The Federal Reserve showed terrible judgment in printing billions of dollars for cheap money. Among 314 million+ Americans, just a relatively chosen few — big investors — benefited from the Fed’s third edition in quantitative easing (QE).
The Fed has stopped its printing of money, but it’s too late.
There are many reasons why it’s been harmful — ranging from weak job growth to being a disincentive to save. It also hurt senior citizens badly because of the resulting negligible interest rates. Typically, a certificate of deposit interest rate has only been .05 percent on savings accounts of $50,000 or more.
Wise economists say the concept is deplorable. That includes Anthony Randazzo.
“…a fancy term for the Federal Reserve buying securities from predefined financial institutions, such as their investments in federal debt or mortgages – is fundamentally a regressive redistribution program that has been boosting wealth for those already engaged in the financial sector or those who already own homes, but passing little along to the rest of the economy,” says Mr. Randazzo, chief economist at the Reason Foundation.
“It is a primary driver of income inequality formed by crony capitalism,” he astutely points out. “And it is hurting prospects for economic growth down the road by promoting malinvestments in the economy.”
Federal Reserve’s Districts
Indeed, investors have gone bananas over QE3, despite the nation’s formidable problems:
- We’re in another year of a pathetic economy. Economic growth is a fantasy, a misnomer.
- Noted economists like Peter Morici, Ph.D., have been warning the U.S. is headed for a double-dip recession unless President Obama fixes the nation’s economic infrastructure, stops spending, and works with Congress to end the fiscal-cliff threat. (See: Dr. Morici’s economic analyses here.)
- Fewer Americans are working now than in 2000. Twenty-three million Americans are unemployed or under-employed, and if they get work, it’s part-time at smaller wages than they used to earn.
- Thanks to the Obama Administration’s undesirable budget proposals that failed in the House of Representatives and the heavy-handedness of Majority Leader Harry Reid in the Senate, a federal budget wasn’t adopted for more than three years.
- That’s not to absolve Republicans during the Bush Administration. They ran Congress and approved countless pork spending. Mr. Bush didn’t veto any pork until his sixth year as president.
No wonder the public debt keeps increasing. It’s about $19 trillion and counting.
The Fed’s support of banks prompts two questions: Where are the bank loans to business? Where are the bank jobs?
The Fed’s short-term rate – on loans between banks – has been near zero for many years. Bank profits have been huge – $34.5 billion in Q2 2012, according to the FDIC. Their balance sheets became much healthier.
The results: Many small businesses have long complained about the lack of bank loans and lines of credit. Before the Great Recession, banks had 2.2 million employees. But now there are thousands of fewer banking employees. No wonder most big banks are profitable.
Printing money hurts long term
Unfortunately, liberal Janet Yellen was appointed to replace Ben Bernanke as the chair of the Federal Reserve. She’s continued his absurd policies in unprecedented steps in a highly questionable attempt to boost the economy.
All of this means many Americans are mortgaged up to their eyeballs.
The Fed believes printing money out of thin air – issuing Federal Reserve Notes – is good for the nation. In recent years, his QEs have pumped up the stock market as he pushed interest rates lower to encourage spending.
Why Mr. Bernanke had critics
Republican presidential contender Mitt Romney — who has a track record in creating wealth and jobs – was opposed to such economic superficiality. Had he been elected, he said Mr. Bernanke didn’t have his support to be reappointed as Fed chair. (See why 5 Nobel Prize Winning Economists (Among Hundreds) Back Romney’s Economic and Jobs Plan.)
Stock market recovery based on a band-aid approach hasn’t and won’t help the economy. Under-employment and unemployment will remain high and businesses won’t have customers for their products.
“This is a disastrous monetary policy; it’s kamikaze monetary policy”
Ironically, investors are short-sighted in believing in the Fed’s bogus strategies. Creating superficial capital isn’t a solution. But instituting public policy for growth is.
Mr. Bernanke and Ms. Yellen aren’t the only Fed Chairs to come under fire for not understanding the economy or taking steps to help administrations stay in power.
- More than four decades ago, money-creation policies exacerbated inflation. As a young father of two small children, I’ll never forget working at two jobs, in part, to pay for the high price of milk in 1971. That’s when President Nixon imposed wage and price controls. True, the price of milk was frozen, but so was my salary and everyone else’s.
- In 1972, Fed Chair Arthur Burns over-stimulated the economy, which helped Mr. Nixon get re-elected despite the emerging Watergate scandal.
- In the slow 1992 economy, Fed Chair Alan Greenspan’s tight policies helped Bill Clinton to defeat President George H. W. Bush.
- Just four years later in 1996, Mr. Greenspan reversed course – he developed market-friendly policies that insured the re-election of Mr. Clinton.
That’s not to say the Fed has consistently performed poorly or disingenuously in recent decades. The nation had recessions in 1974 and 1975, which coincided with a terrible inflation rate. Remember President Ford’s WIN buttons, “whip inflation now?”
