Joseph Stiglitz, two-time Nobel laureate in Economics, stated in an interview this morning that “monetary policy, failed monetary policy, did play an important role in creating the crises. [The Fed] really did a terrible job, but while they can create a mess, it is much harder to clean up after they have created the mess.” While my opinions do not always coincide with Stiglitz's, I couldn’t agree more.
Stiglitz goes on to point out that the models the Fed uses to address real interest rates and liquidity traps are ineffective at achieving their stated goals of maximum employment, stable prices, and moderate long-term interest rates. He points out that “real interest rates are effectively negative and have failed to stimulate the economy.”
Looking back at those stated goals, how could one argue? Unemployment is over 9%, prices have been anything but stable, and interest rates are negative. From the beginning to the end of QE1 and QE2, the stock market doubled, but along with it oil, corn, sugar, coffee, and cotton all more than doubled in price. Following the end of the Fed’s easing programs, prices for everything has spiraled out of control, but aside from oil prices and stocks, many commodity prices still remain elevated.
Goldman Sachs yesterday issued a note that “we now see a greater-than-even chance that the FOMC will resume quantitative easing later this year or in early 2012.” And, why not? The Fed has had such wonderful success pumping the values of stocks with their purchases (just not in a way that helped household balance sheets), that after the latest market deluge they’ll be right back to their old tricks. Even despite three dissenting opinions from the FOMC statement yesterday, Bernanke will most likely bail on consensus decision making and initiate another round of buying.
But at this stage in the game, Bernanke is betting the farm.
A third round of Fed stimulus will surely again fail to stimulate the economy as Stiglitz has noted, but when it has proven that their policy does little other than pump the values of stocks, doing QE3 at a time when commodities remain at high levels and interests rates are already effectively negative, further easing can cause significant long-term harm. Betting on the value of stocks at this point could have permanent effects on commodity costs, as they will surely rise, and rise significantly, with more easing.
The goal of monetary policy is to control the supply money and the price of money, not to speculate. Right now there is an ample supply of money, and it can be borrowed at an unbelievably cheap price. Businesses could not be presented with better conditions to borrow, and more QE will only encourage speculation and malinvestment toward commodities and other rising assets.