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Rex Nutting
Aug. 11, 2010, 12:01 a.m. EDT · Recommend (9) · Post:
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Face it, wealth is wasted on the wealthy
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Is Google playing a dangerous game?
By Rex Nutting, MarketWatch
WASHINGTON (MarketWatch) -- The U.S. economy is on the edge of the cliff, threatening to plunge back into ruinous recession, but the worst part is that Washington won't do anything to stop it.
The shame is that the Federal Reserve, the White House and Congress know they have a duty to act decisively, but they can't or won't under the mistaken notion that they've already done too much.
We were sicker than they thought, but instead of increasing the dosage or looking for a better medicine, they've declared us to be cured.
Well, not cured, exactly, but as healthy as we're going to get. We'll just have to live with the nagging cough, the constant pain and the bleeding gums. Honestly, once you get used to it, you'll barely even notice 8% unemployment and falling living standards.
To its credit, the Federal Reserve is at least keeping open the option of further stimulus to nudge the economy back to life. On Tuesday, the Fed said it would reinvest the proceeds of the maturing mortgage-backed bonds that it owns, thus preventing a stealth tightening of policy as the bonds run off. See full story on the FOMC meeting.
For their part, the politicians in the White House and Congress have simply given up on any significant additional impetus for the economy.
The Fed is also reluctant to act, in part because officials are worried that monetary policy has run up against the boundary of what it can accomplish.
The essence of monetary policy is to influence the cost of borrowing by raising or lowering the interest rate that banks pay to borrow money from each other overnight, which is called the federal funds rate. The Fed can affect the money supply by manipulating this rate.
Lower rates mean easier credit, which, in normal times, leads to economic growth and job creation as businesses and consumers borrow.
But no one has to tell us that these are not normal times. Who cares what it costs to borrow when no one wants to take out a loan?
The Fed has lowered the federal funds rate essentially to zero, and it's flooded the economy with hundreds of billions of dollars. Instead of putting it to work, the banks have taken the Fed's money and parked it. The banks are nervous about lending it out, remembering what happened the last time.
What's more, no one wants to borrow, and that's the biggest problem in getting the economy moving again. The economy needs money to grow, and money is created by borrowing. No borrowing, no money growth. No money growth, no economic growth. No economic growth, no jobs.
Instead, small businesses and consumers are busy paying down debt. Even 0% loans aren't attractive when you're deleveraging, when you're trying to work off the hangover that inevitably follows a binge of borrowing.
The Fed moved to prevent its huge balance sheet from shrinking, an effort to spur the U.S. economy's recovery and avoid deflation. Sudeep Reddy, Phil Izzo and David Weidner discuss. Also, Jerry Seib discusses the legacy of former Sen. Ted Stevens of Alaska, who died in a plane crash on Tuesday.
"And there isn't a damn thing Chairman Bernanke and company can do about it," says economist Stephen Stanley of Pierpont Securities. The Fed is "pushing on a string," to quote one of the favorite metaphors of economists.
The Fed has tried some fancy stuff to get around the problem of trying to get reluctant people to lend and borrow. It's tried quantitative easing, where the Fed goes into the market and buys securities such as Treasurys or mortgage-backed bonds. In exchange, the former owners of those securities now have cash burning a hole in their pockets.
What to do with the proceeds? Splurge on consumer goods and stimulate the economy? Invest in some risky but potentially lucrative new venture that will create new jobs and economic growth? Or put it into a boring S&P 500 stock fund and buy more Treasurys? Guess what happened.
It's pretty clear that quantitative easing isn't a very efficient way to stimulate the economy. The Fed may try it again, but we shouldn't be surprised if it's ineffective.
The Fed could just wait for households and small businesses to pare down their debts. Someday, they'll be ready, willing and able to borrow again. This is the point in the argument when John Maynard Keynes reminded us that, "in the long run, we are all dead."
The output gap -- the difference between where we are and where we should be -- isn't just lines on paper or theories in a classroom; it's real incomes that aren't earned, real goods and services that aren't produced or consumed, real dreams that aren't realized.
It doesn't take a poet to know what happens to a dream deferred. Sometimes, it explodes. If the Fed's hands are tied, are we doomed to a lost decade of deferred dreams?
Happily, no. There is one group that's still able to borrow: the federal government, which could fill the gap temporarily by directly employing idle people to fulfill some of those deferred dreams. They could teach the children, heal the sick, build the infrastructure, discover new drugs, and invent new technologies.
Unhappily, it's not going to happen.
Rex Nutting is MarketWatch's international commentary editor.
Some wonder if the search giant is growing too quickly for its own long-term health, posits Jon Friedman.
12:09 p.m. Today12:09 p.m. Aug. 11, 2010 | Comments: 6
- How-R-U-doin | 9:54 a.m. Today9:54 a.m. Aug. 11, 2010
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