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.