by Dom Armentano
Recently 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 can…and it's not the so-called "fiscal cliff" problem currently being debated in Washington. It's the Federal Reserve's crazy monetary policy of repeated "quantitative easing" and extremely low interest rates.
Both President 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 Fed's 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 Fed's "easy money" policy and it's corollary, near-zero interest rates for savers and investors.
Let's 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 Bernanke's 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.
Nonsense. The 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 Fed's policies actually work, why continue them? Memo to the Fed: Allow interest rates to adjust to free market levels.
Actually the 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.
Let's face 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.
Dom Armentano is Professor Emeritus at the University of Hartford (CT) and the author of Antitrust and Monopoly (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.