Bernanke on 60 Minutes: Doesn’t rule out QE3… But why we should.


The following is from CNNMoney.com…

Bernanke on 60 Minutes: Doesn’t rule out QE3

Federal Reserve Chairman Ben Bernanke this Sunday will make his second appearance on 60 Minutes, defending the central bank’s controversial $600 billion bond buying program.

And he doesn’t rule out the possibility that more could be on the way.

He explains why the Fed announced its intention to buy $600 billion in Treasury securities, defending against charges the move will lead to inflation and not ruling out the purchase of more,” CBS said Friday.

The Fed’s latest move would mark the central bank’s second round of quantitative easing since the financial crisis in the fall of 2008. Nicknamed QE2, it is meant to stimulate the economy by keeping interest rates low and encouraging consumers to spend more and businesses to create jobs.

The plan has drawn a major backlash from both conservatives and global leaders. Critics argue the policy of low interest rates will artificially devalue the dollar, and feed long-term inflation and asset bubbles.

Bernanke last appeared on 60 Minutes in March 2009 to defend the government’s actions during the financial crisis, including its decision to let Wall Street firm Lehman Brothers fail while at the same time stepping in to save insurance giant American International Group.

The broadcast is expected to appear on CBS at 7 p.m. ET this Sunday.

Investors have been mulling over the prospects for QE2 since August, when Bernanke said at the Fed’s annual retreat in Jackson Hole, Wyo., that the central bank would consider all manner of tools to support the economy.

But many observers believe much more than $600 billion will be needed. Economists at Goldman Sachs said this fall they believe that to truly fill the private sector demand shortfall, the Fed would need to buy some $4 trillion in securities.

Goldman acknowledged that the political unpopularity of QE2 would make an asset-purchase program of that size unlikely. At the time, economist Jan Hatzius said he believed it was likely the Fed would purchase half that much, or about $2 trillion worth.

But since then the backlash against QE2 has only intensified and U.S. economic data have turned slightly more positive, so Goldman has recently backed away from even that forecast. Hatzius said this week that signs of a more robust U.S. recovery could limit Fed purchases to $1 trillion.

Have you had enough yet? I have. Apparently the first attempt at crushing the dollar didn’t work well enough with QE2, so we have to try again. With $600 billion the first time, The Fed managed to get rid of dollar cling-ons like China and Russia. I wonder how many other countries will fall off if they print another $1 Trillion… or how many run from us after $4 Trillion is printed. In an upcoming interview on 60 Minutes, Federal Reserve Chairman Ben Bernanke will be discussing the ineffectiveness of the last round of quantitative easing that we went through. 

Although Bernanke might like to incorporate this action into the first $600 Billion issued during QE2, he had enough faith in that amount to consider it a good number. However, even that is getting a little extra help from leftover TARP funds. There was approximately $250 Billion left from TARP that will be rolled into the QE2 to make it a more effective amount while that little detail doesn’t get advertised either. That alone nears the $1 Trillion mark. With no clear answer as to how far the next amount will go, and based on the effects so far, how much will be enough to achieve the intended stabilization?

The intention of the quantitative easing policy is to put more money back into the system by buying up Treasury securities that are held by banks, major corporations, investment firms, pensions, and other Wall Street types. The money is then thought to be freely exchanged from these big businesses to the smaller businesses and regular people through loans at improved interest rates. The inherent problem here is that the money that is supposed to be freely moving about the country isn’t free, it comes at the price of whatever interest rates the banks are willing to let it go. It’s effects are already seen, as the dollar had fallen in value by 15% in just the first 2 months after QE2 was announced.

Our problem has less to do with credit and more to do with thrift. Thrift is what generates a free market system. The money for thrift shouldn’t come at the price of interest especially when the economy is so far drawn down like it is today. With a recession like we are still in, the smart thing to do is to encourage sound business growth. Frankly, it was a form of monetary easing policy that got the whole subprime lending practice going in the first place. The race to sell homes came after money was released at great rates from The Fed. The key to economic recovery will come from the people spending money because the products are cheaper, the quality is better, the jobs are located in America, and the encumbrances on small business growth are removed.

Quantitative Easing is a manipulation of the economy by the government. It is no different than TARP under Bush, or any of the other stimulus plans that have been pushed through by the Obama administration and is just another of the proven failed tactics of Keynesian economics. These are the same measures that were used during the Bush administration, especially in the later stages of his second term and are the aspects of his presidency that so many Democrats want to point to when they talk about failed fiscal programs from Bush. (That is if you can get them to stop talking about “the two unfunded and failed wars that we are still involved in” garbage that they spout.)

