Ben Bernanke is nicknamed “Helicopter Ben” for his propensity to dump dollars into the economy — the equivalent of dropping greenbacks out of a helicopter. He’s at it again, in yet another attempt to add liquidity to an economy already soaked with cash. The Wall Street Journal explains:
The Federal Reserve, in a dramatic effort to rev up a “disappointingly slow” economic recovery, said it will buy $600 billion of U.S. government bonds over the next eight months to drive down interest rates and encourage more borrowing and growth.
Many outside the Fed, and some inside, see the move as a “Hail Mary” pass by Fed Chairman Ben Bernanke. He embraced highly unconventional policies during the financial crisis to ward off a financial-system collapse. But a year and a half later, he confronts an economy hobbled by high unemployment, a gridlocked political system and the threat of a Japan-like period of deflation, or a debilitating fall in consumer prices.
In other words, the Fed will print money and buy up bonds, thereby pushing up the cost of bonds (supply and demand at work) and pushing down their yield. “The Fed hopes that will result in lower interest rates for homeowners, consumers and businesses, which in turn will encourage more of them to borrow, spend and invest. The Fed figures it will also drive investors into stocks, corporate bonds and other riskier investments offering higher returns.”
Well, gosh, if it was that easy, why not print a trillion dollars or three? Well, the scheme, as you might imagine, has its risks.
The first, of course, is inflation. The Fed says not to worry, because the economy is limp. There is “so much spare capacity in the economy—including an unemployment rate at 9.6%, a real-estate landscape littered with more than 14 million unoccupied homes, and manufacturers operating with 28% of their productive capacity going unused.” Umm. But that suggests that the problem isn’t lack of liquidity (the banks are sitting on piles of cash). Moreover, the Fed will eventually, as they say, need to take the punch bowl away from the party — that is, jack up interest rates to shut off inflation as the economy gathers steam.
By the way, have you noticed commodity prices going up? Oh, yes:
An inflationary tide is beginning to ripple through America’s supermarkets and restaurants, threatening to end the tamest year of food pricing in nearly two decades.
Prices of staples including milk, beef, coffee, cocoa and sugar have risen sharply in recent months. And food makers and retailers including McDonald’s Corp., Kellogg Co. and Kroger Co. have begun to signal that they’ll try to make consumers shoulder more of the higher costs for ingredients.
The problem will get worse. As we flood the economy with dollars, we devalue our currency, making the price of imported goods, including oil — have you noticed pump prices lately? — more expensive. It has already begun, in fact. “Crude oil futures shot higher on Thursday on the back of a weaker dollar following the Federal Reserve’s decision to inject $600 billion into the U.S. economy.” That’s what happens when you drive the value of the dollar downward.
The risk of creating new speculative bubbles is real, and our trading partners are none too pleased about the Fed’s move. (“U.S. trading partners, particularly in the developing world, openly worry that the Fed’s money pumping is creating inflation in their own economies and a risk of asset-price bubbles. … In recent weeks, China, India, Australia and others have pushed their own interest rates higher to tamp down inflation forces.”)
You can understand why some regard this as a “Hail Mary.” Maybe it will work, maybe not. And maybe it will make things worse. But in the meantime, the most obvious steps — reducing the cost of capital and labor, lessening the regulatory burden on employers, and getting our fiscal house in order — go unaddressed. On that front, the new Congress and the president should get cracking. Betting on Helicopter Ben to rescue the economy is the riskiest proposition of them all.
