Our Money Managed by Mr. Bubble

Published November 19, 2012

A close look at the most recent statement from Federal Reserve Chairman Ben Bernanke after the formal announcement of QE3 two weeks ago, plus articles and blogs in reaction to QE3 and my own personal interviews with economists and financial advisors, make one conclusion inescapable.

Our money, our economy, our future, is in the hands of Mr. Bubble.

Bernanke loves bubbles–housing bubbles, stock bubbles, bond bubbles, commodities bubbles. Blow, baby, blow!

That’s what this is all about, this QE3 that follows QE2 and QE1 and Operation Twist2 and Operation Twist1.

Bernanke and the Fed’s Open Market Committee officials who voted for open-ended money creation say their aim is to drive up stock, bond, and housing prices and drive down interest rates and unemployment. Here’s how their thinking goes:

As the Fed’s artificially low interest rates make it virtually impossible for people to earn anything by putting money in a savings account, certificate of deposit, or money market, people will save less, spend more, and invest in stocks, real estate, and other things that are much riskier but offer some hope of earning a return.

Higher stock and bond prices should make people feel wealthier. Record-low interest rates should prompt people to borrow more and bid up prices on houses, adding to the feeling of wealth and the inclination to spend.

So says Mr. Bubble.

I have little doubt Mr. B is a smart person, but persons in positions of power often know much and understand little.

For instance, Mr. Bubble seems not to understand that millions of people who got burned by too much debt and a housing bubble probably will not want to take on new debt or buy into a new housing bubble.

He seems not to understand that trying to manipulate people into investments they otherwise wouldn’t make is what causes bubbles, and bubbles always pop.

He also seems not to understand that although near-zero interest rates help borrowers, economies also need savers, because savers provide the capital banks need to lend money. His Fed policies discourage saving because, with interest on savings below the real inflation rate, savers lose money on every dollar held, whether in a bank, money market, or pocket.

One wonders whether he understands interest rates are the price for money and that manipulating interest rates is a price-fixing activity that destroys the ability of interest rates to reflect supply, demand, or the perceived risks of people who borrow and lend money.

No individual, no matter how smart, can be smarter than the rest of the world. Price fixers implicitly claim to know better than the rest of the world. At least one central banker understands this: Richard Fisher, president of the Federal Reserve Bank of Dallas. He was the lone committee member to vote against this latest round of money creation.

A few days later, in remarks before the Harvard Club of New York City, Fisher said:

“[N]obody on the committee, nor on our staffs at the Board of Governors and the 12 Banks, really knows what is holding back the economy. Nobody really knows what will work to get the economy back on course. And nobody–in fact, no central bank anywhere on the planet–has the experience of successfully navigating a return home from the place in which we now find ourselves. No central bank–not, at least, the Federal Reserve–has ever been on this cruise before.”

QE1, QE2, Operation Twist1, and Operation Twist2 have all attempted to deliver strong and sustained economic growth. All have failed. QE3 is more of what has failed. Perhaps they have failed because they are not addressing the real problems. Perhaps they’re worsening the problems.

Richard Fisher understands this. We may pay a high price for the failure of Mr. Bubble and the rest of the Fed’s Open Market Committee to understand.

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