It’s an old saying that if your only tool is a hammer everything begins to look like a nail. Ben Bernanke, the Chairman of the Federal Reserve Board, has now decided to take a third whack at unemployment by another round of “quantitative easing,” using “open market operations” to manipulate interest rates.
In March 2009, the Fed launched a $1.25 trillion program to buy up mortgage backed securities in hopes of jump-starting the economy. This massive injection of liquidity into the economy certainly helped the stock market (which bottomed that month) and stabilized the economy. The second bout of qualitative easing, however, in November 2010, when the Fed began buying $600 billion in treasuries, had far less effect. Will this one help? The promise to buy $40 billion of mortgage-backed securities a month for the indeterminate future has already sent stocks soaring around the world, but anything that tends to lower interest rates and increase the money supply sends investors out of bonds and dollars and into commodities and stocks. The theory is that higher stock prices will have a “wealth effect,” making people think they’re richer and therefore more willing to spend money. But since the move is likely to make commodities costs more (both oil and gold rose yesterday) it’s at best doubtful that it will work.