To do the same thing over and over again and expect different results is the definition of insanity. Thomas Edison didn’t invent the light bulb by trying the same design 2,000 times. Nor should the Federal Reserve expect the outcome of their third round of “quantitative easing,” better known as printing money to buy Treasury bonds, to be any different than the outcomes of the last two.
The Fed announced last week that it would begin QE3, a program designed to inject money into the economy on a regular basis in hopes of giving a jolt to our anemic economic growth. But the last two times the Fed attempted such a program, in 2008 and 2010, growth stagnated. To the dismay of Fed Chairman Ben Bernanke, his program caused no miraculous fiscal turnaround. To be sure, stocks on Wall Street got a little jolt, but Real GDP—a much more accurate barometer of the long-term economic condition—remained unaffected.
So why renew a failed program? It’s impossible to deny that quantitative easing has no effect on the economy in the short term. Last week, stocks—particularly those of big banks—rallied. Over the next couple months, Wall Street will get a little buzz, then return to normal. But by the time things settle down, Election Day will have passed. It is no coincidence that Bernanke announced QE3 in the midst of the campaign season, as that little buzz might just carry President Obama to victory. Perhaps the thank-you cards he’ll get from Wall Street will have a few dollars slipped inside.
Bernanke, a Republican, was one of the few Bush appointees retained by the Obama administration. A Romney administration, however, will not keep him around—Mitt Romney has said that if elected, he will not appoint Bernanke to a third term. Therefore, Bernanke’s job security depends on buoying the president’s chances in this dead-heat election.
The truth is, though, that Obama and Bernanke are leading us down a dangerous road—far more dangerous than they or the public realize. Printing money, especially over a long period of time, has some drastic long-term consequences, most notably inflation. Our dollars will be worth less, and with them many of our more secure investments, such as savings accounts and treasury securities. The parents trying to save for their child’s college education will find tuition costs rising with the inflation tide, while their savings stay chained to the ocean floor. The worker building a nest egg for retirement will have to labor well into his golden years because the devalued currency will comparatively shrink his IRA. These are Main Street investors, the people we want to protect, but the Fed’s policies will leave them in the dust.
To avoid the consequences of inflation, people (and banks) will resort to more risky ventures with higher returns, such as buying on the margin. Excessive risk-taking, though, by banks and other financial institutions, landed us in the crisis in the first place. By printing money, the government is not only condoning, but encouraging, the sort of risky behavior that drove us off the cliff in 2008 and will drive us off it again.
Not to mention that it will come back to bite the government, too. Devalued savings and worthless Treasury bonds will make the middle class more reliant on government programs such as Medicare and Social Security to fund its retirement. These programs have extensive solvency problems, and will be bankrupt by the next generation without serious reform. Making people more dependent on them, however, will stiffen public opposition to any sort of change, and the generation of students currently at Swarthmore—our generation—will pay for the collapse of these New Deal titans.
Economic consequences aside, is it really ethical for the government to be able to print money whenever it pleases? This is our currency that the government is meddling with, but it is left in the hands of the unelected Federal Reserve Chairmvan and his Board of Directors. Ben Bernanke, or whoever may sit in his seat, has the power to manipulate our currency for political purposes or otherwise.
Quantitative easing is somewhat like a jolt of caffeine, except that Obama, Bernanke and their Wall Street bedfellows will get the high, while the rest of us suffer the inevitable crash. With this program, perhaps the Obama administration is seeking to emulate its 2008 performance on Wall Street, when Candidate Obama received nearly $16 million in donations from bankers there, according to CNN Money. (John McCain, by comparison, received only $9 million.) It’s crony capitalism at its finest.
What kind of an example does this set for the nation? The ultimate message is that in tough times, it is okay to produce money out of thin air. For the everyday person, this means borrowing obscene amounts of money on credit cards. But the consequences of such reckless action will always come back to bite you, whether in the form of a credit card’s debt collector or a mortgaged future for our children and grandchildren.