Tweet to Savers and Investors: Drop Dead
by Dom Armentano: The
Feds Close a School
Can you identify
the one major economic issue that was all but ignored by both major
parties (but not by Ron Paul) in the recent presidential
election? I canÖand itís not the so-called "fiscal cliff"
problem currently being debated in Washington. Itís the Federal
Reserveís crazy monetary policy of repeated "quantitative easing"
and extremely low interest rates.
Obama and Governor Romney had several heated debates about taxes,
government spending, deficits and government debt. They did not
agree on almost anything but at least they recognized that these
macro-economic fiscal policies were important in any serious analysis
of unemployment and slow economic growth. Yet amazingly, both candidates
steered miles clear of any serious criticism of the Fedís monetary
policy over the last decade and especially since the recession of
2008. Politicians in both parties, apparently, have decided that
the public should best remain blissfully ignorant of the unintended
consequences of the Fedís "easy money" policy and itís
corollary, near-zero interest rates for savers and investors.
Letís be absolutely
clear. Federal Reserve monetary policy over the last decade has
been entirely unprecedented in our economic history. There has never
been a 10-year period where the central bank of the U.S. has expanded
the money supply so enormously and never ever a 5
year period (2008-2012) where the Fed has kept interest rates at
near-zero in real terms. (Real interest rates are nominal market
rates minus the rate of inflation). And Fed Chairman Ben Bernankeís
testimony before Congress and the recently released minutes of the
last Fed Board of Governors meeting make it crystal clear that these
unprecedented policies will be continued into the foreseeable future.
So what has
the Fed been actually doing? Simply put, when the Fed purchases
government securities in the open market it puts "new"
money into the banking system and into the economy generally. This
increase in the supply of money depresses market interest rates
and normally tends to increase the value of financial assets like
stocks and bonds, at least in the short run. Chairman Bernanke has
justified a continuation of such policies by arguing that the current
economic expansion is so fragile that business investment and the
housing recovery can only be sustained by super-low interest rates.
banks are already loaded with enough "excess reserves"
on their balance sheets ($1.5 trillion at last count) to finance
any legitimate economic recovery if only there were appropriate
incentives to make profitable loans and investments. In addition,
any further continuation of low interest rates will only fuel the
sort of rampant price inflation and non-sustainable mal-investments
(in housing and construction) that we all saw come crashing down
in 2008. Why would we want to repeat that again? Finally,
since there is no evidence that the Fedís policies actually work,
why continue them? Memo to the Fed: Allow interest rates to adjust
to free market levels.
most important reason that the Fed is keeping interest rates artificially
low (a reason that Chairman Bernanke dare not share publicly)
is that the Federal Government itself would likely go broke attempting
to finance its massive annual borrowing and refunding of debt if
interest rates were sharply higher. Those who assert that the Federal
Government could never default on its debt obligations should explain
how the government could possibly rollover old debt or fund massive
new annual deficits if interest rates were, say, 7% or higher. Ironically,
perhaps, sharply higher interest rates would curb government deficit
spending faster than all of the hot air "negotiations"
coming out of Washington these days.
it: The current Federal Reserve policy of quantitative easing props
up the value of government securities and subsidizes U.S. borrowing
and it does this at the expense of working and retired people who
will continue to earn next to nothing on their bank savings accounts
and CDs. This policy is inefficient and immoral and it should end.
In addition, some economists believe (with good reason) that the
U.S. Treasuries market has now become the biggest asset bubble in
financial history. If and when it crashes, it will make the so-called
"fiscal cliff" problem look like a walk in the park.
Armentano is Professor Emeritus at the University of Hartford (CT)
and the author of Antitrust
(Independent Institute, 1998) and Antitrust:
The Case for Repeal
(Mises Institute, 1999). He has published articles, op/eds and reviews
in The New
York Times, Wall Street Journal, London Financial Times, Financial
Post, Hartford Courant, National Review, Antitrust Bulletin
and many other journals.
© 2012 Dom Armentano
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