Quantitative Easing May Not Be Pleasing

by The Wall Street Geek on October 4, 2010 · 2 comments

Whenever I hear the phrase “quantitative easing”, I get a flashback to this statistics class that I took in graduate school. I’m sitting there with my stomach in knots, befuddled as to what the heck is going on.

It’s pretty accurate to apply that same reaction to the latest buzz of a second round of quantitative easing potentially occurring this fall.

The government has several tools in its belt when it comes to impacting the economy. Some tools fall under the “Fiscal Policy” category (including government spending to spur economic growth, and tax collection to provide revenue to the government). Other tools may fall under “Monetary Policy”, such as tweaking the money supply or interest rates to increase demand, encourage business lending and potentially a reduction in unemployment.

Like the dials of an Etch A Sketch, the government uses these tools in a delicate dance towards creating a rosy picture out of the US economy. One flinch in the wrong direction, and you’ve got a mistake that’s tough to fix without shaking it all up and starting over again (which some say describes how this last recession reset our economy to lower levels).

These dials have to go a particular way according to theory in order to get a certain result. However, with interest rates already low, government spending and debt already high, and the tax cut debate predicting dubious results; what’s left to do?

Like Superman, in swoops the idea of “Quantitative Easing” (also known as “QE”). If this sounds familiar, this monetary policy tool was last attempted in 2008 as one of the last acts of the Federal Reserve under the Bush Administration. The Fed injected money into the financial system by buying assets such as debt issued by private banks (such as bad mortgages packaged into mortgage-backed securities).

The Fed “eased” the burden on banks by providing them a “quantity” of liquidity in the form of cold hard cash, providing the banks with more capital to theoretically lend.

But the desired result of increasing in private sector loans, spurring commerce and reducing unemployment didn’t exactly happen. So why is the Federal Reserve trying it again? Haven’t you heard of the saying “Fool me once, shame on you. So fool me again”?

We’ll hear about the decision to try Quantitative Easing again (e.g., “QE2”) when the Federal Reserve has its November 3rd Federal Open Market Committee (FOMC) meeting. So there’s time for the government to reconsider, although at this point it sounds unlikely.

I say reconsider this form of trickle-down economics for two reasons:

1. Today’s financial system is far too complex and interwoven for traditional public finance tools to work predictably. For example, as far back as before the 1930’s it was fairly clear that lowering interest rates had upside potential. But now, we’ve got seniors without guaranteed pensions living off of savings often invested in bonds that may or may not produce the income that they need when monetary policy changes interest rates.

2. These traditional tools are Rube Goldberg machines for solving the issue in my opinion. There is unemployment because businesses aren’t hiring, because demand isn’t there, because people don’t have money to spend. And even if people had money to spend, nine times out of ten it would go towards paying down household debt.

Our government has very smart people at the top. But on this issue of improving the US economy, they’re thinking way too hard.

Rather than apply quantitative easing and giving money to banks towards encouraging lending towards entrepreneurs creating jobs towards putting money into people’s pockets which will produce spending–just cut out all of these middle men, put that same money in an envelope and mail one to every US household.

In the age where millions of people donated $25 to produce millions each month for our current president’s campaign, why not have the same faith in millions of people–when directly given the tools to feel secure to spend–to produce a “Trickle Up” economic recovery?

$1.7 trillion dollars were given to the banks in 2008 for the last attempt at QE. With the 2009 US population estimate at 310M, a Main Street QE would equal a check of almost $5500 to each person in the US.

If we narrowed the recipients to individuals over the age of 18, using 2009 census number the check would increase to just over $7200 per person.

And if we went by household, approximately 105M households by the 2009 census ups the check to $16K per household.

In order to increase the likelihood of having a return on their investment, the Federal Reserve could provide the following three choices to individuals on how to spend the money–and more than one could be chosen:

Choice 1: Enroll and pay for a local corporate or public sector provided educational program to learn competitive skills–skills that would give people the tools to build things such as software, electronics, and other sellable products.

Choice 2: Use the money to pay down household debt, and deposit a percentage in a local bank (which would provide local banks with deposits towards providing loans to the community).

Choice 3: Save a percentage, and spend a percentage in local businesses.

It’s definitely not easy to solve the problem of spurring the US economy. But if QE2 is implemented and doesn’t work, just don’t try to fool us a third time.

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Price CapitalAfter turning $1100 into $7015 in the stock market right out of college, Michelle worked 15 years on Wall Street at Morgan Stanley, Citigroup and Goldman Sachs. She wrote "How to Buy Stocks Online", and is a fee only financial advisor providing investment help in New York City.

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