When Ben Bernanke issued the open ended statement this past week of a third round of Quantitative Easing, in the form of 40 Billion dollars a month of Fed purchases of mortgage backed securities, he essentially tripled down on a bad policy.
Please don’t misunderstand me; I favor a stimulus approach. In my mind, it averted the second great depression, and can keep the US economy from imminently slipping back into a recession. But buying mortgage backed securities is essentially code for propping up Wall Street. The basic concept here is that if we make rich people richer, they will invest more in hiring and business creation, and the effects will trickle down to the average consumer.
Whether you believe in trickle down economics or not, my issue with this strategy is that it is every bit as likely that this free money will trickle it’s way out of the country in foreign investments or (ahem) offshore accounts. Even if the money stays inside the US, the time that it takes to feel the effects on the economy does not justify the expense.
If we want to dump 40 billion dollars a month into the economy, I can see justification for that. But I think the money is far better spent on helping actual homeowners who are underwater and therefore completely unable to open their wallets and do what Americans do so well – buy things. Better yet, where are the shovel ready projects that were all the rage 3-4 years ago? Where are the boots on the ground projects that put average Americans to work today, tomorrow, and for months to come? That creates an immediate stimulus of buying, which translates into hiring.
Another concern is of course that the timing of this stimulus, coming so close to the election, calls into serious question to role of, and supposed impartiality of, the Federal Reserve. Ostensibly the Fed exists to protect the US currencies viability. I think there are a lot of folks asking whether this is really what they are supposed to be doing, and a lot more asking why now?
My simple suggestion? Fix the roads and the bridges. Train and support our teachers, invest in new schools and better classrooms and equipment. Do that today, and you will have a far more effective, and impartial, stimulus in my opinion.