GHEI: Bernanke’s more-placebo policy

OPINION:

The problem with Washington is there’s no interest in any cure to our economic ills that has the side effect of angering powerful special interests. On the left, there’s no desire to trim government spending that public-sector unions depend upon. On the right, there’s no appetite for risking the “reckless” label by shutting down the government to keep outlays in check. Both sides would rather avoid the issue. Enter Federal Reserve Chairman Ben S. Bernanke and his magic bag of economic placebos.

After swallowing two rounds of “quantitative easing,” the nation is being told it’s time for a third. On Thursday, the Fed announced it will be buying $40 billion in mortgage-backed securities every month in an attempt to push interest rates down further. The lowered rates are supposed to jump-start investment, and the cash infusion will continue for the foreseeable future.

The Fed’s desperate move won’t work. Interest rates are already at historic lows: 3.55 percent for 30-year mortgages and 2.85 percent for 15-year mortgages, according to Freddie Mac. When rates are this low, lenders earn little, so their eagerness in providing such loans diminishes. This results in further tightening of lending conditions, reducing the number of people eligible for mortgages to match the limited supply. That’s not going to help the housing market recover; nor will it stimulate the economy.

The federal government is coming dangerously close to the point where its spending accounts for one-quarter of the nation’s entire economic output. This unhealthy binge is financed by $1 trillion in annual borrowing, and the public realizes the bill eventually will come due. They’re holding as much cash as they can in reserve, so it’s no wonder the economy is limping along in the weakest recovery in decades.

Earlier this month, the United States slipped from fifth to seventh place in the World Economic Forum (WEF) competitiveness rankings. The job creators surveyed saw countries like Finland and the Netherlands offering a superior environment to do business. Driving the pessimism for U.S. firms are fears of increasing taxation, eroding trust in public institutions and worries about increasing cronyism.

Government subsidies lavished on politically-connected firms like solar-panel maker Solyndra, which went bankrupt a year ago, diminish trust in public institutions. When government starts picking winners and losers in the marketplace, it encourages cronyism. Profit and risk must be closely linked for investors to make the best calls on the use of their resources. If investors know Washington stands ready to bail them out at taxpayer expense, they’re going to take otherwise unwarranted risks. After all, they get to keep the profits without any worry about losses.

Mr. Bernanke’s scheme to pump money into the economy ahead of the election might provide a temporary boost, as markets respond to the infusion of cash. However, the underlying sickness — the unsated desire to spend — remains. Government manipulation is a false remedy that gives Congress and the president an excuse to continue business as usual.

Nita Ghei is a contributing Opinion writer for The Washington Times.