The Fed Will Create More Money, but Will It Help?

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money cash manThere isn't much surprise left in the expected Federal Reserve decision to embark on a program of buying bonds in hopes of stimulating the economy. It's just that more and more people think it's a bad idea.

The Fed is likely to announce the move at the end of a two-day meeting of its interest-rate-setting committee on Wednesday. Fed Chairman Ben S. Bernanke has been hinting at this policy course since August, and leaks from the committee suggest the policy will be adopted, but perhaps on a smaller scale than analysts had earlier expected.

According to The Wall Street Journal, which has been used by members of the committee to get their views out in public, the bond purchases are likely to be a few hundred billion dollars over the next several months. Some had expected the amount to be well over $1 trillion -- a "big bang" like the $1.7 trillion purchase program the Fed started in March 2009, to keep the economy from collapsing. But the Journal says that's not likely to happen.

Chasing Zero

The purchase of Treasury bonds is designed to get money pumping through the financial system. It works like this: Because the primary interest rate is already at zero, the Fed has to resort to other means to lower returns in the greater marketplace. So the Fed creates money out of thin air and buys bonds from the markets. The hope is that this demand for the bonds will cause their prices to rise, which results in lower interest rates. If interest rates are lower, the theory goes, people and businesses will have more incentive to stop hoarding their savings and start borrowing and spending.

The concept of bond buying, which is known as quantitative easing, has some fierce critics even within the Fed, including Thomas Hoenig, president of the Kansas City Federal Reserve Bank. Hoenig says expanding the money supply is "a bargain with the devil." Even notables like Nobel-prize winning economist Christopher Pissarides think it's a bad idea, saying there already is enough money floating around the American economy.

The conventional view is that the Fed has little choice but to act. "While a lack of liquidity is not the problem in the economy," say Bank of America (BAC) analysts, "quantitative easing is the best of a bad set of choices for the Fed. [It] can stimulate the economy by depreciating the dollar, and boosting the stock and bond markets. Moreover, the alternative of doing nothing could seriously damage confidence."

Not Much Firepower Left

But there is also growing concern from economists and businessmen on Main Street that the program won't work.

"The impact of quantitative easing is going to be very minor," says Robert Barone, an economist who is a partner at Ancora West Advisors, a Reno, Nev., money-management firm. "The Fed has already shot all of its major artillery, and all they have left now is a .22 rifle."

Barone says banks are already flush with cash, and the loan rate has actually been falling rather than rising. So giving them more money isn't going to get companies the loans they need. He also says interest rates are already at historic lows, so making them marginally lower isn't going to do much beyond spurring the wealth effect -- the notion that because things might be getting better, people will start spending again.

Worried About Inflation

Stephen Stanley, chief economist at Stamford, Conn.-based Pierpont Securities, says the bond-buying program may result in stoking inflation above acceptable levels. He points to the fact that prices for some assets such as gold and commodities have rocketed higher in the past few months. Gold is up 14.75% in the last six months.

Stanley says it's also not certain if quantitative easing will accomplish the Fed's main goal of lowering interest rates. He notes that after the first round in March 2009, yields on 10-year Treasury bonds fell by 0.5% in one day. But they bounced back to the same level within a month and were 1% higher within two months.

He said businesses aren't spending now because of the uncertainty over government policies such as taxes and regulation, which the Fed can do little to change.

Stanley maintains that while households are saving more than in the past, the government is running massive deficits so that the net result is the country has a negative savings rate. So, the Fed doesn't need to create incentives to get people to stop saving money, he says.

Is the U.S. in a "liquidity trap"? That's when no matter how much the Fed increases the money supply, it doesn't affect the economy. Barone thinks so. "Even if they create more money, it's not being turned over -- people simply accumulate it," Barone says.

Playing a Weak Hand


Small businesses will get hurt, he believes, because quantitative easing will cheapen the value of the U.S. dollar and cause import prices to rise. But exports won't get the kick they need because it has taken 20 years for manufacturing companies to set up shop in China and elsewhere in the developing world, and it would take a very long time to reverse that trend.

So whether you're worried about inflation or the money supply, it looks like the Fed is playing a weak hand. And not many analysts expect it to win, no matter what the details of the program coming this week.

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witteyjb

The experts said it all so what should I say? Only that its all part of the Obama plan to bankrupt the United States! It's on track as any blind man can see! When Germany had the same problem in 1934 Hitler asked his economists what he must do to bring prosperity back to the Germany people; they all said the same thing,"They didn't know". I hate to use Hitler in my story but he's the only one I know in history so I appollogize if I offend any one! Any way he went on the radio & told everyone that wanted to work to report to the town hall at 9am monday morning, sharp. The economists said he would go broke in a few years; instead Germany became the world model for growing living standards. They were doing so well both America & Britain were jealose of their living standard. Note this was before the mass arrests started. Both Roosevelt & Baldwin were amazed at the sight of German prospertity. The moral of the story is "a fully employed nation is a prosperous nation;" monkeying around with bonds & stock does not creat jobs. Jobs are created when a nation has a goal & objective to build things, NOT SCRAP the space program, cut defense, cut infrastructure; etc, etc. How shall we get the money to build things? Put the american people back to work & stop lying about the number of un-employed.10% unemployed, what nonsense the number is 50% if you count those that lost their jobs 10 years ago & have never found work. A little truth goes a long way!

