Carol Perry: QE2: Will it work this time for Fed? | NevadaAppeal.com

Carol Perry: QE2: Will it work this time for Fed?

Carol Perry
For the Nevada Appeal

Remember last time I mentioned a movie called “I.O.U.S.A.”? I do not know how this happened, but the director of the film contacted me to thank me for plugging his film and he sent me a copy in DVD along with the book. I will try to put both on reserve at the library for everyone in Carson City to enjoy. Thanks very much to Patrick Creadon for what I consider the best documentary on our country’s deficits. Notice the plural of deficit.

Now on to another scary topic. How many of you think that QE2 is a cruise ship? Well it is, but it has another meaning that has been in the news this week. QE is quantitative easing and 2 stands for the second time the Federal Reserve has tried it.

This month the Fed announced that it will purchase $600 billion worth of long-term treasuries over the next eight months. Additionally, the Fed will reinvest an additional $300 billion with the proceeds from earlier investments. The bond purchases are aimed at stimulating our economy and averting deflation due to stagnant consumer spending. The Fed has already kept the fed funds rate at zero hoping that would encourage spending and make borrowing easier. Hmmm, hasn’t the Fed already made $2 trillion in similar purchases (QE1) with rates at zero earlier in the recession and nothing happened?

I know the Fed is claiming that QE1 was aimed at repairing the damage on bank balance sheets. The Fed even offered to pay banks interest on reserves, so what did all those banks do with all that money? They parked it at the Fed to earn interest. Granted , the Fed is only paying .25 percent, but on 2 trillion dollars that amounts to $2.5 billion a year in interest. Not bad for banks that were almost bankrupt in 2008.

For QE1, the Fed essentially printed money and handed it over to the banks, so how is QE2 supposed to work differently at stimulating our economy? The Fed will print more money and buy bonds hoping for a different result, but there are many critics of this plan including members of the Federal Reserve Board that see this tactic as nothing more than the central bank monitizing the Federal debt over the next eight months.

I don’t know about you, but this sounds like risky business. Looking back, history is littered with the economic carcasses of countries that have used this central bank tactic. Why would the U.S. be any different? I do not know about you, but I am not confident that the Fed can pull this off. We are talking about the same Fed that fueled the last two bubbles keeping interest rates too low for too long.

Alan Greenspan testified before Congress that he had failed to recognize the housing bubble or understand how large the subprime loan market had become. Al is gone now, replaced with Fed Chairman Ben Bernake who testified to the House Budget Committee back in June 2009 that Congress should either cut spending or raise taxes to stabilize our fiscal situation. Read his lips, “the Federal Reserve will not monetize the debt.” Even Greece criticized QE, the plan of printing money (federal reserve notes) to buy your own debt as “clueless and absurd.” When you get a lecture from the Greeks, perhaps it is time to re-evaluate your strategy.

Personally, if we add 900 billion new dollars to the 2 trillion already printed, but not really circulated yet, we may devalue our currency and face massive inflation. Since the Fed has made a few booboo’s already, I am less than confident that QE2 can be successfully pulled off without negative consequences.

Watch the prices of food and other commodities rise along with metals to see that the dollar’s value is indeed going down due to inflation. How bad can it get? I hate to even think about it, but perhaps I should buy some extra canned goods and toilet paper at the Costco while I can still afford it. I hope the worst case scenario does not happen, but it is better to be prepared. Besides, toilet paper never goes bad.

• Carol Perry has been a Northern Nevada resident since 1983. You can reach her at carol_perry@worldnet.att.net.