For the Economy's Sake, No Quantitative Easing

With the Fed supposedly in crisis mode ahead of today's meeting, much ink has been spilled in advance about what a Fed lacking any economic resources can do to "jumpstart" the economy. Many, including money manager Jonathon Trugman, have called for another round of "quantitative easing" from our central bank.

The Fed may well grant Trugman's wish, but like all its other naïve efforts to "fix" the economy, this won't work. Instead, it will make things worse.

Trugman's view is that if the Fed enters the market to buy Treasury and mortgage-backed securities from the banks, that this will increase their lendable reserves, and that businesses will borrow them on the way to expansion and economic growth. Nice try.

The obvious problem there is that the Fed can push all the money it wants into banks, but so long as businesses are fearful of an economic outlook that government intervention, a weak dollar, looming tax increases and more regulations are making worse, there will be no demand for the reserves on bank balance sheets. Demand for credit increases with good economic policy, but with the pro-growth policy of the ‘80s and ‘90s variety very much a distant memory, demand for loans is and will remain low.

Also captive to the fantasy that growth in the supply of money is a source of economic energy, Trugman and others believe that increased supply on its own will boost the economy. Basically Trugman is ascribing magical powers to money that quite simply don't exist.

Not only will monetary aggregates remain low so long as government policy remains in place to penalize production, money is not a source of growth. Instead, its sole purpose is to facilitate the exchange of goods. Nothing more, nothing less. When production increases so does the money supply, not the opposite as Trugman presumes.

Put more simply, the supply of money is irrelevant while the quality - meaning currency value stability - of money is paramount. And with the dollar weak and unstable at present, the desire to produce and invest is being reduced by a debased dollar decreasing the desire among individuals to save; savings the fuel for all growth-enhancing investment.

Sadly, the story gets worse from here.

While the Fed is not permitted to buy corporate bonds, it can as mentioned above purchase Treasuries and mortgage securities. If it goes this route, this does not foretell increased economic growth.

Indeed, as evidenced by all the wasteful programs authored by our federal minders, Treasury purchases would simply funnel even more money into programs that detract from our economic health. When governments spend, their spending must be measured in terms of dollars that if not spent, would fund actual growth in the private economy.

In this case, Fed purchases would enable more government spending, and worse, the Treasury purchases would protect existing Treasury investors who would likely see the value of their investments in government debt increase. In short, Treasury owners will have very little incentive to sell the debt and move the proceeds into the private economy if the Fed's stated goal is to bid up the value of Treasury securities. Trugman decries a lack of capital for private businesses, yet his quantitative easing plan would ensure that more money remains locked up in support of government initiatives, and out of the hands of private actors.

Considering Fed purchases of mortgage securities, this one defies logic too. If it's even partly true that the rush to property played a role in our eventual economic crackup, then by definition it must be said that there was a painful bill paid for too much money flowing into property and the loans that supported those purchases. In that case, the single best boost for our economy would be to let it heal itself through a decline in mortgage securities as a way of ensuring less capital for unneeded property loans, and more for things the economy actually needs.

Put simply, the Fed's purchases of mortgage securities would protect the very kind of non-economic investment that gave us a recession to begin with. The shocking thing here is that Trugman and others, including the leadership at the Fed, actually believe that more of the same would be economically stimulative. It would be comical if their beliefs and actions weren't so economically harmful.

In Trugman's case, he doesn't want to end it there, however. Captive to the naïve view that rising home prices are in and of themselves an economic input, he seeks even more quantitative easing from our central bank in order to prop up home prices that might otherwise reach their natural, and lower, market level.

Who cares that the rush to housing is what gave us the recession whereby limited capital essentially flowed into the ground, and away from innovative, economy-enhancing investment? Trugman's goal is to foster more of the same, and if home prices are held up artificially, there will exist a greater incentive to push the capital he deems limited into housing, and away from productive pursuits.

That market prices themselves are how any market economy organizes itself doesn't seem to concern him. That falling and rising market prices tell investors where capital is actually needed doesn't seem to concern him either. The suburbs of the U.S. are littered with houses that no one wants, yet Trugman is calling for more of that which didn't work the first time.

The sad reality is that the basic incentives that drive federal bureaucrats, including the hopeless cast at the Federal Reserve, likely ensures that our central bank will emerge from its meetings with plans to "do something." So it's a fair bet that the quantitative easing of the kind that Trugman describes will emerge victorious.

That it will prove superfluous at best, and harmful at worst doesn't seem to concern anyone involved. The false logic that reigns supreme today argues that government intervention is what the economy needs, and no amount of depressed activity will convince the stimulus cult that its actions are the economy's death.