Yesterday, Ben Bernanke announced a third round of Quantitative Easing or QE3. QE occurs when the central bank creates new money in order to buy assets from commercial banks and private firms. In buying mortgage securities, for example, the Fed loosens up spending money of companies that those companies can now use to invest. In addition, the absence of these securities on the books, enable lower interest rates.
Normally, QE is temporary because large influxes of money into the economy can lead to rapid inflation. However, the Fed has announced that QE3 will be open ended until jobs start coming back. Maybe QE3 will help. But QE 1 and 2 certainly didn’t add much to the economy.
It seems obvious that the Obama Administration is committed to increasing the jobs numbers prior to the election. Bernanke and Obama are in this together and they’re going all in. I’m not an economist and I haven’t been around long enough to really comment on the success rates of Fed experiments like QE 1,2 and 3. But I do know that inflation is dangerous and that when the Fed releases billions of new dollars into the economy, it makes the few dollars in my pocket worth less.
If republicans are to completely take over the mantle of fiscal responsibility as they had pre-GWB, we are going to have to come to grips with the fact that while the Fed may always want the economy to look good on the outside and do well in the short term, today’s Chair and Board are not committed to a fiscally solvent American government with a reliable currency. That hurts us all long term. I am not anti-fed. But when the government continually tampers with the money supply, the only people who can lose are the American people. We’ve worked too hard for the little money that we had. We don’t need our savings worth less due to the actions of a government that exists at our pleasure. That’s something worth thinking about.