November 19 2010 at 5:46 PM Report abuse +1 rate up rate down Reply
Dona

Do we even have enough money to buy the green ink? IF so send the entire stimulus to us in California as we are going down for the count. Jerry Brown hasn't even been recalled yet, he was elected over 12 hours ago whats taking so long?

November 03 2010 at 8:53 PM Report abuse +1 rate up rate down Reply
ajgorm

Two things to remember this November to remember. Trickle down jobs using trickle down economics will create jobs at Wal mart. Printing till we Pop will lead to more debt and a melt down. The last thing to rember is that all roads will never lead to ROME. One world currency will not work. Welcome to the NWO no way out !

November 03 2010 at 12:56 PM Report abuse +2 rate up rate down Reply
jvrtex

Theodore Roosevelt's ideas on Immigrants and being an AMERICAN in 1907. 'In the first place, we should insist that if the immigrant who comes here in good faith becomes an American and assimilates himself to us, he shall be treated on an exact equality with everyone else, for it is an outrage to discriminate against any such man because of creed, or birthplace, or origin. But this is predicated upon the person's becoming in every facet an American, and nothing but an American...There can be no divided allegiance here. Any man who says he is an American, but something else also, isn't an American at all. We have room for but one flag, the American flag... We have room for but one language here, and that is the English language.. And we have room for but one sole loyalty and that is a loyalty to the American people.' Theodore Roosevelt 1907

November 03 2010 at 12:04 PM Report abuse +1 rate up rate down Reply
k4jlp

ANOTHER STEP IN THE "PLAN" TO WEAKEN THE DOLLAR, JACK COMMODITIES FOR QUICK GOLDMAN SACHS PROFITS AND MOVE US TOWARDS THE AMERO...WHATS THE AMERO YOU ASK??? WELL IT'S MONEY FROM AMERICA, CANADA AND MEXICO COMBINED INTO ONE BILL, EVER HEARD OF THE EURO???

November 03 2010 at 7:25 AM Report abuse +1 rate up rate down Reply
rwdvddndcrw

another mistake,,,, The problem is unemployment by greed. the money will get pilfered by financial ceo's like last time. Companies have learned to use employees as slaves, increasing work loads, decreasing benifits, etc. Workers are afraid of losing jobs, as companies are no longer family oriented, but serve only profiteering, outsourcing jobs, using Temp agencies to skirt hiring, all the exportation of good paying jobs. People can't spend what they no longer have. It's a cycle that won't end until American economy completely implodes on itself.

November 03 2010 at 4:40 AM Report abuse +4 rate up rate down Reply
MSmailbox

I think that we might live to see the pyramid collapse. Interestingly enough, I think that life will go on, perhaps even better than it was before. We had become obessed with the almighty dollar and materialism. How many years, we worked and saved and invested, but how much time did we spend with each other? If I find a wife, some pupose and peace, then it will be money well spent (lost in the market, in '09). Excuse me, Ben is on line #1... I told that man to get some sleep. He's taking this money stuff, far too seriously. Wouldn't it be funny to end up in one of the "Titanic's" life boats, with Mr. Bernacke and the President? I'd probably laugh, roll a joint, fire it up and pass it around. Ben deserves it, as do we all.

November 03 2010 at 1:59 AM Report abuse +1 rate up rate down Reply
mikfete58

Any further stimlus (Quantitative Easing) will further burden our country and devalue the dollar in a worldwide economic depression. Expect inflation to hit hard by 2011, oil to raise to $100.00 bbl by December 2010, and also look for a major stock market correction or even an economic crash and burn any day now.

November 03 2010 at 1:34 AM Report abuse +5 rate up rate down Reply
priority109

............toooooo quiet tonite out here----goin over to glp or the du to see what's happening !

November 02 2010 at 11:37 PM Report abuse rate up rate down Reply
MSmailbox

I bought tons of the white metal, from a couple of guys by the lastname of Hunt. I can't even remember what I paid, but it was very cheap. My interests were not monetary, but rather, I was intrigued by the fact that silver posesses a very loose (promiscuous) electron, that's easily displaced from it's valance shell. This makes it the most conductive of all metals, far exceeding the conductivity of gold, copper and aluminum. I never figured out what to do with it all, so I buried it in my back yard.

November 02 2010 at 11:29 PM Report abuse +5 rate up rate down Reply