"Too much of a good thing," said Mae West, "is wonderful."
It needs to be said that Federal Reserve Chairman Ben Bernanke's innovative quantitative easing was a good thing, pumping vast sums of money into the economy when it was on the brink of collapse. Initially it was part of the Troubled Assets Recovery Program and I have no doubt it saved the economy from collapsing, possibly averting a depression. It was so successful in fact that now we have been through a second round of quantitative easing, and are now looking at a third, while our friends in Europe are following our example.
However, I am concerned that we may be asking too much of a good thing and, unlike Ms. West, I am not sanguine that the results will be wonderful. I am afraid in fact that we may be fostering yet another bubble.
First we had the dot com bubble. Over a period of years, as each day brought news of yet another high tech startup, investors flocked to put their money in without much thought about the viability of the new high tech company. The result was a bunch of overpriced companies with inflated stock values. When the bubble popped, millions of people lost billions. Even those too prudent to invest in speculative dot coms, saw their retirement savings drastically reduced. That was a bad time, but worse was to come.
We shifted almost immediately from the dot com bubble to the real estate bubble. All around the country people flocked to pour their money into real estate ventures. As home values rose steadily upward year after year, millions of people transformed their apparent equity into cash for other purchases. But the real estate bubble popped like the dot com bubble, and we are still struggling to dig our way out of the economic rubble. Today, some 11 million home owners are still under water.
Now we are deliberately concocting a new bubble based on easy money that is driving up commodity and stock prices that would otherwise be at dramatically lower levels. This is perhaps the most insidious bubble of all. The dot com bubble saw a lot of phony wealth, but at least there were some real assets out there being overvalued. The same was true of the real estate bubble. The houses and condos may have been overpriced, but at least they existed and after the bubble burst, they retained some value.
Moreover, in addition to distorting stock and commodity prices, maintaining zero interest rates for a prolonged period distorts financial capital markets. While there is little evidence that recent Fed actions have helped increase job creation, pumping such large sums of money into the system raises the real possibility of fostering inflation, followed by rising interest rates, further increases in budget deficits, and a breakdown in the economic recovery.
When this bubble bursts, as all bubbles do sooner or later, there will be no residual value on the ground as with the dot com and housing bubbles, and we will be left with numerous new problems. Right now quantitative easing is masking the true cost of the deficit, and even worse puts the Fed in the political role of making fiscal policy. Given the lack of real benefits to growth and job creation, and the potential cost of major economic disruptions, the Fed should step back from its own economic and political cliff.
Jerry Jasinowski, an economist and author, served as President of the National Association of Manufacturers for 14 years and later The Manufacturing Institute. Jerry is available for speaking engagements.