QE3: Why It's Bad For Our Economy

The new Federal Reserve mortgage bond purchasing program is useless.  Last Thursday they announced a quantitative easing program in which the Federal Reserve would purchase $40 billion dollars a month in mortgage bonds, as well as keep interest rates low through mid-2015.  As long as consumer confidence and consumer spending stays low, the Fed can spend all the money they want, but it is going to have next to no effect on our GDP.  What this new quantitative easing program is going to do is create a liquidity trap and stall our economic growth even more.

Because of the low interest rates, the banks have no incentive to go and lend the money to small businesses and consumers.  The banks can borrow money at very low interest rates, go reinvest it at 3% or 4% and make a 2% to 3% return at very little risk.  This money that the Federal Reserve is going to inject into the economy is not going to have its intended effect.  That currency is just going to sit on the banks' balance sheets and never actually be lent out to the general population to drive growth.  The only way that this new monetary easing actually drives economic growth is if it makes it into the hands of businesses and consumers and they start to spend it, spurring GDP growth.  Due to the debt crisis in Europe and the economic crisis caused by subprime mortgage bonds in the United States, consumers, businesses, and banks are very reluctant to spend money.

QE1 and QE2, while they did do some necessary things to keep our sinking economy afloat, did not have the effect that Bernanke and the Federal Reserve wanted.  The $3 trillion increase on the Fed's balance sheet from the quantitative easing's have not even been dispersed into the general economy.  Most of that money just went directly into savings in banks and financial institutions.  With the Chinese economy in stagnation and Europe in crisis mode nobody is hastily spending money.  Until the Fed can get people to spend and banks to invest, the liquidity trap is just going to grow and our economy is going to continue to struggle.

I believe that QE3 was a major mistake by Bernanke and the Federal Reserve.  It was their last hope.  The last bit of monetary changes that they had at their disposal.  While it may have looked like the markets responded well, the Real Dow Jones actually fell by .65% on September 13.  This is due to the increase in gold by 2.2%, and since the Real Dow compares the price of the Dow Jones to the price of gold, the 1.6% jump in the stock market was overshadowed by the even greater jump in the gold market.  Fiscal and monetary policy has in fact had a negative effect on our economy, leaving us with even more debt and no growth to show for it.  Ben Bernanke has proved that you can't shock our economy into growth, it has to occur naturally.

The Gold Standard

To start off my blog with a random thought, we need to do something about these gold-standard supporters.  Going back to the gold standard right now would just cause more harm than good, not to mention the fact that it would be very, very hard.  The credit standard is the primary reason that our world is in so much debt.  I can agree with that fact, but credit has done so much more than just shove our world into debt.  Without credit we would not be where we are today.

Credit allows our economies to grow past the amount of gold that we have.  It spurs industrial growth and technological improvements.  Credit is the reason that our GDP has been allowed to grow to over 15 trillion dollars.  The gold standard also takes away the ability of the Federal Reserve to use monetary policy to help our economy.  Whether you think that the government should interfere in the economy or not, you have to see the reasoning against the gold standard.  It just does not make sense.  Ron Paul somehow convinced other Republican leaders that this was a good idea.  Sure credit has its downfalls, but I would take the good with the bad any day.  People need to learn how to take responsibility for themselves and their money, and our economy would be fine.  The only thing that is going to pull our economy out of this recession is borrowing and spending, and credit allows this to be possible.