Last week our fearless (not to mention mindless) Federal Reserve Bank Chairman Ben Bernanke showed us two things. The first one was that the old saying “if at first you don’t succeed, try, try again” is alive and well in the Federal Reserve’s fantasy land view of the US economy. The second was his confirmation of the definition of insanity….doing the same thing over and over and expecting a different outcome.
At the outset of the stock market crash a few years ago, the one caused by the sub-prime debt crisis, the economy was in a death spiral and the Fed needed to act. Bernanke’s first move was to take interest rates down to zero (actually 0.25%). The second was to initiate a $600 billion dollar quantitative easing program (QE1). After two years of rates at historic lows, plus at least an additional $600 billion in quantitative easing (QE2), today’s economy is just as bad as it was then. In addition, we now run a gigantic risk of runaway inflation. When the economy finally does turn around and heats back up only the deftest, smoothest hand will be able to raise rates fast enough to keep inflation under control, but, not so fast that the timing of the hikes puts a premature and potentially dangerous halt to a real recovery.
As bad as this situation sounds, it could get worse. Bernanke’s promise to keep rates at the record low levels for the next two years just got compounded by a statement by Atlanta Fed President Lockhart. He stated(or perhaps warned) that, “If additional actions are required, I can assure you the Federal Reserve is not out of bullets. Expansion of the balance sheet or changes in the composition of the Fed’s asset portfolio are available, in my view.” Is he foretelling QE3??? (QE3 refers to speculation that the Fed may eventually undertake a third round of asset purchases known as “quantitative easing” to boost the economy.) He indicated that there was no worry or concern about overloading the Fed’s balance sheet. He stated that the Fed has not fired its last bullet as many believe. I guess the printing presses still have plenty of ink!
It seems we have been down this road before. We tried the same procedures before with QE1 and QE2 and they did not work in fixing the economy in the short term and actually seriously complicated and jeopardized the economy in the long term. Now, here we are about to try more of the same thing that didn’t work twice before. I’m sorry…….what was the definition of insanity again, Ben?
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