July 14 2011
Nicole Kurokawa Neily
It’s time to stage an intervention, folks – it looks like Fed Chairman Ben Bernanke might have an addiction… to printing money. According to the Los Angeles Times, in his semi-annual presentation to Congress yesterday, “Bernanke left the door open to further monetary stimulus, including another round of bond purchases.”
Last year, the Fed undertook a program called “QE2” – which sounds like a benign ocean liner. Harmless, right? Wrong.
What it actually stands for is “Quantitative Easing 2,” which is Washington-speak for “printing money we don’t have,” in an effort to artificially hold down interest rates. (Great video here explaining QE2, featuring talking cartoon animals.)
Low interest rates sound good, of course – they make borrowing money cheaper for things like home loans! Just think about all those people who took out adjustable-rate mortgages out of their price range – we can’t make their loans more expensive! (But wait… isn’t that’s what got us into this housing bubble mess in the first place?)
The government is fearful that any rate increase will have a negative effect on the economy, because when interest rates are higher, people save their money – and the government wants people to spend, spend, spend. Accordingly, the Fed has been doing all they can to keep rates low by flooding the market.
Unfortunately, this policy isn’t sustainable in the long run – meaning interest rates are going to rise, sooner or later. And thanks to this meddling, when they do increase, the effect will likely be worse than it would’ve in the first place, because by printing money, we’ve created a situation where there’s more money chasing the same amount of goods – meaning our money is actually worth less!
The economy needs less government intervention, not more “help.” Bad monetary policy isn’t the cure for bad fiscal policy and chronic overspending. When people have correct information – like interest rates that are set by the market, not by a bureaucracy – they will make investment and savings choices accordingly.
That’s why it’s so stunning that Bernanke is considering doing it all over again. For the love of the economy, don’t muck things up any further!