The Fed Shouldn't Double-Down On Failure

Ben Bernanke is preparing for his speech on Friday at the central bank's annual gathering and not everyone at the Fed is keen on another round of quantitative easing. Since the first round of quantitative easing the economy has been stuck in the doldrums, with subpar GDP and job growth.

Posted 08/28/2012 06:36 PM ET

As Federal Reserve Chairman Ben Bernanke prepares for his speech Friday at the central bank's annual gathering in Jackson Hole, Wyo., trouble is brewing.

Not everyone at the Fed — or in Congress — is keen on another round of quantitative easing. And we can see why.

Since the Fed first began its QE program in 2009, the economy has been stuck in the doldrums, with subpar GDP and job growth, 15% real unemployment, a 4.8% decline in median incomes, a fast-shrinking middle class and a tidal wave of government debt that threatens to swamp the economy.

Yet, to hear Bernanke, you'd think things are fine.

In a recent letter to California Rep. Darrell Issa, one of a growing number of Fed critics in Congress, Bernanke said: "There is scope for further action by the Federal Reserve to ease financial conditions and strengthen the recovery."

Really? Fed "action" hasn't worked so far, despite two rounds of easing and an "Operation Twist" that have added more than $2 trillion to the Fed's books.

Even so, some speculate that Bernanke will announce this Friday — or at an upcoming Fed meeting — one of two policy moves.

Either he'll keep the so-called zero-interest-rate policy, or zirp, in place beyond 2014, or he'll announce a third round of quantitative easing, in which the Fed basically prints money and buys government bonds to hold interest rates down.

Both are fraught with risks, including how to sell off the Fed's $2 trillion debt portfolio once the economy begins to recover — as it should under a new Romney administration.

And again, neither policy has worked so far. It might be argued that the Fed's actions helped initially after the crisis hit. But even Bernanke admitted in June that his policies show signs of "diminishing returns."

The most dangerous problem in all this, however, is that the Fed continues to enable the most fiscally irresponsible government in history by creating money out of nowhere and putting it into circulation by buying government debt.

According to Fed data, the central bank's balance sheet has now swollen to $2.87 trillion — an unprecedented expansion from just $850 billion before the financial crisis hit — mostly by buying U.S. Treasurys.

This has let Obama and congressional Democrats run $1 trillion-plus deficits and blame it all on former President Bush. With federal debt now at $16 trillion and rising fast, these policies will bankrupt the next generation and ruin America's economy.

Even within the Fed, there are critics of this approach. Robert Fisher, head of the Dallas Federal Reserve, seems to be one of them. This week, he posted a study by OECD economist William White that essentially debunks Bernanke's QE program.

Titled "Ultra Easy Monetary Policy and the Law of Unintended Consequences," White's study says Fed policies have failed because they basically accept the conventional Keynesian idea that "aggregate demand" must be stimulated, and the only way to do that is through the Fed. But it isn't.

As we've noted repeatedly, a growing body of evidence and academic studies suggest that cuts in spending and taxes — reducing government's real size and scope — are the most effective way to spur economic growth.

Such cuts would increase economic activity, leading to higher government revenues, shrinking deficits and hundreds of billions of dollars more for private-sector spending and investment.

The Congressional Budget Office now says the fiscal tsunami headed our way will push the economy into a nasty recession next year — thanks largely to Democratic tax hikes that kick in at the end of this year.

If the Fed has emptied all of the bullets in its policy gun, what then? Will there be a QE4? Or zirp forever?

Monetary policy isn't the problem today; fiscal policy is. The Fed should simply announce it's done all it can do — and that now is the time for Congress to cut taxes, spending and regulations to move the economy forward.

That will force Democrats in Congress, who have now gone 1,214 days without passing a budget as required by law, to do their job — or run out of money.

Now there's an idea.


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