Fed Actions More Politics Than Policy: So-called ‘Quantitative Easing’ Will Do More Harm Than Good

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.


  1. Inflation? There’s a certain type of nut (Peter Schiff, Ron Paul, et al.) that once loved to cry foul when QE1 and QE2 landed by reasoning that an increase in the monetary base must lead to a proportionate increase in aggregate price levels. Ben Bernanke ended the debate by saying “You don’t understand how liquidity traps work” – years later, inflation’s been trucking along at a healthy-to-moderate clip of 1-3.5% over the past two years- nowhere near the Zimbabwean hyperinflation we’d been promised from the right. You’re worried about a stagnant economy in the pit of a liquidity trap encountering inflation. I’ll let you brood on that.

    You follow up with a list of patently absurd claims are worth quickly paraphrasing / deconstructing:
    “But the last two times the Fed attempted such a program, in 2008 and 2010, growth stagnated. T
    o the dismay of Fed Chairman Ben Bernanke, his program caused no miraculous fiscal turnaround.” Monetary policy has proven relatively when nominal interest rates are near zero? Shocking! And growth stagnating over this period? Well, certainly that’s the result of monetary policy, which was undertaken because… oh, right, that ‘global recession’ thing. Here was your grand opportunity to shift the debate toward the Fed’s policy of buying long-term assets to reduce term spread or any of the other reasonable topics to be discussing, by the way.

    You also argue that people and firms are likely to ‘engage in risky practices’ to cope with inflation. You think this leads to margin calls or overleveraging or something- this is wrong. Many reasons for this, but most importantl is that many financial institutions are liquidity-constrained. Expectations of inflation drives consumer spending up (good) and excess reserves up (bad). Comparing the two could make for an interesting article, but your strategy instead seems to focus on fantasy.

    Inflation-protected securities are a thing, by the way.

    And then you’re trying to claim that Bernanke (R) is, uh… in bed with Obama. Or politicking. In fact, in less than two sentences your argument leaps from “Is it ethical for the government to be printing money” to “Ben Bernanke isn’t elected” to “the Chaiman… has the power to manipulate our currency for political purposes or otherwise.” You understand that the Federal Reserve Board isn’t elected to *insulate* it from the political process, right? What about those numbers of donations you’re citing – you know they’re miniscule in the grand scheme of campaign finance and represent aggregated donations from individual donors, right?

    Here we are – an article on quantitative easing in the Phoenix… devoid of any discussion whatsoever regarding the size, scope and nuance involved in the policy. Instead, we’re left with a laundry list of grossly political talking points. Ew….

  2. It would be quite helpful if the author relied on actual data, rather than political talking points. In addition to what the points the earlier comment says, price levels don’t just magically increase. You have to trace the increase from somewhere. Wage growth has been fairly anemic, allowing the Fed to pursue a QE policy. Wages, if they were increasing, would put pressure on price levels, but guess what? That would mean the economy is growing at a faster clip than it has in the past and prices are increasing – that at least to our knowledge, is not happening. Further, we’ve embarked on 2 rounds on QE and inflation has stayed has not gone in the direction you predict it will go this time around. And no, people aren’t resorting to “riskier” behavior as you attempt to claim. If that were the case, Treasury rates would be INCREASING. Go back and read the intro to econ book – simple supply and demand. Long term UST rates have actually been falling, both in response to QE and that fact that UST bonds funds are seeing HIGHER inflows. Analyzing the situation in a vaccuum, without considering that foreign buyers are searching for safe havens (traditionally UST), is a poor analysis.
    In general, this is one large political takling point with no regards as to facts or accuracy.

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