Ben There, Done That

Although QE might seem like a good idea at first, it isn't a panacea; after all, wasn't excessive liquidity (that is, easy money) a contributing factor to the financial crisis that began in 2008 with the subprime mortgage scandals? There's still too much debt in the private sector for QE3 to do much good, because most people are unable or unwilling to increase their debt load, especially in this economic environment. And keeping interest rates low will continue to discourage savings and will disadvantage retirees, many of whom depend on investment income to cover their living expenses.

Although prior stimulus plans lifted stock prices, the market rush was shortlived, like a temporary sugar high. At the same time, gas prices also increased, leading some to wonder if this could be the beginning of the return of inflation. Has the Fed developed a tolerance for inflation, given the current condition of our economy? According to Bernanke, the Fed's projections don't involve any inflation because the FOMC believes inflation will stay close to 2% through mid-2015.

Monetary Policy Limitations

It would be unrealistic to expect that the Fed could unilaterally solve our economy's problems with the limited monetary policy tools it has at its disposal. In theory, QE3 should work; in reality, however, the funds often seems to get stuck in a money pipeline bottleneck before they can get into the hands of consumers and investors.

Consider some additional economic complexities: the wild gyrations of the stock market in response to reports of trouble in the European Union, gas price increases whenever there is political instability or tension in the Middle East (a regular occurrence), and questions regarding the adequacy of some of our largest financial institutions' capitalization. Add to this the downgrades of U.S. government bond ratings by credit research firms (the latest was Egan-Jones's downgrade of U.S. debt from AA to AA-), arguably a reflection of a dysfunctional federal fiscal process. The next crisis may be triggered by the so-called “fiscal cliff'—the potential sequestration (automatic spending cuts) and the scheduled expiration of the Bush tax cuts that will occur if our legislators—who seem to think “compromise” is a dirty word—cannot reach an agreement on fiscal matters before the end of the year.

It's no wonder that consumer confidence in the future of our economy has fallen, and with it, consumer spending. A recent study by the Fed showed that unemployment would fall to approximately 7% if consumers felt less uncertainty about economic issues. Unfortunately, I don't think the Fed has anything in its toolkit to fix that problem.

As always, I welcome your comments.