There is considerable disagreement over the potential effectiveness of another round of Federal Reserve easing. Opponents of further rescue efforts point to persistent dismal unemployment figures and deteriorating economic statistics as proof that QE1 and QE2 were ineffective. Supporters of an easy Fed monetary policy argue that without those earlier efforts, today’s economy would be in far worse condition. Even within the Fed itself there is disagreement over whether additional stimulus will provide any appreciable benefit to the economy.
With economic conditions now in a clear downward spiral, it appears highly probable that the Fed will act again at next week’s meeting to offer some additional rescue aid. Former Fed Vice Chair Alan Blinder recently suggested that QE3 was the most likely of a few alternatives. More commentators have settled on Operation Twist as the probable choice. That option would entail the Fed selling short-maturity securities or letting them run off, then reinvesting proceeds in longer-term notes and bonds. Puzzled by the lack of success of their earlier actions, the Fed governors are undoubtedly apprehensive about additional efforts. While most Fed watchers similarly shrug their shoulders when asked whether or not the Fed can get the economy back on a positive course, they argue that the Fed must do something.
Few seem to weigh the possible consequences of additional Fed action. Clearly there are potential negative consequences; otherwise monetary authorities would add stimulus regularly. Increased potential for inflation is the most obvious negative possibility. In the present environment of increasing deflationary forces, however, that fear is easily dismissed. Unfortunately, what is rarely even examined is the morality of Fed rescue efforts.
Every Fed action involves the choice of winners and losers. In evaluating such actions it’s important to recognize that the Federal Reserve Board is an entity established by bankers for bankers. That recognition explains why maintaining the health of banks and bankers always appears to be the most important objective in any rescue effort. That intention becomes all the more galling in the current instance in which ultra-wealthy bankers, whose firms were bailed out and force-fed essentially free money for lending or investment, received giant bonuses while vast numbers of U.S. citizens remain unemployed. The money to bail out and feed those banks has to come from the far less affluent general public.
The greatest inequity falls upon the elderly retired and generations unborn. Millions of Americans worked for decades, saved, and retired with the valid expectation that their retirement assets would provide a variable but reasonable return. By reducing short-term interest rates essentially to zero, the Fed denied the elderly retired a risk-free return. Fed officials have acknowledged their intent to “force” investors to take risks. Imagine the psychological distress that prospect creates in those who don’t want or can’t afford to take risks with their money. Worse yet, imagine the psychological and financial distress it causes those who take risks and lose money. Unlike big banks, such people are not “too big to fail,” and the Fed has no bailout program for them. Now that the Fed has pledged to keep interest rates exceptionally low through at least mid-2013, a growing numbers of retirees will be forced to take risks for a chance to receive any appreciable return.
It is, frankly, very surprising that there has been no hue and cry raised by savers–especially the elderly retired–about their money being used to bail out overextended borrowers. Have the Grey Panthers gone dormant? We see a very clear choice by the Fed to reward the profligate at the expense of the frugal. That choice turns everything we’ve been taught in life on its head.
The elderly retired are not the only victims of the Fed’s rescue policies. As the greatest debtor nation in world history, we have no stash of cash waiting to be distributed to stimulate the economy. Any money distributed has to be borrowed or printed. To the extent that it is printed, it decreases the value of existing dollars. That devaluation falls most heavily on the elderly retired, who can’t go out to earn more of those newly printed dollars. To the extent that money is borrowed, the debt burden that will be passed along to subsequent generations grows. QE1 and QE2 testify eloquently to the uncertainty of success that attends such rescue efforts. We can’t know in advance whether another intervention will succeed or fail. We can be confident, however, that we will be leaving a legacy of massive debt to our grandchildren and very possibly to their grandchildren. What right do we have to bail ourselves out of problems that we created with money from future generations who have no voice in the decision to spend?
The Fed feels compelled to act with no clear blueprint for success. I suspect that unborn generations would vote “no.” I encourage the elderly retired to make their voices heard by strongly objecting to being victimized for the purpose of bailing out the overleveraged.