Just as he did back when Wall Street was crumbling and the country was sliding into the "great recession," the Chairman of the Federal Reserve, Ben Bernanke once again is riding to the rescue with "QE-2," our latest euphemism for "bail out."
Speaking to economists in
As you probably know by now, QE-2 does not refer to the ocean liner, but rather the insidious term "quantitative easing." The two at the end means this is the second time the treasury has attempted to stimulate, rejuvenate or "quantitatively ease" our lagging economy.
Here's how it's supposed to work: The Fed buys billions of dollars worth of treasury bonds which in turn supposedly would lower long-term interest rates and that would hopefully stimulate consumer spending, corporate buying and eventually help lower unemployment.
It will also increase inflation, which Bernanke thinks is too low to begin with. Inflation is capitalism's double-edged sword. For an economy to grow, inflation needs to grow with it. The key is to keep it line with the growth, otherwise is reaches a tipping point and begins to strangle whatever growth is left.
Tepid response
So far, the reaction to Bernanke's announcement has been rather tepid.
Stocks began to rise but then fell back and the idea of more dollars being pumped into the financial system caused the value of the dollar to slide even further against other currencies. The dollar is near a 15-year low against the yen and is approaching its 2010 low against the euro.
In his address, Bernanke said the continued high unemployment was due to the sharp contraction in business activity that occurred in the wake of the financial crisis and a lack of customer demand since then.
His idea then is to drive interest rates down from already low levels in an effort to spark borrowing and spending by companies and consumers.
So, in a sense, Bernanke is enabling our addiction to spending and borrowing to pay for things so companies make more money and eventually be able to hire more employees. That's an honorable goal to be sure, but will it work?
Wouldn't it make more sense to first create the jobs so people could go back to work and earn the money that they could then spend? Didn't we try this before and it didn't work. Consumers instead used the money to pay down their debt or put it into emergency funds in case they lost their jobs.
This is like a cat chasing its own tail. Consumers have yet to regain their lost spending power due to the weak job market and falling home values. Businesses are reluctant to hire and expand when they don't perceive strong demand.
Then, as critics will point out, there's no guarantee interest rates will go down once the Fed pumps the money in. Some say rates could even go higher. But assuming rates fall, then what?
Mortgage rates may decline further, which will allow more homeowners to refinance their mortgages. But many can't even do that because their homes are worth less than they owe. And if they do refinance, the current trend is to move to a lower fixed payment. Those days where homeowners did cash out re-financings and used home equity to give them more spending money are over.
As for companies getting cheaper access to capital, they could use lower rates to refinance their debt, pay dividends, and give out bonuses. But create jobs? In theory maybe, but that hasn't been the case lately. So if the goal is to push consumers to spend more without taking on more debt, or to give small businesses the confidence to hire, spending $500 billion on government bonds may not be the most effective way to do it.
Some critics suggest that instead of trying to lower interest rates, Bernanke should urge the congress and the White House to do their part to pump cash into the economy with lower taxes, infrastructure spending, and the creation of jobs.
In his book, What Americans Really Want, pollster extrordinaire Frank Luntz said after surveying thousands the one thing Americans want more than anything is the ability to work and to earn a living, not lowering interest rates, not more stimulus money, not higher inflation, jobs. Is it really that hard to comprehend?
