Since the 2008 financial crisis the Federal Reserve (Fed) and central banks worldwide have been on a grand experiment. They pushed interest rates to near zero and have been printing money at historic levels, sometimes referred to as Quantitative Easing. When these efforts were first employed they were justified with the theory that without them the world was heading towards economic Armageddon. That claim will never be proved, but there is no doubt the financial markets froze up and required action.
We are now five years past the height of the financial crisis and Fed policies remain unchanged. We also now have the benefit of history that indicates the policies have not cured the economic malady facing United States and much of the world.
David Malpass, an assistant Treasury Secretary during the Reagan Administration, published an op-ed in the Wall Street Journal titled “Fed Policy is a Drag on Recovery” proffering the view that the Fed’s low-interest policies have hindered economic growth and recovery. Malpass’s op-ed includes (emphasis added):
“As this month’s stock and bond market gyrations showed, traders are obsessively focused on every nuance of the Fed’s monetary plans. Billions of dollars are at stake for Wall Street, which profits mightily from the Fed’s bond buying and cheap credit.”
“Recoveries are normally fast and broad once markets are allowed to clear and begin operating. Quarterly growth topped 9% in 1983 after a deep recession and 7% in 1996 leading into President Clinton’s re-election. Interest rates were high, yet median incomes were rising sharply.”
“Growth in the current recovery only rose above 4% once, in the fourth quarter of 2011, and averaged just 2% per year in its first four years versus 5% in the same period of the 1980s recovery, 3.2% in the 1990s recovery and 2.9% in the 2000s recovery. The underperformance over the past four years translates into more than three million jobs that should have been created but weren’t, an economic disaster that lowered real median incomes by 5%.” In addition, “Private-sector credit grew only 0.8% from the end of 2008 through the end of 2012, whereas credit to the government grew 58%.”
“Tax-and-spend policies sapped investment, and the Fed’s low rates and bond purchases damaged markets, hurt savers and channeled credit to the government at the expense of job creators. It’s a zero-sum process that should be stopped because of the bad effect on growth and jobs.”
“Incredibly, as Fed Chairman Ben Bernanke alluded to in his May 22 congressional testimony, the Fed is now angling to create a semi-permanent control dial with which the Fed can increase its $85 billion in monthly bond purchases when growth slows and reduce them if growth ever speeds up. This creates maximum uncertainty for the private sector, giving an advantage to traders, the government and the rich but hurting growth and long-term investors.”
“This trickle-down monetary policy has contributed to very fast growth in corporate profits, part of the explanation for the record stock market, but also to weak GDP growth and declining middle-class incomes. The extra credit the Fed channeled to government and big corporations meant less credit elsewhere in the economy, a contractionary influence since most new jobs come from small businesses.”
Finally, Malpass quotes retired Federal Reserve Chairman Paul Volcker who recently said that the Fed should not “accommodate misguided fiscal policies” and that such policies “will inevitably fall short.” Volker also said of the Fed that “credibility is an enormous asset” that ”once earned, it must not be frittered away.” Given the failure of the Fed’s accommodating policies its credibility has been severely damaged.
President Obama was recently praised by retired Secretary of State Colin Powell for his handling of the economy based on the stock market’s high valuation and the improving unemployment rate. The lofty stock market valuation in a slow-growing economy is a negative sign of a bubble. As for the employment rate, the chart below shows that it is now at a 30 year low. Decades of government intervention, along with the current Administration’s and Fed’s failed policies, are the cause and need to be dismantled.