So the powers that be on the Federal Reserve Board have decided to engage in round two of their little quantitative easing experiment, basically agreeing to purchase $600 billion in government debt over the next 8 months in order to keep interest rates artificially low and hopefully juice the economy in the process.
That $75 billion a month isn't that much in the grand scheme of things, and the markets are certainly acting as if all is copacetic, but I still find the hubris of the Fed incredibly alarming - though not incredibly surprising.
Fed Chairman Ben Bernanke of course considers himself an astute historian of The Great Depression, and he remains firmly and forever convinced that the primary cause of that debacle - or at least of its depth and duration - was the Deflation Boogeyman. He is determined to avoid repeating that experience at any and all costs.
(Is there anything scarier than a historian/academician who is so convinced in the righteousness of his beliefs and cause?)
Unfortunately, the costs this time may end up being a permanent debasement of our currency and an economy so out of whack it will take generations to recover. Meanwhile, people like me who have put way too much of their nest eggs into dollar-based savings accounts just get screwed.
I don't want to get into a debate about the necessity of the Fed as an entity at all (does the idea of eleven men and women setting market prices really sound wise?), or the silliness of their wildly conflicting dual mandate (low, stable inflation and high employment) that they are charged to work under, but this latest move is pure madness.
Bernanke says that the Fed's first round of quantitative easing a couple of years ago did its job - helping stabilize a free-falling economy while keeping inflation at low levels. Never mind that QE1 led to one of the weakest post-recession recoveries in history. Never mind that many measures of incipient inflation have been soaring (price of TIPS bonds, sugar, oil, gold, corn, etc. etc. anyone??). Never mind that many of the assets the Fed purchased were trash mortgage securities not worth the paper they were written on and that the Fed never engaged in shrinking its balance sheet as it planned on doing once the crisis had passed (When all is said and done after QE2, the Fed's balance sheet may equal a mind-boggling 20% of GDP according to some estimates.)
Look, I'm not a trained economist, so I don't know whether the economy has the excess capacity to absorb another round of quantitative easing as Bernanke suggests it does. What I do know is this:
1) The first round of QE did little to stimulate the economy, suggesting that the root of our problems wasn't a lack of too little money sloshing around (the contraction in available credit was a normal and appropriate response to the destructive debt orgy that preceded it)
2) The Fed is quickly running out of bullets to fire to juice the economy
3) Continuous quantitative easing hasn't worked in Japan
4) Other countries will respond to our attempt to debase our currency and it won't be pretty
5) In his quest to defeat the Delfation Boogeyman, Bernanke is ignoring many key signals of incipient inflation (The soaring prices of gold and government bond just cannot continue. One of these markets will prove to be spectacularly wrong).
Bernanke even says in the Washington Post article linked to above that QE2 has already begun to work because interest rates have fallen and the stock market has risen since the Fed signaled its plans to the market. Are you kidding me? Bernanke is so obsessed with stock prices, it actually seems like a rising stock market has become a third part of the Fed's new mandate. But it's no shock that the stock market will perform well in a high inflation environment - anything priced in dollars will go up on a relative basis.
And in yet another stunning display of hubris, Bernanke also says that the Fed is fully prepared to reverse QE2 should conditions warrant. I hope he's right but I have a hard time believing the Fed will have control over the situation if inflation becomes the proverbial snowball rolling down the hill as I suspect might happen. (Try reversing QE when the Chinese government is trying to dump hundreds of billions of dollars of our debt at the same time)
Look, I understand why politicians never get religion when it comes to entitlement reform and deficit reduction. In good times or bad, they are always trolling for votes, and passing out free money is the quickest path to re-election.
But the whole point of the Fed was that the wise and thoughtful men and women who populate this independent entity would know better. The problem is when you put a small group of people - and one man in particular - in such an enormous position of power, they just end up thinking they know better. And God help us all if they don't.
