No one is really fit to “run the economy.” The pretense of the ability can be fun to watch, amongst economists as well as pundits. But because they’re doing the impossible, what they say can lurch from wisdom to utter folly in the space of a paragraph.
Neil Irwin, at the Washington Post, admits that the Federal Reserve’s current policy of pumping more and more money into the economy may finally be working, “but that may not be a good thing.”
I suspect he’s right.
But not for the right reason.
Irwin notes that the Fed “in September introduced a policy meant to boost housing and stock prices, and now, nine months later, housing prices and stock prices have risen quite a bit. Enough, indeed, to (so far) offset the impact of higher taxes that went into effect Jan. 1 and federal spending cuts that took effect March 1.” But the problem, he goes on, “is that these channels through which monetary policy affects the economy tend to offer the most direct benefits to those who already have high incomes and high levels of wealth.”
Irwin sees the problem as inequality: the policy helps the rich get richer and does little for the poor. His solution is fiscal policy that throws more money directly at the poor.
Yet there’s not much reason to believe his preferred giveaway would actually “stimulate” the economy. The Fed’s current policy, on the other hand, may stimulate, a bit, but will lead to a new boom-bust cycle.
The poor need jobs; the rich need to invest. But all this requires a degree of stability and trust and sustainable prices — not government-knows-best tinkering with the money supply. Or yet more deficit spending.
This is Common Sense. I’m Paul Jacob.
4 replies on “Fed Up”
The belief that the government can suspend or negate the laws of economics, and therefore human nature, is actually the symptom of collective pride. That false premise, buoyed by Utopian dreams and acted upon, has actually destroyed empires and countries throughout the ages.
Only problem with this is that housing prices and stock prices are generally not going up, they are staying almost the same. The value of the dolar is going down, so it is taking more dollars to purchse the same equity. QE3 continues with its indefinite printing of a new trillion dollars a year by the FED which then uses the money to buy stock and bonds, preventing the cost of the market from crashing. Which might be a good thing, except that all the extra new dollars make the purchasing power of the old dollars less. Most of the price of food and energy, which the government conveniently neglects to count in figuring inflation but which make up the bulk of the living espenses for the middle class and poor has increased substantially because the dollars that the middle class and poor are useing to make purchases don’t buy as much.
It is like that each year, the dollar has been secretly replaced by an 80 or 85 cent valued replacement that still looks identical. The cost of stocks is up. And the cost of housing. And the cost of a tank of gas and a jar of coffee or peanut butter too.
This is not stimulation. It is economic rape.
The Fed, being born of banks, by banks and FOR BANKS has totally distorted everything. I propose that NOT ONE SINGLE PRICE in this economy is real. Here’s “The Fed Uncertainty Priciple” by Libertarian and Austrian economist Mike Shedlock, aka Mish:
Fed Uncertainty Principle:
The fed, by its very existence, has completely distorted the market via self reinforcing observer/participant feedback loops. Thus, it is fatally flawed logic to suggest the Fed is simply following the market, therefore the market is to blame for the Fed’s actions. There would not be a Fed in a free market, and by implication there would not be observer/participant feedback loops either.
Corollary Number One:
The Fed has no idea where interest rates should be. Only a free market does. The Fed will be disingenuous about what it knows (nothing of use) and doesn’t know (much more than it wants to admit), particularly in times of economic stress.
Corollary Number Two: The government/quasi-government body most responsible for creating this mess (the Fed), will attempt a big power grab, purportedly to fix whatever problems it creates. The bigger the mess it creates, the more power it will attempt to grab. Over time this leads to dangerously concentrated power into the hands of those who have already proven they do not know what they are doing.
Corollary Number Three:
Don’t expect the Fed to learn from past mistakes. Instead, expect the Fed to repeat them with bigger and bigger doses of exactly what created the initial problem.
Corollary Number Four:
The Fed simply does not care whether its actions are illegal or not. The Fed is operating under the principle that it’s easier to get forgiveness than permission. And forgiveness is just another means to the desired power grab it is seeking.
Read more at http://globaleconomicanalysis.blogspot.com/2008/04/fed-uncertainty-principle.html#F4i7UV4ZZ7xEChIK.99
forgot to say: the housing market is NOT getting better. one third of all housing transactions are all cash. that is not gen x buying houses. that is wall street, afraid of this way overcooked stock market buying something, ANYTHING besides stocks that may be a store of value and generate some return. Blackrock owns 26,000 single family houses now. and they plan to spin it off into a REIT to have the liquidity to not get killed if things go bad.