I’m not uying that three negatives make a positive. But, Ben Bernanke thinks so and he is much smarter than I am. From reading his profile at Wikipedia, I learned that Ben was class Valedictorian of his highschool. His highschool didn’t teach calculus, so he taught it to himself. He did his undergraduate studies in economics at Harvard and graduated Cum Laude. He then got his Doctorate in economics at MIT. Me? I managed to get a Masters in Metallurgical Engineering at a state college in Michigan. Game, Set, and Match_ Bernanke!
Despite my disadvantage, those who have visited this site more than once know that this humble observer is not shy about voicing his opinions and today will be no different.
Let me start by giving you my layman’s definition of what QE or Quantitative Easing means. In a nut shell, it is a fancy term for printing money with the goal of juicing the economy. However, in this modern age, they don’t actually turn on the printing presses to produce more green backs. With a few keystrokes on a computer, digital money appears like magic.
A little background is in order. Ben Bernanke and Hank Paulson (Secretary of the Treasury under Bush II) and Tiny Tim Geithner were, up to a few weeks before the sub-prime mortgage bubble burst, telling everyone who would listen that our economy was rock solid and was only going to get better. it was these same gentlemen that when the bubble broke, convinced the President Bush and most of our Congress that the world would come to an end if they didn’t immediately to bailout the Too Big To Fail (TBTF) banks. The result of their sale of panic was TARP and Obama’s stimulus package. So, think of QE as monetary stimulus in the same way Obama’s program was fiscal stimulus. The same thing happened in Europe and other countries for all the same reasons. To my knowledge, the only country that did the smart thing by telling the banks to go to hell, was Iceland and they have recovered very nicely, thank you very much!
While trying to keep up with all that is going on in the political arena and now the events in the middle-East, I have read many articles about Bernanke’s announcement of the Fed’s lattest launch pf QE 3. It should be noted that Bernanke and the Fed also had, and still have, a program going on called Operation Twist. I’ll give a short explication of what the funny money is used for in the QE and Twist programs in a moment. First, here is a short list of some of the articles I’ve read, along with some annotations by me, that you can peruse at your pleasure. You will recognize that some of the sources are from my blogroll.
- Sherman Broder at property…Fredom…Peace worte Obama Is In The Catbird Seat. Sherman sees Bernanke’s action as politically motivated to help Obama win reelection and there by save his own job. There is definitely a political element to Ben’s QE 3.
- John Galt at America¡s Chronicles wrote, Ben Bernanke – Destroying The Independence of The Fed And Our Future Growth. John also sees a political element to QE 3 and points out that the goal to reduce interest rates to kick-start the economy is doomed to fail because interest rate are already near zero. he correctly points out that this may backfire on Bernanke and Obama if inflation takes a jump before the elections.
- Brian at Frankenstein Government wrote, Bernanke Screws the Pooch! Welcome to the Idiocracy. Brian sees us heading for hyperinflation because of Ben’s maddness. There certainly is that risk.
- John Carney at CNBC wrote, Could Fed’s QE Spiral Out Of Control?. Of course, he thinks it will and so do I.
- Robert Frank at CNBC wrote, Does Quantitative Easing mainly Help the Rich? He and I agree that is the case and I will have more to say om that in a moment.
- Catherine Boyle at CNBC wrote, Gold Set for Even Bigger Bernanke Boost. yep! That’s what happens when there is inflation.
- marc Faber, the famous author of Gloom, Doom and Boom, wrote at CNBC, If I Were Bernanke, I would Resign. Farber blames Bernanke’s expansionist monetary policies for the financial crisis we are still in today. he is right!
- Nouriel Roubini, a well know economist, wrote at Project-Syndicate, Fiddling at the Fire. He believes that the markets in Europe and the US are very unstable and is predicting an investment bubble burst in 2013 and it won’t be pretty. Roubini has an excellent track record so he may be right.
- David Harsanyi at Human Events wrote, The Fed Goes Political. Seems there is a lot of agreement on this point.
- George Will at the Washington Post wrote, A different kind of inflation problem. His article relates to an interview he did with the head of the Kansas City Federal Reserve Bank, Esther George, prior to Bernanke’s annoucement. She sees the Fed¡s role as strictly monetary policy; but it is becoming more and more political and the lines between discal policy and monetary policy are becoming blurred. She is right!
Although every author of the articles listed above are much more knowledgeable about economics and monetary policy than I am, I still have something to say even though I agree with these authors on almost everything.
What is it that Bernanke is planning to do with his new digital dollars from QE 3? He announced that he will spend (my number four and dollar sign key is giving me fits again today) forty billion dollars a month to buy mortgaged backed securities and put them as assets on the Fed’s balance sheet. The theory, we are told, is to reduce mortgage interest rates and spark home buying in the US. he is a smart man and he knows he is talking BS. With current interest rates at about 3%, the reason people are not buying isn’t because the interest rates aren’t 2.9%. Bernanke says he will also continue Operation Twist, a program to buy longer term bonds to drive long-term interest rates down, to the tune of another 45 billion dollars a month. The math is easy. The total comes to about one trillion dollars per year. And, he said he would keep the Fed interest rate at near zero until at least the middle of 2015 even if the economy becomes more robust. This last point is important and I will have more to say on that shortly.
Those that say the Quantitative Easings have mostly helped the rich are right. Only a small part of all of these digital dollars have reached the main stream economy. It has been enough, because of the debasing of the dollar, to cause some inflation. You see it when you buy gasoline or food. The Fed, however, ignores oil price and food price in their calculation of inflation because they are too volatile. Most of the QE dollars have only helped a very small part of our economy. The Big Boy investors and the Wall Street bankers have benefited big time. Most of these new dollars ended up with the TBTF banks and is now sitting, about two trillion dollars, in their excess reserves accounts at the Fed. After the announcement of QE 3, the stock market has taken off. The QE 3 funds will be used to buy securities backed by mortgages, right? Who do you think are holding those mortgage back securities? The TBTF banks, of course. It is like TARP all over again.
The bearded wonder “crapweasel” and nobel laureate economist, Paul Krugman, is forever wagging his finger at the Austrian economist and others critics of stimulus who argue that stimulus will lead to inflation. He says “Where is the inflation?”. And he is right because he is not talking about the inflation you are seeing at the gas pump and grocery store. He is talking about real serious inflation. But, he is being dishonest because he knows why the serious inflation hasn’t hit yet. That two trillion dollars, and soon to be three trillion, is sitting on the sidelines in the excess reserve accounts. And, there in lies the real danger of Bernanke’s Quantitative Easing policies. When our economy does start moving again, the banks will start lending again. The money will come out of the excess reserve accounts as the banks decide they want to get in on the action of a growing economy.
Here is an easy question for you. Which of the two candidates for the Presidency is most likely to get the economy growing again? Right! So, if Americans want to avoid some serious inflation, they should vote for Obama because he will delay the day of reckoning. If there are enough adults left in America, they will vote for Romney and accept some years of high inflation as being the price we must pay for decades of bad fiscal and monetary policies.
Earlier, I noted that Bernanke plans to keep his zero interest rate policy going well beyond the economic surge. That is because he knows that inflation is going to take off and that the normal Fed response of raising interest rates to curb inflation would send the economy back into recession or worse.
I would like to go on and explain what I would like to see a Romney administration do to minimize the length of time we will have to put up with high inflation; but this post is already way too long. Maybe another day.
Well, now you know what I’m thinking. What are your thoughts?