Last week Federal Reserve Chairman Bernanke announced more quantitative easing. The Fed is purchasing $600 billion in Treasuries to boast the economy, lower interest rates and create an inflation rate conducive to long term stability. Basically the new Fed policy is print more money, which has a strong effect on the dollar and our international trade.
Why the Fed is Printing More Money
Federal Reserve Chairman Bernanke said, “Our first objective, the first goal that we have is to meet our mandate to get price stability and maximum employment in the United States.”
Basically the feds have failed to get unemployment under control and price stability of the dollar has been choppy at best. The unemployment rate has been steady at 9.6%, but the last two months have seen employment increasing slowly. This is in line with economists who say this recession will take a long time to reverse because of the failure of the banking system to loan money to the small business sector, which is the largest block for employment.
Michael Burry, former hedge fund manager, who predicted the housing markets plunge, has said the Fed’s policy is encouraging investors to take on more risk and threatens to undermine the dollar. China, Brazil, and Germany are also concerned about the impact on Global economics and rightly so because its not all about the US.
How Does Quantitative Easing Help the Unemployment Situation?
Banks are not loaning money to small businesses. Why? Well why should they because after all they can borrow from the Fed’s at zero interest and reinvest that in Treasuries which will guarantee them between 2-4% depending on the length of maturity. With no bad debt that guarantees them a profit with out any additional risk.
But with quantitative easing the government buys up treasuries by printing more money and forces the banks to start lending again because they can’t buy treasuries which causes their reserves to inflate. Will that be good or bad for small business? Well maybe is the best answer. Although banks don’t have to loan to small business where else can they go to get the rates they seek to remain solvent?
In Japan, were they tried quantitative easing to help them out of the recession, it didn’t trickle down to the little guy. Basically large corporations and big wealthy investors borrowed the money and took it overseas to invest so it had little or no effect on Japan’s recession.
I believe quantitative easing will help to stimulate the economy here in the US but it will be in conjunction with other policies and measures taken up by the government. Frankly at this point there is little the Federal Reserves can do except quantitative easing.
The untold truth is it will take some congressional strong arms to get the banks to accept risk and loan to the small businesses so they can begin hiring. Look for congress to use their legislative and voting power to force banks to loan to small business.