as far as the eye can see. The Fed will start buying $40 billion of additional mortgage assets a month, with a goal of further reducing long-term interest rates. But if “the labor market does not improve substantially,” as the central bankers put it, the Fed will plunge ahead and buy more assets. And if that doesn’t work, it will buy still more. And if. . .
The “And if…” is the key passage. For all intents and purposes, Bernanke has said that the Fed is going to relentlessly focus on the variable it can’t control (employment) at the risk of causing bad news for the variable it can control (inflation).
Since that hasn’t worked in the past, it presumably won’t work in the future. The WSJ notes that recent Fed easings have made the economy worse.
Will it work? Mr. Bernanke recently offered a scholarly defense of his extraordinary policy actions since 2008, and there’s no doubt that QE1 was necessary in the heat of the panic. We supported it at the time. The returns on QE2 in 2010-2011 and the Fed’s other actions look far sketchier, even counterproductive. QE2 succeeded in lifting stocks for a time, but it also lifted other asset prices, notably commodities and oil. The Fed’s QE2 goal was to conjure what economists call “wealth effects,” or a greater propensity to spend and invest as consumers and businesses see the value of their stock holdings rise. But the simultaneous increase in commodity prices lifted food and energy prices, which raised costs for businesses and made consumers feel poorer. These “income effects” countered Mr. Bernanke’s wealth effects, and the proof is that growth in the real economy decelerated in 2011. It decelerated again this year amid Operation Twist. When does the Fed take some responsibility for policies that fail in their self-professed goal of spurring growth, rather than blaming everyone else while claiming to be the only policy hero?
For those of us who worry about the pernicious impact of inflation, it’s possible that the Fed will soak up all this excess liquidity at the right time. But don’t hold your breath. The WSJ continues.
The deeper into exotic monetary easing the Fed goes, the harder it will also be to unwind in a timely fashion. Mr. Bernanke says not to worry, he has the tools and the will to pull the trigger before inflation builds. That’s what central bankers always say. But good luck picking the right moment, which may be before prices are seen to be rising but also before the expansion has begun to lift middle-class incomes. That’s one more Bernanke Cliff the economy will eventually face—maybe after Ben has left the Eccles Building.
Last but not least, the WSJ is not terribly happy about the Fed seeking to influence the election.
Given the proximity to the Presidential election, the Fed move can’t be divorced from its political implications. Mr. Bernanke forswore any partisan motives on Thursday, and we’ll give him the benefit of the personal doubt. But by goosing stock prices, and thus lifting the short-term economic mood, the Fed has surely provided President Obama an in-kind re-election contribution.
If we go to the other side of the Atlantic, Allister Heath of City A.M. has some very wise thoughts about QE3.
In the long run, real sustainable growth comes from entrepreneurs inventing better ways of conducting business, from investment in productivity enhancing capex financed from savings, and from more people finding viable jobs. Eventually, the short-term becomes the long-term – and that is where we are today. Cheap money is just a temporary fix – and like all drugs, the economy needs more and more of it merely to stay still now it is hooked. …manipulating the housing and construction markets is a dangerous game that the Fed should not be playing; it would be better to allow the market to clear freely. In a brilliant new paper for the Federal Reserve Bank of Dallas, William R White, one of the few economists to have predicted the financial crisis, warns of the disastrous unintended consequences of ultra easy money. He explains why there are limits to what central banks can do, that monetary “stimulus” is less effective in bolstering aggregate demand than previously, that it triggers negative feedback mechanisms that weaken both the supply and demand-sides of the economy, threatens the health of financial institutions and the functioning of financial markets, damages the independence of central banks, and encourages imprudent behaviour on the part of governments.
In other words, Allister is worried about the Fed acting as some sort of central planning body, attempting to steer the economy.
Sadly, the Fed has a long track record of doing precisely that, as documented in this lecture by Professor George Selgin. It’s 40 minutes, so not for the faint of heart, but if you watch the video, you’ll have a hard time giving the Fed the benefit of the doubt.
And let’s also remember that bad monetary policy is not the only thing to worry about when considering the Fed’s behavior. It also has started to interfere with the functioning of credit markets, thus distorting the allocation of capital.
Here’s the bottom line. I think, at best, the Fed is pushing on a string. Why will it help to create more liquidity when banks already have more than $1 trillion of excess reserves?
