Economists are now ratcheting down their forecasts for final 2nd quarter GDP to 1% which just further illustrates the ineffectiveness of fed policy measures. Ben Bernanke blames fiscal policies out of Washington, saying he can only do so much to counteract their lack of a healthy tax code, job creation plans, and inefficiencies.
However, it is starting to look more and more like Fed policy, a lack of creative fed policy, or even too much fed policy is equally to blame for the non-recovery five full years after the financial crisis.
Dallas Fed President Richard Fisher talked about pushing on a string, and it looks more and more that the fed is actually doing more harm than good to the economy with their programs.
Pushing on a string implies that they just are not getting the desired results from their programs, but that they definitely are not having negative effects on the economy. But the Fed’s Ben Bernanke is actually damaging the economy through policy measures in several ways.
Ben Bernanke – Low Interest Rates Hurts many Segments of the Economy: Savers
For example, just in my limited sphere of contacts on a daily basis over the last four years I have met many people who rely on CDs for their income; this is their only major source of income. They are unemployed, their spouse has died, and the deceased husband left enough money in a CD program with a paid off mortgage for the wife to pay her monthly living expenses.
The Stock market is great for younger, more risk taking investors, but for many baby boomers and others not wanting to take chances on the market given its volatility CDs with higher interest rates serve a valuable need in the economy for protection of capital, with a slight return to supplement their income.
This entire market niche has been hurt and destroyed by the fed policy of keeping low rates for such an extended period of time.
A high saving`s rate has many benefits for the economy. For one, it means the health of people’s finances is in much better position to handle unexpected life events. Often the government has to fill in the gaps when citizens fall upon hard times because their savings rate was inadequate.
This is an inefficient model, which leads to higher governmental debt, higher costs, and higher taxes which provides a major economic headwind for future growth.
Ben Bernanke – The Stock Market isn’t the Economy
Another way in which low rates hurt the economy is that companies are incentivized to buy back stock with these low interest rates instead of using the money to put towards business investment which will lead to more hiring.
This improves the economy because the derivative benefits of higher employment feeds on itself, and more add-on jobs are created to account for more spending in the economy by those members of society who now have disposable income to buy goods and services.
I worked in major fortune 500 companies, and I can tell you from firsthand experience, the executive team who are the ones who make all the business decisions, mainly care about hitting their earning`s expectations so they don`t get fired. Furthermore, making sure their stock price goes up so they don`t get fired and collect with all their executive peers the hefty stock options that become vested in their compensation plans.
The stock buybacks accomplish those two goals far better than growing the business through planned business development. Ergo, extremely low interest rates where borrowing money at exceptionally low rates serves as a major enabler of the status quo and proves as a dis-incentive for taking risks, growing the business through creative means, and hiring new employees. It is highly ironic because these are the desired outcomes that the Fed talks up in their policy philosophy.
This is a major reason why corporate earnings are so much better than the actual economy for the last 5 years. The fed might want to look a little deeper into the harm this has caused for economic growth the last five years. A major QE policy failure in my opinion.
Gasoline & Oil Prices much higher than Fundamentals = Major Tax on Growth
The price of oil and gasoline has been much higher than theyshould have for the last five years because of Ben Bernanke’s QE policies.
In fact, Oil and gasoline priced much closer to the fundamentals would have served as a major stimulus to consumers who would have much more disposable income to infuse into the economy over the last five years.
Instead all this money goes towards filling up the tank, and even limits mobility as high gas prices, limit travel, leisure opportunities, and even business profits which could be used for re-investment, and hiring additional workers.
It is obvious that Oil and thus gasoline would have beenmuch lower over the last five years without QE Liquidity used to artificially inflate many asset prices.
The amount of money that is wasted on higher energy prices, and the knock on effects that high energy prices have on business growth and investment models served as a major drag on the economy over the last five years and is a major policy failure.
Ben Bernanke – America needs to Rethink the Makeup of the Federal Reserve: Too Much Group Think
This is much worse than merely pushing on a string Mr. Fisher, this is outright fed incompetence. The incompetence is that the fed continues the same policy initiatives even after it fails to get the desired results they were seeking at the outset of the programs. That is why they continue additional QE programs.
But what did Albert Einstein say regarding insanity and continuing to do the same thing over and over again, and expecting different results? You would think that after the policy didn`t meet their objectives, that they would try something different! I think this is where we need more diversity in the Fed governors.
We have too many members of the same ilk, same type of academics, no market experience, no business experience, no minorities, when was the last time an African American was on the Fed, or an Asian American, a Latin American, etc. How about cross-discipline smart people on the board of governors?
But the failure, and continued adherence to a limited scope of fed tools to try and invigorate this economy