Our Exhausted Monetary Policy Arsenal

Monetary Policy: After meeting Tuesday, the Federal Reserve signaled that it believes the economy isn't performing as well as it should. But there's not a whole lot left that the Fed can do.

A government can "stimulate" a dead economy in only two ways. One is to print money and risk inflation - monetary policy. The other is to cut spending and lower taxes - fiscal policy.

Unfortunately, as the results of Tuesday's Fed policy meeting show, we've pretty much exhausted our monetary policy arsenal. Starting in December 2008, the central bank slashed interest rates to zero - in effect, letting financial institutions borrow at no cost. It also printed up more than a trillion dollars to buy up bad assets from banks and the U.S. government.

Yet, despite this extraordinary monetary stimulus, unemployment remains a year and a half later at an unacceptably high 9.5% and businesses are creating just 93,000 jobs a month. Nearly 15 million people are without work, a record half of them for more than six months. GDP growth in the second quarter was a disappointing 2.4% - and looks like it's trending lower.

In short, the economy is barely growing, and businesses are not creating nearly enough jobs to soak up each month's 120,000 new job-seekers.

In its statement Tuesday, the Fed admitted that "the pace of recovery in output and employment has slowed in recent months." In other words, despite what the Fed, President Obama and Congress have done, the risk of a double-dip recession is growing.

So what'll the Fed do now, besides hold interest rates near record lows? To prime the economy's pump, the central bank said it will "(reinvest) principal payments from agency debt and agency mortgage-backed securities (from the stimulus and bailouts) in longer-term Treasury securities."

Translation: As bailout and stimulus funds get repaid, the Fed will use the money it created out of thin air to help fund the nation's budget deficits, now running at more than $1 trillion a year.

But it won't work. The Fed has already pumped an estimated $2 trillion into the banking system to encourage lending. All that new money may have kept us from deflation, but it didn't boost real economic output.

We also know that Keynesian "stimulus" - spending trillions of borrowed dollars on stimulus, bailouts and de facto takeovers of the auto, health care and financial industries - hasn't worked. If anything, the Keynesian medicine prescribed by the president and Congress is making the patient sicker.

So in the end, what's left? Only real stimulus of the "supply-side" variety - the kind that creates not debt and phony money, but increased output through serious spending cuts, genuine entitlement reform, freer trade, less-onerous regulations and - yes - either further tax cuts or at least the extension of the Bush tax cuts due to expire at year-end.

Surely policymakers have learned that when all else has failed, logic requires you to do the one thing you haven't tried - especially when it has worked before. Is common sense too much to ask?