It should probably be forbidden to start a column with Einstein’s “The definition of insanity is to do the same thing over and over again, expecting a different result.” As a lead, it’s the equivalent of fiction’s “It was a dark and stormy night.”
However, there is no better way to describe Federal Reserve Chairman Ben Bernanke’s latest program to lift the economy from its doldrums—quantitative easing 3, or QE3, or QEinfinity as most in the financial press term the plan. It calls for continuous purchases of treasury debt and agency securities by the central bank until the nation’s unemployment rate is lowered to an acceptable level.
Based upon the results of QEs 1 and 2, plus Operation Twist, where the Fed sells short-term Treasuries and buys Long-Term government paper in an attempt to lower long-term rates, Bernanke’s latest plan is more of the same that will have the same result, which is to say, not the result the central bank brass is advertising.
What has Bernanke’s money creation done for Nevada? Trillions in new money and ground-hugging interest rates, and Las Vegas headline unemployment is still 12.3 percent. Add the discouraged and underemployed, and the rate is well north of twenty percent.
The Fed’s dual mandate is to control inflation and create full employment. For all the levers he’s pulled and buttons he’s pushed, the Fed Chair can’t take credit for either. So Bernanke is crowing that quantitative easing has led to higher stock prices. “This effect is potentially important because stock values affect both consumption and investment decisions,” he argues, implying that working people can somehow live on their 401k balances.
The Fed’s four-year easy money policy has been directed at improving the housing market. Stomping down interest rates is supposed to lower mortgage rates, spur sales, raise property values, and stimulate construction. During the Q & A after announcing QE3, Bernanke was asked, “How does boosting assets really help the economy?”
The Fed Chair didn’t really answer the question, replying, “There are a number of different channels: Mortgage rates, corporate bond rates, and increase in home prices and stock prices.”
So clearly, he has it in his head that inflating the money supply will lift values, lift spirits, and eventually lift employment. However, there is no historical evidence that this plan will work.
Keynesians, like Bernanke, believe there is a simple positive correlation between total employment and the size of the aggregate demand for goods and services, leading to the idea that full employment is possible by maintaining total money expenditure at a level the wise ones at the Fed dictate.
F.A. Hayek explained in his 1974 Nobel Prize acceptance speech the error of the Keynesian ways. “Such complex phenomena as the market,” Hayek said “which depend on the actions of many individuals, all the circumstances which will determine the outcome of a process . . .will hardly ever be fully known or measurable.”
The latest projections from real estate analytics firm Fiserv indicate that home prices in Nevada will not return to their peak for another 40 years. That assumes 2.3 percent annual appreciation, which might be optimistic given the large percentage of underwater homeowners and potential foreclosures there are in the state, and especially in Las Vegas.
Bernanke may have been Time magazine’s 2009 “Person of the Year.” But he is no hero to everyday Nevadans (or Americans in general for that matter). His money printing has indeed pushed up stock prices for his friends on Wall Street, but average household income has fallen to 1995 levels. Meanwhile, costs have soared. The average price of gas in ’95 was $1.13, and today it’s $4.13; a new car in ’95, $15,500; today, $30,748; tuition, room, and board at a four-year university in ’95: $10,330; today, $21,189.
Bernanke can create money, but he can’t pinpoint where it goes. The financial press acts as if the Fed Chair is Van Gogh working on a masterpiece. In reality, he is painting a barn with a spray gun.
“If man is not to do more harm than good in his efforts to improve the social order,” Hayek lectured, “he will have to learn that in this, as in all other fields where essential complexity of an organized kind prevails, he cannot acquire the full knowledge which would make mastery of the events possible.”
Despite their continued failures, central bankers continue to be worshipped. But a generation is suffering because these money manipulators don’t recognize their limitations.
Doug French is a former Nevada banker and a senior editor for the Laissez Faire Club
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