QE3 meant to aid Wall Street, not Main Street
By John Browne
Published: Saturday, September 22, 2012, 9:17 p.m.
Updated: Saturday, September 22, 2012
When Federal Reserve Chairman Ben Bernanke announced a third round of stimulus for the weak U.S. economy 10 days ago, the infusion of $40 million a month into financial markets sounded mild compared with its predecessors.
Potentially, the injection of dollars — called quantitative easing — is huge. The economic actions boosted stock markets and the prices of other assets, including oil, gold and silver. At a news conference, Bernanke alluded to this Wall Street benefit as a triumph.
But it offers a disheartening insight into the Fed's view of the nation's economic prospects.
Today, central bankers and politicians talk in trillions. Tens of billions of dollars appear now as chump change. To keep things in perspective, the past trillion seconds encompassed about 31,400 years.
The $40 billion a month will amount, in one year, to nearly the size of the first two quantitative easings. Worse, QE3 is open ended. It could be larger than QE1 or QE2.
Despite the fact that QE1 and QE2 appear to have failed, with trillions of synthetic dollars piling up in bank deposits and falling economic growth, the Fed appears intent on extending the problem.
In free markets, producers follow real market demand. Booms do occur, but normally are brief, and are corrected quickly by recessions and the genuine financial failure caused by miscalculation. Like it or not, free markets reward only well-judged investment.
The natural economic cure for a speculative boom is a recession, which, in free markets, is normally short and sharp. Based on free market economics, the United Kingdom and the United States grew to become the richest nations on Earth. Having abandoned that system, they now rank among the world's largest debtors.
As politics evolved from a public service into a career, the pain felt by voters who made misjudgments became unacceptable to politicians. The pols began “protecting” certain industries against changes in free market demand. Voter protection was enacted by discriminatory tax breaks, subsidies and regulations. These distorted markets led to speculative or imprudent investment, guided by politicians rather than natural market forces.
In recent decades, supposedly “independent” central banks have been encouraged to subsidize failed enterprises, particularly financial companies. The Anglo-American world has survived on this economic drug for almost a century.
Free market competition from the developing world now challenges the debt-laden, Anglo-American-led economies. In response, Anglo-American-led governments and central banks have acquiesced in subsidizing bad investment at any cost.
Bernanke announced also that interest rates would remain distorted downwards until mid 2015. When questioned about the long-term effects of the negative real returns this imposed on investors, Bernanke admitted this disadvantage, but appeared pleased that it benefited the stock market.
This indicates Bernanke's priority with QE3 is to boost financial markets rather than the real economy of Main Street, job creation and improvement of individual wealth.
John Browne, a financial analyst and former member of Britain's Parliament, is a financial and economics columnist for Trib Total Media. Email him at firstname.lastname@example.org.
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