Throughout its history, America has faced numerous challenges of every variety, and what has kept us great as a nation is our willingness to confront those challenges head-on. But when the market crashed in 2008, America’s confidence and resilience was shaken, and under Obama our government sought to hide from tough economic realities using unsustainable policies like bailouts and money printing. Now, as Obama’s “recovery” limps along, those cowardly economic policies are preventing us from actually moving forward.
The latest news from our economic “leaders” is yet another round of “quantitative easing,” the largest such money-printing binge yet attempted. With this program, the Federal Reserve will print money to purchase $40 billion worth of bonds each month, an exercise that could cost in excess of $1.7 trillion. And, at a time when government should be confronting its out-of-control spending, the Fed is purposely keeping quantitative easing spending uncapped. In short, we still have no idea how much this weak economic measure will cost taxpayers.
In the short term, printing money always sends markets rallying, just as feeding a child candy will send him into a hyperactive frenzy. But what happens when the rush is over? According to the Bank Of England, a similar program in the UK only benefitted the top 5% of income earners, making it one of the most regressive wealth redistribution policies ever enacted. Meanwhile, banks are not short on liquidity, so all you accomplish by printing money is higher prices… also known as inflation.
Inflation plus stagnant growth equals “stagflation,” last seen under Jimmy Carter. And the only way out of that mess was through tough monetary policy under Reagan. When the economy needs a down cycle, fighting it with funny money will only prolong the agony. Making tough choices, like not printing money, allows inefficiency to be worked out of the economy, setting the stage for a comeback. With Obama’s quantitative easing and bailouts, a Japanese-style “lost decade” seems to be the inevitable result.
Twice now, the government has printed stacks of money aimed at restarting hiring, and both times it’s simply been used to gamble on commodities and mortgages, inflating short-term bubbles, and driving up prices while doing nothing to fix the economy’s underlying problems. These were exactly the kinds of problems that led us into economic trouble in the first place, and with the real estate market struggling to find an equilibrium, the latest round of mortgage-backed-security buying, we’re even farther from getting real estate back to reality.
But not only will quantitative easing fail to have an economic impact in the short and medium term, it also exposes the taxpayers to a huge economic risk which in turn could derail a future recovery (if we ever get there). The problem with buying up mortgage-backed securities now is that the government will eventually have to sell them. Not only could this expose the government to a loss on this “investment,” it will also drive interest rates up just as they are starting to climb, creating another credit crunch just as we’re emerging from the wreckage of the last one.
Meanwhile, gambling with newly-printed money isn’t just dangerous and immoral, it keeps the government from actually addressing the real underlying economic problems in America: overtaxation, overregulation and fiscal profligacy. By creating the appearance that the Fed is fixing the economy with Monopoly Money, politicians want to take the pressure off themselves to fix these thorny problems. And if we ever want America’s economy to return to the vibrant dynamism of the past, we need to drop the short-term rushes and fix these structural issues.
Over the past few years, we’ve seen what happens when the government “rescues” the economy: big banks and the politically well-connected get their bailouts, while everyone else suffers. This latest round of quantitative easing fits the pattern: folks with big stock portfolios, and Wall Street traders get the sugar rush they want, while taxpayers pick up the bill and the economy continues to limp along unfixed. And that money doesn’t go towards anything more productive than gambling on various asset classes in ways that create bubbles which will eventually burst, bringing the economy down once again.
As Ronald Reagan taught us after the disaster of Jimmy Carter’s “stagflation,” breaking out of the economic circumstances we face today takes a strong dose of bitter medicine. Masking the pain with fiat money, bailouts and new bubbles keep the economy on its knees, while subsidizing the parasites who caused the problems in the first place. If we’re ever going to regain our economic strength, we need to break our addiction to Bernanke’s funny money, fix the underlying problems with our economy and be willing to endure a little pain.
After all, America’s finest moments have always come when we confront problems rather than hiding from them.