More Fed Stimulus Means More Failure

Published July 27, 2012

“Fed Weighs More Stimulus” read the banner headline at the top of page one of The Wall Street Journal (July 12), raising the question: How can Ben Bernanke and other central bankers who pretend they run national economies believe a new round of stimulus will succeed when multiple prior stimuli have failed?

Calling for more of what already has failed apparently has become a staple of U.S. economic policy.

Shortly after assuming the presidency, Barack Obama signed into law a “stimulus” spending program that eventually topped $800 billion. Employment and economic activity languished. A smaller “stimulus” spending program late in the George W. Bush presidency before Obama assumed office likewise failed.

Meanwhile, the Federal Reserve and other central banks have poured trillions of dollars into the economic system. Fiscal stimulus and central bank money-printing at best have had short-term impacts. This is why the government has tried multiple stimuli and the Fed has done QE1, QE2, Operation Twist 1, and Operation Twist 2. The effects wear off.

Fed money-printing and bailouts of failed banks, auto companies, government mortgage entities, etc. forcibly move huge sums of money from some parts of the economy to others. These measures prop up failed businesses and weaken formerly strong ones. Failed businesses survive but are weak, and formerly strong businesses are weakened. It averages out to mediocre at best.

Don’t believe me? How about believing Jaime Caruana, general manager of the Bank for International Settlements (BIS) in Basel, Switzerland, which serves central banks around the world. Last month he told Peter Nielsen of CentralBankNews, “Monetary policy cannot resolve the fundamental problems that hold back sustainable growth. The root causes of the crisis are structural and fiscal, and only structural and fiscal reforms can bring the global economy back to sustainable growth.”

Governments could start by allowing failed companies to fail. Healthy banks could have bought good assets from failed banks on the cheap, making those healthy banks stronger. Instead, the failed banks have been propped up and declared too big to fail, giving them unfair advantages over smaller banks that could be allowed to fail. Dodd-Frank financial regulation makes things even tougher on small banks.

Chrysler and General Motors should have gone out of business. Good assets from those companies would have been purchased by other automakers, or entirely new automakers might have appeared. This nation used to have a “Big Four” automaker, American Motors Corp., which was itself a combination of several other automakers.

AMC in the 1980s went out of business. But a big part of AMC did not go away. AMC built the Jeep line of vehicles, and Chrysler bought the Jeep line, which is a big reason Chrysler survived its own bailout in the 1980s. We no doubt would have seen something similar happen with the Chrysler and GM lines if they had been allowed to fail several years ago.

This is an important point: We already had evidence that bailouts fail. Is the government every 25 years or so to pour billions of dollars into Chrysler to keep the company going? If we had to bail out Chrysler in the 1980s and again in the 2000s, the first bailout was a failure. The government doubled down on failure by rescuing Chrysler and GM, wasting resources that could have been put to better use.

The Federal Reserve and government officials keep telling us we need more spending to boost the economy. They’re wrong: We need more savings and investment.

Savings and investment provide the capital for new machines, technologies, and ideas that provide jobs so people have money to spend. Apple did not become a successful company with thousands of employees because people demanded personal computers, iPads, and other Apple gadgets. Those gadgets did not exist until men and women with vision created them by using money from savings and investment.

Without people saving money to provide investment capital, there’d be no Apple. There’d be no economy.

Until central bankers and people in government understand these things and act on them, we can expect continued economic weakness.

Steve Stanek ([email protected]) is a research fellow at The Heartland Institute in Chicago.