The opiate of easy money
Much like a drug addict, the U.S. economy is hooked on the Federal Reserve’s easy-money policies.
Since the financial crisis, the Fed has pumped trillions of dollars into banks and financial markets — first, by buying banks’ troubled real estate loans and then by purchasing long-term Treasury and mortgage-backed securities to push down mortgage rates.
This rescued Wall Street banks from near-death experiences while federal regulators shuttered more than 480 smaller banks. Unable to cope with more cumbersome regulation, many other regional banks sold out to bigger institutions.
Bank consolidation reduces competition for deposits and drives down CD rates. Retired Americans who rely on interest from savings to help pay bills have taken an enormous loss.
Yield-hungry investors have scarfed up the junk bonds of troubled companies. Should the Fed permit interest rates to rise, defaults would burn investors in a replay of the financial crisis.
Home-buyers, farmers and speculators, armed with cheap mortgages, have bid up home and agricultural land values, and should the Fed let mortgage rates rise, many would not be able to sell properties as needed and ultimately would default on loans.
Smaller businesses can’t get credit from disappearing regional banks.
Easy money made the economy function somewhat better for a brief period. From the beginning of the recovery through last September, GDP grew at a modest 2.2 percent.
But just like an addict, the economy needs ever larger doses to stay on task. Last September, the Fed nearly doubled purchases of long-term securities, but growth has since slowed to about 1 percent.
Early in June, Fed Chairman Ben Bernanke caused panic by merely stating that as the economy improved, the Fed would scale back securities purchases. Two weeks later, forced to backtrack, he said easy money would continue as long as it takes — and that may be forever.
The White House and Congress have done little to fix what caused the Great Recession: A growing trade deficit with China saps demand for U.S. goods and destroys jobs; dysfunctional federal policies invest in bogus alternative-energy schemes and limit drilling for oil offshore; burdensome business regulations raise the cost of new projects; and bank reforms enrich the Wall Street banks while starving America’s biggest jobs creators — small businesses — of credit.
Easy money is the opiate of the American economy. It has few prospects for genuine improvement as long as President Obama pursues an extreme left-wing agenda, conservatives in the House indulge in the fantasy that free markets can solve every malady of mankind right down to athlete’s foot, and senators posture like toga-clad aristocrats attending the games on Mt. Olympus.
With growth slowing, the Fed may have to pump even more cash into the economy with diminishing results. Sooner or later the recovery could falter. And much like Europe, a few pockets will prosper but much of the rest of the country will sink into double-digit unemployment.
Peter Morici is a professor at the Smith School of Business at the University of Maryland and former chief economist at the U.S. International Trade Commission.