The Great Depression was brought on by a confluence of emerging factors including global economic crisis and monetary mistakes made by The Federal Reserve(then only in it’s infancy stage since being created in 1913). That kind of sounds a lot like the current state of economics in play today. Back then, The Fed felt the right play was to tighten up the money supply but that didn’t fit the situation just as loaning money out today doesn’t fit the economic climate today either. It’s the same type of mistake only in reverse. There is money in the hands of businesses and the wealthier people but they’re sitting on it because no one knows what the government has in mind with tax rates. Why would we expect them to let the money flow if they don’t know how much they’ll have in less than a month.

Just today, the unemployment numbers came out and there was yet another jump in the wrong direction. We went from 9.6% unemployed to 9.8% unemployed while the stock market seems to improve. Hmmm… are fat cat Wall Street types getting rich while the little guy gets poorer? Perhaps, but much of the market improvement comes on the fact that with a Republican-controlled House, players in the market finally have the first light of certainty. Prior to the election, the business climate appeared fearful because of looming policies, questions over tax rates, and the possibilities of either hyper-inflation or complete collapse the dollar. Those fears of uncertainty are alleviated by the pending gridlock of Congress in the next term. It is a sad turn of events for our economy when Congressional gridlock is what actually spurs a market change. It is for this reason alone, we should not consider an expansion on QE2. Let the markets rebound from spending confidence and the economy will start like a cold engine… slowly at first but it will warm up and rev strongly again.

A return to Reaganomics is in demand here… (from wikipedia)

The four pillars of Reagan’s economic policy were to:

  1. Reduce government spending,
  2. Reduce income and capital gains marginal tax rates,
  3. Reduce government regulation,
  4. Control the money supply to reduce inflation.

In his stated intention to increase defense spending while lowering taxes, Reagan’s approach was a departure from his immediate predecessors. Reagan enacted lower marginal tax rates in conjunction with simplified income tax codes and continued deregulation.

Some highlights of the effects of the Reagan economic policies from a study conducted by the Cato Institute:

 

 

Economic Growth
. The average annual growth rate of real gross domestic product (GDP) from 1981 to 1989  was 3.2 percent per year, compared with 2.8 percent from 1974 to 1981 and 2.1 percent from 1989 to 1995. The 3.2 percent growth rate for the Reagan years includes the recession of the early 1980s, which was a side effect of reversing Carter’s high-inflation policies, and the seven expansion years, 1983-89. During the economic expansion alone, the economy grew by a robust annual rate of 3.8 percent. By the end of the Reagan years, the American economy was almost one-third larger than it was when they began.

Employment
 . From 1981 through 1989 the U.S. economy produced 17 million new jobs, or roughly 2 million new jobs each year.

Unemployment Rate
 . When Reagan took office in 1981, the unemployment rate was 7.6 percent. In the recession of 1981-82, that rate peaked at 9.7 percent, but it fell continuously for the next seven years. When Reagan left office, the unemployment rate was 5.5 percent. This reduction in joblessness was a clear triumph of the Reagan program.

Inflation
 . The central economic evil that Ronald Reagan inherited in 1981 from Jimmy Carter was three years of double-digit inflation. In 1980 the consumer price index (CPI) rose to 13.5 percent. By Reagan’s second year in office, the inflation rate fell by more than half to 6.2 percent. In 1988, Reagan’s last year in office, the CPI had fallen to 4.1 percent.

Median Household Incomes
 . Real median household income rose by $4,000 in the Reagan years.

 

It’s time to reduce the role of The Federal Reserve in economic stability and monetary policy. And it is definitely time to return to a system like Reaganomics combined with a strong leader like Ronald Reagan. We need a leader who will say, “Stay the course.” while having the improvements to back it up. Chris Christie comes to mind.

While we can almost certainly expect to see growth on Wall Street, we need to expect absolute stagnation in Congress for the coming year. It won’t be until these Keynesian policies find their sunset or Obama is finally removed from office(by election or impeachment), that we will experience a truly healthy free market-driven economy. In the meantime, there will be hurdles to keep productivity from returning and the resurgence of American business growth the way that it has before.

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This entry was posted in Conservatism, Current Issues, Economy, Ethics, Government, President Obama, Ronald Reagan and tagged , , , , . Bookmark the permalink.

2 Responses to Bernanke on 60 Minutes: Doesn’t rule out QE3… But why we should.

  1. Lynde Dodge says:

    Scary stuff Eric! Excellent read as always!

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