The real problem in our economy is the overall burden of government. The tax system is punitive. Wasteful and excessive government spending is diverting resources from productive use. The regulatory burden continues to expand.
These are the policies that need to be fixed. Sadly, they are less likely to be addressed if politicians think they can paper over the problems by figuratively printing more money.
[…] in order to address that problem and set the stage for future prosperity. Obama, by contrast, wants continued money printing by the Fed in hopes that easy money can cure problems caused by easy […]
[…] in order to address that problem and set the stage for future prosperity. Obama, by contrast, wants continued money printing by the Fed in hopes that easy money can cure problems caused by easy […]
[…] in order to address that problem and set the stage for future prosperity. Obama, by contrast, wants continued money printing by the Fed in hopes that easy money can cure problems caused by easy […]
[…] Federal Reserve. Simply stated, I fear we have a bubble thanks to years and years (and years and years) of easy money and artificially low interest […]
[…] that actually would boost economic performance.Indeed, it’s quite likely that an easy-money policyexacerbates the problems caused by bad fiscal and regulatory […]
[…] that actually would boost economic performance.Indeed, it’s quite likely that an easy-money policyexacerbates the problems caused by bad fiscal and regulatory […]
[…] would boost economic performance. Indeed, it’s quite likely that an easy-money policy exacerbates the problems caused by bad fiscal and regulatory […]
[…] that actually would boost economic performance.Indeed, it’s quite likely that an easy-money policyexacerbates the problems caused by bad fiscal and regulatory […]
[…] would boost economic performance. Indeed, it’s quite likely that an easy-money policy exacerbates the problems caused by bad fiscal and regulatory […]
[…] bottom line is that politicians all over the world are exacerbating bad fiscal and regulatory policy with bad monetary […]
[…] bottom line is that politicians all over the world are exacerbating bad fiscal and regulatory policy with bad monetary […]
[…] in order to address that problem and set the stage for future prosperity. Obama, by contrast, wants continued money printing by the Fed in hopes that easy money can cure problems caused by easy […]
[…] an economy is suffering from bad fiscal policy or bad regulatory policy, why expect that an easy-money policy will be […]
[…] an economy is suffering from bad fiscal policy or bad regulatory policy, why expect that an easy-money policy will be […]
[…] needs more liquidity, but folks shouldn’t labor under the impression that printing more money solves the structural problems caused by too much spending, too high taxes, and too onerous levels of […]
[…] If all this sounds familiar, that may be because the Federal Reserve in the United States could be making the same mistakes as the European Central Bank. I don’t pretend to know when and how the Fed’s easy-money […]
[…] So I’m not sure whether I have any firm recommendations – other than perhaps hoping to convince policy makers that easy money is the not the right way of boosting an economy that is listless because of bad fiscal an…. […]
[…] if that’s true, something bad will happen at some point. If there’s too much liquidity out there, it presumably will show up at some point as either […]
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[…] doesn’t mean we’re at near-term risk of becoming another Argentina or Zimbabwe, but I definitely don’t like the trend. No wonder the Canadian dollar is now stronger than the […]
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Fed’s monetary policy will instantly destruct the U.S. dollar with QE3.
Have a check on Ed Butowsky Statement in Fox Business News.
I am not an economics student so whatever I may say on economy might look sketchy. But I got to say that monetary policies cannot replace the need for structural changes which were induced by malinvestments, tax policies, regulatory burden and other forms of government interventionism.
The central bank is now in bed with the executive. Not to worry though, when it’s all for a good cause, checks and balances should be lifted. And the good cause is re-distribution of prosperity by voting (not that voters really get what they got their pitchforks out for but in part they will still get something) rather than by producing. Alas, After the brief feast, prosperity will vanish as the US no longer provides the most straightforward and rewarding environment to produce. Naive Americans don’t really know what that means. Subconsciously most Americans assume that somehow things will work out and America will stay on top. As you see your companies starting to be overtaken on the international stage, there will be shock — but, of course, there will not be reversal and rolling back of policies that a majority enthusiastically supported for a whole decade. No culture has escaped the rathole you are about to enter. And given the speed at which you are entering it ( precipitous on a historical time frame) there is even less chance that the naturally heavy electoral inertia will be reversed.
