The Bernanke Fed: Anti-saver and anti-growth

Every year in late sum­mer an annual event takes place in Jack­son Hole, Wyo., when the crème de la crème of the eco­nom­ics pro­fes­sion come together and dis­cuss the state of the econ­omy. Oddly enough, my invi­ta­tion has once again been lost in the mail. But — per­haps this is sim­ply a ratio­nal­iza­tion — I find I don’t care because this gath­er­ing reminds me of the scene in the “Wiz­ard of Oz” when the wiz­ard, just before the take­off of his hot air bal­loon, indi­cates that he is going to set sail and hob-nob with his fel­low wiz­ards. That’s what this sym­po­sium rep­re­sents to me; a bunch of eco­nomic wiz­ards hob-nobbing about some­thing that is broken.

What is “bro­ken?” Obvi­ously that is the U.S. econ­omy, with few new jobs and eco­nomic growth lag­ging through­out 2012.

In this ana­lyt­i­cal the­atre, who plays the role of the head wiz­ard? That would be Fed­eral Reserve Chair­man Ben Bernanke, who will once again attempt to cap­ti­vate his audi­ence of fel­low wiz­ards with his lat­est pro­nounce­ments as to the likely course of future mon­e­tary pol­icy actions. In recent weeks, chair­man Bernanke has indi­cated the pace of eco­nomic activ­ity is dis­ap­point­ingly slow and labor mar­kets are far from pro­vid­ing full employ­ment. With the Fed charged to pro­vide both price sta­bil­ity and max­i­mum employ­ment, many ana­lysts expect another round of mon­e­tary easing.

Sadly, Amer­i­cans have heard this tale of soon-to-experience-economic-redemption almost with­out inter­rup­tion since the economy’s trou­bles began to unfold in the hous­ing sec­tor back in 2007. Despite the con­stant infu­sion of liq­uid­ity into finan­cial mar­kets, the much dis­cussed “strength­en­ing eco­nomic recov­ery” has largely failed to mate­ri­al­ize, even with record-low inter­est rates across vir­tu­ally the entire spec­trum of loan maturities.

What is the mes­sage the Fed wiz­ard is expected to announce? How about another round of mon­e­tary eas­ing should the pace of eco­nomic growth not pick up over the next few months? That’s right, more liq­uid­ity being dumped into finan­cial mar­kets that are already swim­ming in lend­able funds. And to accom­plish this task, the Fed might extend the cur­rent pro­gram (announced last year) know as “Oper­a­tion Twist” or they might try a blast-from-the-past with a third round of quan­ti­ta­tive eas­ing (known as QE3).

In the first instance, the Fed con­torts its usual buying/selling of Trea­sury secu­ri­ties to sell short-term Trea­suries and use the funds to pur­chase long-term secu­ri­ties. In so doing, the Fed hopes to drive down long-term inter­est rates and increase borrowing/spending. Pre­cious lit­tle luck with this pol­icy thus far, but then what are the down­sides? Can any­one object to super-low long-term inter­est rates? How about savers (often seniors), who wit­ness inter­est income wither on the Fed-manipulated vine? And then there are those buy­ing the long-term Trea­sury secu­ri­ties. Should the Fed even­tu­ally end the pro­gram, long-rates would rise and the value of those secu­ri­ties could tum­ble. The biggest win­ner? The U.S. fed­eral gov­ern­ment, which gets to bor­row at pre­pos­ter­ously low inter­est rates.

Under the other pos­si­ble pro­gram, QE3, the Fed would pur­chase Trea­sury secu­ri­ties or mort­gage backed secu­ri­ties (MBSs) to inject liq­uid­ity into the finan­cial sys­tem. Of the two, the pur­chase of MBSs seems more likely, with the Fed buy­ing exist­ing MBSs from their cur­rent own­ers, many of which may come from the nation’s major banks. In the trans­ac­tion — with full details seem­ingly never released to the pub­lic — the Fed could pay face value for assets the banks are more than happy to dump on a will­ing buyer (the Fed), with the risk of any losses effec­tively passed on to Amer­i­can tax­pay­ers. So, one of the agents of the orig­i­nal mort­gage prob­lem, large com­mer­cial banks, get bailed out yet again by the Fed. And as with past liquidity-inducing attempts, this one may also be a mis­er­able failure.

Even worse, the Fed’s con­tin­u­ing fairy tale that mon­e­tary pol­icy can be used end­lessly to fos­ter eco­nomic growth allows our nation’s fis­cal pol­i­cy­mak­ers to avoid dif­fi­cult tax and spend­ing deci­sions. In effect, the Fed has become an “enabler” of fis­cal pol­icy inac­tion, with the result­ing huge bud­get deficits/debt becom­ing decid­edly anti-growth.

So, what might be an appro­pri­ate announce­ment in Jack­son Hole? How about some­thing along the lines of Pogo’s “we have met the enemy and he is us!” By pro­claim­ing that they can and will do noth­ing more, the Fed could send a pow­er­ful mes­sage to the pres­i­dent and Con­gress: We (the Fed) have run out of mon­e­tary ammu­ni­tion and now it’s your turn.

Some­times, doing noth­ing can truly be something.

Dr. James New­ton serves as chief eco­nomic advi­sor to Com­merce National Bank and is an aux­il­iary fac­ulty mem­ber in eco­nom­ics and sta­tis­tics at OSU-Marion and OSU-Newark. Dr. Newton’s views do not nec­es­sar­ily reflect those of Com­merce National Bank or OSU-Marion/Newark.

Posted by Jim Newton on Aug 28 2012. You can follow any responses to this entry through the RSS Feed. Comments can be made below.