The Federal Reserve recently launched open-ended quantitative easing (QE3), injecting large amounts of money into the financial markets for the third time since 2008. “Quantitative easing” is government speak for printing money.
The plan is to buy $40 billion in mortgage-backed securities every month, for as long as it takes, until the economic recovery strengthens and the job market is back on its feet. It amounts to another high risk, low-reward gamble with our economic future, and transferring wealth from the least privileged to the most.
With a slow jobs recovery and anemic economic growth, perhaps QE3 is evidence that previous efforts have failed.
The Fed also laid out its plan to maintain near-zero interest rates until the middle of2015.
The Fed is supposed to use monetary policy to ensure both maximum employment and price stability. It is currently focusing more on jobs than the inflation critics say quantitative easing will create down the line.
To the Fed’s way of thinking, inflation is under control. The so-called core inflation measures have been within the 2 percent annual rate that the Fed considers acceptable. Of course, that’s because the number excludes volatile energy and food prices.
Federal Reserve Chairman Ben Bernanke calls this “a Main Street policy” that will boost the economy and help the labor market improve significantly. The conceit here is that expanding the money supply will somehow jump-start investment, production and consumption.
It’s hard to see how these policies will protect the average American worker from structural problems such as competition with low-wage countries, technological advances and the relentless corporate drive to cut costs.
What an acceptable unemployment rate is remains an unanswered question in the context of price stability. The headline rate has dropped to 7.8 percent, but that’s because since June, half a million Americans have stopped looking for work. And what happens when the Fed starts to sell all the bonds it has bought when the economy finally recovers and interest rates are rising? Does this abort the recovery by further driving up interest rates?
Monetary policy produces winners and losers. Low interest rates are good for borrowers, like the federal government itself, which has saved trillions of dollars in interest payments in the four years since the Fed started aggressively expanding its balance sheet. But declines in the middle class’ real income have been especially severe during that time.
Printing money floods the market with dollars, which reduces their value and means that commodities such as oil and food end up costing more. These increases are most harmful to those with the lowest incomes. All of this increases income inequality, leading to weak aggregate demand and more unemployment.
Low interest rates are bad for people on fixed incomes who are trying to live off their savings. If you are a saver, you should be unhappy because interest on your savings and pension accounts won’t keep up with inflation, forcing you into high-risk assets such as the stock market to try to keep up.
Driving up stock prices independent of weak corporate earnings would surely put a smile on Bernanke’s face. Jobs are not created out of thin air; corporations need to increase sales to grow their earnings. Sadly demand is not there.
Einstein, who for some strange reason is more widely quoted than read, said, “We can’t solve today’s problems by the same type of thinking we used when we created them.” The Fed told us in 2007 that the sub-prime mortgage debacle posed no danger of an economic crisis; the folks who helped create the economic crisis are not the ones to get us out of it.
originally published: November 13, 2012