The tepid economy and President Ford’s pardon of Mr. Nixon from Watergate led to Mr. Ford’s 1976 defeat as Jimmy Carter was elected president.
It was President Carter’s foreign policy and economic failures – primarily, the Iran hostage crisis in which 52 Americans were held captive for 444 days and his inability to tame the 13 percent inflation rate – caused him to lose to Ronald Reagan in 1980. Mr. Reagan’s strong reputation, in intimidating Iran, was credited with the release of the hostages, who were finally freed literally just minutes before he moved into the White House.
Fed role model
Meanwhile, arguably in 1979, the new head of the Fed, chair Paul Volcker, had one of the most difficult economies with which to deal. A Democrat, Mr. Volcker, is recognized for solving the stagflation crisis. Stagflation meant the inflation rate was sky-high in double digits, economic growth was stagnant, and the unemployment rate was too high.
His measures – such as increasing the prime rate to 21.5 percent by 1981 – drew widespread anger. But he managed to tame inflation – from 13.5 percent to 3.2 percent. Combined with the economic approach of the Reagan Administration, America’s economic climate was a whole lot healthier.
In view of this history, one has to wonder about the answers to three questions:
- Just like the appearances of Messrs. Burns and Greenspan, why has the Fed taken steps at the expense of America?
- Or, why are the people at the Fed in over their heads?
- Do Americans want continued fiscal-policy and monetary-policy dysfunctions?
It’s too bad. With the right leadership for fiscal and monetary policies, we’d be on the road to robust economic recovery and jobs creation.
From the Coach’s Corner, here’s a related article: Federal Reserve Typifies What’s Wrong with Economy
“This is a disastrous monetary policy; it’s kamikaze monetary policy”
Author Terry Corbell has written innumerable online business-enhancement articles, and is a business-performance consultant and profit professional. Click here to see his management services. For a complimentary chat about your business situation or to schedule him as a speaker, consultant or author, please contact Terry.
Updated July 15, 2010 – 3 p.m.
An influential U.S. senator, Sen. Maria Cantwell (D-WA), worked to regulate the perilous use of derivatives by Wall Street bankers, and criticized the Obama Administration in the process. But her derivative strategy worked. The sweeping financial reform legislation will regulate the risky, intangible instruments.
This means derivative trading now faces regulation, and financial institutions will have to set up a fire wall by moving their derivative departments elsewhere.
“This isn’t about poking the White House, it’s about getting capital flowing to small businesses,” Sen. Cantwell said in an interview with Les Blumenthal, a reporter for McClatchy’s Washington state newspapers.
She helped lead the fight against investment bankers, who were bailed out by taxpayers only to shell out big bonuses and who are at it again. Instead of extending credit to business, Wall Street is back to the old tricks of playing risky derivative games that helped lead to Wall Street’s meltdown and the global-financial disaster.
She’s also had a testy exchange with Treasury Secretary Timothy Geithner over the failed efforts to bail out community banks and the associated credit issues faced by her Washington state constituents and other American businesses and consumers.
“We are trying to keep the focus on what needs to be done to get credit flowing and avoid another bubble,” Sen. Cantwell also said. “Do I wish the White House team was more attuned to these issues? Yes.”
Yes is right. It’s commendable that she’s become outspoken about regulating Wall Street’s behavior.
If she’s successful, we’ll see job creation – the only way out of this mess. I’ve been harping about this and asking for answers to questions for an extended period of time starting with this column, “Is it Time to Police Pay at Wall Street Banks?”
And she was right about voting against the reappointment of Fed Chair Ben Bernanke. Few in Congress seem to understand Main Street issues and his tardy, tepid handling of the Great Recession at the Fed.
Sen. Cantwell partnered with Sen. John McCain (R-AZ), the former GOP presidential candidate, to bring back the commercial/investment banking firewall. This will prevent risk-taking by commercial banks that exacerbated two downturns in the 1930s and the most-recent financial chaos. The two worked together on the Senate Commerce Committee.
Cash flow and credit are critical for operating a business. With too-few funds available in loans, businesses have been failing or, at least, suffering from bad credit as a result of not having access to capital.
Efforts by the Obama Administration and Small Business Administration to provide more loans are to be commended. However, they are way too-little and too late. Most afflicted small businesses now have poor credit because of the cash cutoffs and they won’t qualify for any the funding.
Credit card regulations were too late, too.
Nothing has been done to help repair the credit of the millions of small businesspeople and consumers who were victimized by the credit card companies – domiciled in a handful of states that permit predatory behavior – their rapacious interest rate hikes for bogus reasons and slashed credit lines.
Sen. Cantwell also indicated her disappointment that the Obama Administration twice reneged on promises for action on the proposed firewall between commercial and investment banks.
“Their economic team is not living up to what they said they would,” she explained to Mr. Blumenthal.
Hmm. Broken promises? That’s not what America needs, but we can appreciate Sen. Cantwell’s candor and successful efforts.
From the Coach’s Corner, on another somber note regarding credit: Customers of the hospitality industry are ostensibly the No. 1 target of hackers, here’s the article.