Blah Blah Blah Quantitative Easing Blah Blah Blah - “I Want a New Drug”

Blah Blah Blah Quantitative Easing Blah Blah Blah – "I Want a New Drug"

Let’s step back into our time machine and travel alllllll the way back to the 2000-2009 decade – the one we just finished. We suffered a massive financial crisis because we, as a country and a world really, had borrowed and lent far too much money based on paper asset prices. The assets in question were homes, and the prices were inflated by a massive ignorance of risk on the part of all parties – borrowers, lenders, insurers, modelers, financial wizards, etc. When we borrowed money based on paper asset prices, we were totally hosed when the prices of those assets declined and we then couldn’t afford to pay back our loans.

Now press "live" on your remote, and return your DVR time machine to the present. The solution our fearless leaders at the Federal Reserve have chosen is to run this play again – quantitative easing is designed to inflate asset prices, which in turn will hopefully result in people feeling wealthier, borrowing more, and spending more – it’s a "virtuous cycle!!!" Bernanke actually told us this, specifically, in an Op-ed today:

Easier financial conditions will promote economic growth. For example, lower mortgage rates will make housing more affordable and allow more homeowners to refinance. Lower corporate bond rates will encourage investment. And higher stock prices will boost consumer wealth and help increase confidence, which can also spur spending. Increased spending will lead to higher incomes and profits that, in a virtuous circle, will further support economic expansion.

Just to recap, the Fed’s basic goal (in my opinion) is to force capital into risk assets. The Fed buys treasuries, driving their yields to unappealing levels, until investors are forced to put their money into other asset classes: stocks, corporate bonds, commodities. As that happens, portfolio valuations increase, everyone is supposed to feel good again, and we go out and spend money, which flows through to the rest of the economy. Now get back in the time machine and crank it back just a handful of years. How did that work out last time? Of course it was great while the bubble was inflating – flat screen TVs and newly landscaped yards for everybody! – but reality is always a bitch, and bubbles always burst.

I sympathize with The Pragmatic Capitalist, who seems to be pulling his hair out in frustration over the "solutions," we’ve enacted so far:

If this indeed works (pushing up asset prices) then why don’t we just perpetually perform QE? Why don’t we just sustain asset prices “higher than they otherwise would be”? The very idea of this as an economic strategy is frightening in my opinion. If QE actually works then there is no need for fundamentals. Why does anyone get up in the morning and go to work? We can all just go out and open an ETrade account and let Ben pour money into our accounts. Unfortunately, that’s not the way economics works. You would have thought that we’d have learned this after two bubbles in less than ten years, but no. Here we are again.

We are trying to ameliorate the effects of a collapsing asset price bubble by inflating a new asset price bubble. That drug doesn’t work. In the words of Huey Lewis, I want a new drug.