What Is Quantitative Easing?

Federal Reserve Chairman Ben Bernanke announced Thursday that the Fed will be rolling out QE3; that is, a third round of quantitative easing. Quantitative easing is another way of saying that the Fed will create money from nothing, inject it somewhere in the economy and hope that it gets the economy moving. He’s promising to keep interest rates low until 2015 and to pump an additional $40 billion per month (for a total of $85 billion per month) into mortgage-backed securities at least until the end of the year. The Fed will continue its “easing” past the year end if necessary until growth is “quantitatively” evident. Quantitative easing is another one of those convoluted and counterintuitive government-speak terms. It’s neither “quantitative”, nor is it “easing.”

Central economic planning is not an exact science (unless the goal is to destroy the economy slowly and painfully; then, it works like a charm). There’s no way that Bernanke or anyone else knows how to manage such a complex conglomeration of human relationships that is the U.S. or international economy. He has blind faith in himself and big-government that if he injects the right quantity of money into the economy (the more the better), it will somehow spur growth. It hasn’t worked before, and previous rounds of QE in the past 4 years have only contributed to rising unemployment numbers, rising prices, people leaving the workforce altogether and an overall dwindling of our economy. But Bernanke presses on, thinking that this time will be different. What’s the definition of insanity again?

Creating money ex nihilo and dumping it into a sector of the economy does not “ease” the economy. It ends up putting a strain on the economy by devaluing our dollar, which drives prices up and further divides the chasm between the rich and the poor by erasing the middle class. The injection might feel good to those that get it first, like the big banks and financial institutions who are well connected to the Fed, but any semblance of a recovery will most certainly be short-lived, especially for the average hard-working American. But the “recovery” might be long enough to convince Americans to make a certain choice this November. Can you see the headlines? “President Obama Saves the Economy Just Before Election” And they try to tell us that the Fed is “independent” of politics.

So what’s the solution? There is a right way and a wrong way, but neither is the easy way. The wrong way is what Bernanke continues to do. By keeping us in economic stagnancy, he is only prolonging an inevitable burst of a giant bubble. The longer we wait for the market to correct itself, the more painful the burst will be. Get the government out of politically motivated central economic planning. Cut bureaucratic red tape that holds small businesses back from being able to succeed. Drastically cut government spending and eliminate most taxes including the income tax. These are some measures that should be taken in order to restore economic prosperity. Less government is always the solution. I know, easier said than done.