The fact that around half of the American electorate supports the Europeanization train of HopNChange, tells me that the other half don’t have much of a clue either to how America got to be the most prosperous nation in the world. Apparently Americans seem to have finally figured out how democracy works and are about to have a cozy party by burning the furniture. Alas, the pace of decline may be so steep that you won’t even get the normal brief pitchfork party that typically characterizes this type of decline.
I wonder if Obama plans on having the US Treasury get into the game to figuratively print even more money than this to cover spending, or if he is planning massive tax increases. He made this incredibly absurd comment in Colorado:
http://www.denverpost.com/nationalpolitics/ci_21529165/obama-takes-campaign-political-battleground-jefferson-county
“We will use the money we are no longer spending on war to pay down our debt”
There is a massive deficit that neither major party had been talking about ending in the foreseeable future. Yet now he is talking about paying down the debt? Its unfortunately doubtful he plans massive spending cuts, so there are only two ether alternatives I see..
Ok, three: it could just be an remarkably audacious lie that everyone should start calling attention to.
There are many objections to these deceptive, ultimately futile, distracting and fundamentally damaging types of macro-economic manipulations. They amount to little more than gimmicks to signal that someone is doing something. Some incomprehensible public hope that a magical shortcut to more consumption with less effort will be found. These manipulations distract from the more fundamental problem and are ultimately outright damaging — because they augment the inherent unpredictability of the world with an additional layer of artificial, politically motivated, unpredictable redistribution of wealth. For example, savers (those successful of whom typically take the longer term view) will remember for a long time this political protracted redistribution from savers to consumers. And that fundamental erosion of trust in meritocracy will be very damaging in the longer term — another pillar in making the once unique American ethos more like the rest of the world – with prosperity being, inevitably, on the same irreversible convergence path.
But the central theme as to why these manipulations are little more than damaging gimmicks is that they concentrate on demand. As if there were ever a time when people did not want (demand) more than they have. It is production (supply) that happens to be a bit more challenging, not demand.
Everyone is willing to consume. Producing what will be consumed at an ever improving value to cost ratio is where the challenge is. And finding the motivation to do so in a unique worldwide competitive way, when at one end your exceptional work will be cropped to insulate others from the consequences of mediocrity, while at the other end, mediocrity is made (albeit temporarily) more comfortable… then, yes, that motivation to outcompete the rest of the world becomes hard to find. That is the root cause of the decline you are experiencing dear Americans, and most of the slowdown you see around you is just a manifestation of this more general and unstoppable process. The process of Hoping that you can maintain six times world prosperity by Changing and becoming like the rest of the world.
The fact that production and not consumption is where the real challenge lays, is a simple concept. But it is certainly a lot more appealing to believe that some smart person in Washington has a way to maintain your American six times world average standard of living on blunted, more comforting, flatter effort-reward curves that resemble those that are prevalent in the rest of the world. Effort-reward curves that are descending from their American heights to worldwide averagedom. Prosperity levels will also, inevitably, converge to the world average. The primary mode in which this smart person in Washington is using his intelligence is deceiving you with gimmicks of hope. Gimmicks he hopes you cannot decipher. If you cannot refrain from seeking a more comforting political solution in central planning and flatter effort reward curves, and if a person offering such delusional hope is the only person you are willing to elect into office, then somehow, from somewhere such a smart person will come forward to be elected — even one who sincerely believes in your delusional dream. You will have then followed the standard appealing script that brought many one other cultures into decline. You will, in short order, lose the privileged six times world average prosperity you earned in the past.
Here’s a couple of potential additions to the t-shirt:
The QE3 Kid: Bernanke childhood photo! (http://bit.ly/RQBn0O)
On the day that Federal Reserve Chairman Ben Bernanke announced QE3, his latest attempt to heal the economy, a rare and never before seen photo of Ben as a child has been uncovered. After seeing this picture it’s obvious that he was practicing to be Chairman even as a young boy!
Video Replay: The Bears explain QE3! (http://bit.ly/QJZn9t)
An animated video that explains in simple terms what QE3 is and why it most likely won’t work. While printing money will keep interest rates near zero neither QE1 or QE2 have made any difference in the creation of jobs or in the stimulation of the economy.
Is it the definition of insanity to think it will work this time? Or is it the definition of politics!
Mike Haltman
The Political Commentator
New York