Yesterday, as was widely expected (yet somehow still disappointing to Wall Street) Dr. Bernanke unveiled the Fed’s latest installment of market manipulation. The Fed announced plans to expand Operation Twist by $267 billion over six months. Apparently, record low interest rates for corporate, mortgage, treasury, and almost any other debt you can think of simply aren’t low enough to promote recovery.
Since the crisis began, the Fed has held interest rates at zero, engaged in not one, but two rounds of money printing, promised to keep rates at zero through 2014, extended the maturity of its holdings with Twist 1.0 and now announced Twist 2.0. Oh yes, and the Fed said it stands ready to do more. Aren’t we blessed? Yet, here we are three years after the official end of the last recession and economic growth is not faster, but slower than before Dr. Bernanke took us off the rails with QE 2.
I hate to be the bearer of bad news, but monetary policy has provided no sustained benefit to the real economy in over three years. At this point, the Fed is snapping to keep the elephants away. It may be difficult for erudite Fed policymakers to believe, but economies really are self-correcting. The modest economic recovery of the last few years has happened despite, not because, of the Fed’s activist policies.
Dr. Bernanke’s monetary interventions have prolonged the economic misery by dragging out the inevitable but necessary clearing of markets. Yes, that means allowing prices to fall. Why a group of PhD economists (Fed Board) believe that propping up prices with monetary policy helps economic growth defies common sense. Even non-economists understand the basic laws of supply and demand. Lower prices spur demand. At the macro level, demand is GDP. So then, by propping up prices, is it not true that the Fed is holding back GDP? Well, I don’t think anybody except Dr. Bernanke can claim with a straight face that recent monetary policy has stimulated the economy.
But it is undoubtedly true that Fed policy has stimulated widespread mispricing, manipulation, and misallocation of capital. Twist 2.0 is just more of the same misguided policy. It will create greater distortions in the financial system, punish conservative investors and savers, and further complicate the Fed’s exit policy (if it ever comes). It is long past time for Dr. Bernanke to stand down.
Jeremy Jones, CFA
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