Everybody knew it was coming. With the economy continuing to
founder, it was only a matter of time before Ben Bernanke and the
Federal Reserve decided to turn once again — like the proverbial pig to
its wallow — to printing money in a vain attempt to jolt the moribund
American economy back to life. As with the first two such feckless
efforts, they’re dressing this one in fancy verbiage — “quantitative
easing” — that fools no one. This third round of quantitative easing —
QE3 for short — announced on September 13, is just the digital
equivalent of printing still more money, money that banks and other
financials will either hoard in vaults or pour into equities, driving up
stock prices but doing little to enliven the economy as a whole.
In point of fact, this latest Fed “stimulus” will end up doing more
harm than good, prolonging and exacerbating an epochal downturn that
refuses to go away — because America’s financial policymakers refuse to
let the Great Correction run its course. The latest Fed initiative will
involve the monthly purchase of up to $40 billion in mortgage-backed
securities by the Federal Reserve, which it will pay for by expanding
the money supply. The Keynesian logic (if such it can be styled) of this
move is that the Fed purchases will keep mortgage rates low and
encourage skittish American homebuyers to jump back into the market.
More home purchases will get money circulating again, encouraging people
to go out and shop and start running up their credit cards like they
did in the go-go days prior to 2008.
The reality, as only a central banker, buffered from real-world
business by a comforting cocoon of academic abstractions, could fail to
grasp, is that most Americans are too busy struggling to find or keep
employment, pay down debts, and avoid foreclosure to give any thought to
taking out a mortgage on a new McMansion. Meanwhile, banks and big
business, the primary beneficiaries of the Fed’s latest credit-buying
binge, are too worried about dark clouds on the near-term economic
horizon — continuing fiscal chaos in Europe and the impending “fiscal
cliff” chief among them — to loan out or otherwise invest the new money
productively.
What is likely to result from QE3 is rising prices coupled with
stubbornly stagnant unemployment figures. With gasoline again at record
highs and grocery costs soaring, inflation is starting take a serious
bite at the checkout counter. As Peter Boockvar, equity strategist at
Miller Tabak, told CNN Money recently, “I would love for Ben Bernanke to walk into a
Wal-Mart and tell a person living paycheck to paycheck that high
inflation will be good for them.”
And Boockvar is far from alone among investment professionals and
economists in voicing concern over the latest round of quantitative
easing. An August survey by CNN Money showed that a whopping 93 percent of investment strategists were opposed to
QE3, and 77 percent of economists agreed with them. And as Martin
Feldstein, Harvard economist and former chairman of the Council of
Economic Advisors under Ronald Reagan, has pointed out,
what will happen when the Fed has to begin raising interest rates once
again, as it must? How will the economy fare when borrowing once again
begins to cost serious money? This will be a particular concern for the
granddaddy of all debtors, the U.S. government.
In fine, the Fed is caught in a snare of its own devising, unable to
resist micromanaging the money supply, and unable to exert any influence
save for the worse. If interest rates are kept at essentially zero,
stagflation will continue apace; if they are raised, already
hard-pressed debtors, including, perhaps, the government itself, may be
forced to abandon any lingering semblance of fiscal responsibility.