Ben's big bluff blows bubbles

Do you like tongue twisters? Try repeating the title of this column five times fast. During last week’s round of the world series of (financial) poker among the leading central bankers, the representative of our Federal Reserve system went “all in,” announcing the third installment of “quantitative easing.” The QE3 strategy involves buying, for months and even years, hundreds of billions of dollars of mortgage-backed securities, thus making home loans cheaper. Personally I should not complain too excessively—this is good news for people like me who plan to buy their first house within a couple of years.

With this bold move of creating tons of virtual money, Ben Bernanke and his colleagues hope to make our banks look healthier and to boost employment figures in the construction industry. What they conveniently forget to tell us is that such actions also tend to encourage excessive borrowing and risk-taking, the same behaviour that brought on the 2008 financial crisis. What most of the reporters who cover these events forget to ask is for some proof that the previous monetary interventions totaling more than $2 trillion have been worth it.

Keeping interest rates close to zero for four years has not brought unemployment below 8 percent, but it has made it much easier for this administration to increase our national debt at a rate of more that a trillion dollars per year. Does our government really need additional temptations to borrow and spend? It is like leaving my 6-year-old son (who has inherited his dad’s sweet tooth, bless his soul) alone with a jar full of chocolate chip cookies and with written instructions to act responsibly as the only constraint.

The Fed’s “shock and awe” initiative weakens the dollar in an attempt to strengthen our exporting sector, making American goods more attractive to foreign consumers. It also increases fears of inflation, leading to the immobilizing of massive amounts of domestic capital into gold. Monetary expansions fuel commodity bubbles and redistribute wealth in unpredictable ways. The process usually benefits the wealthiest stockholders and hurts the poor and lower-middle-class citizens by making food more expensive. And do not forget the likelihood of even higher oil prices and consequently intensified pain at the pump. These are just a few of the economic consequences of QE3.

Next week I will focus more on the political implications of Bernanke’s gamble.