Has Ben Bernanke Gone Bonkers?

Nothing puts people to sleep like Federal Reserve Bank monetary policy. The Ambian of all Fed maneuvers is the arcane practice of quantitative easing or QE. Yet Americans better start paying attention because a crisis of epic proportions may be brewing.

Fed Chairman Ben Bernanke recently announced a plan for the central bank to buy $600 billion of government debt. During the financial crisis, Bernanke has overseen the purchase of $1.7 trillion in government and mortgage bonds. The decision to embrace quantitative easing was greeted with benign news coverage which cheered the effort to boost the weak recovery of the U.S. economy.

However, the mainstream media as usual failed to grasp the significance of the Fed's move. The economic morons in the media were content to talk about the central bank's effort to increase the amount of credit available to borrowers. To do that, the bank issues new money to purchase assets from other banks, the media reported. Theoretically,at least, the banks then have more money to lend to businesses and consumers.

While the coverage is factually accurate, it obfuscates what is really going on here. Bernanke, who seems to have bought into President Obama's economic theories, has fashioned his own stimulus package. With Republicans poised to oppose any more billion dollar stimulus boondoggles, Bernanke decided to take matters in his own hands to circumvent the Congress. It is a maneuver fraught with high-stakes economic risks that far outweigh any expected benefits.

Bernanke's roll of the dice must first be understood for what it is. The Obama Administration's efforts to inject life into the economy have failed miserably by any measure, including the most important one, employment. With interest rates near zero, the Fed's latest move amounts to a show of financial resolve on the part of monetary policy makers. That's why defenders of the policy argue that QE has psychological value. For example, investors have driven up stock prices in the wake of the Fed's action. However, $600 billion dollars seems a steep price to pay for good feelings on Wall Street.

Meanwhile, the central bank is spending money it has created out of thin air. Increasing the money supply will create the likelihood of out-of-control inflation. While once the Fed was the staunch last line of defense against inflation, Bernanke seems to have forgotten the chief mission of the central bank in order to please his White House masters. So much for an independent Fed.

In addition, the Fed is purchasing assets, such as mortgage-backed securities, that run the risk of default. There are other questions surrounding the QE maneuver, including what happens when the Fed decides to sell the assets it has purchased through QE. When the central bank exits with its cash, this will tighten the supply of money, leaving less dollars for banks to lend.

Another victim of QE is the American dollar. It has gone into free fall since the Fed pulled the rug out from under previous efforts to shore up the currency. As a result, the currency has been seriously weakened. This makes American exports less costly, but drives up the cost of goods and services the country imports from other countries.

All that said, the most glaring weakness of the Fed's action has gone unreported. QE is based on a faulty premise that the asset purchase will spark borrowing by businesses and consumers, thus lifting spending to spark real economic growth. The assumption is bankrupt of any logic.

Businesses are sitting on something like $1 trillion in excess cash. The problem is not that corporations can't get money from lenders. In fact, many are using the low interest rates to borrow funds to restructure current debt. The overriding issue is that no business will begin investing until there are signs that consumers are spending again.

Bernanke has fallen prey to Harvard academic economics while ignoring common-sense pragmatic solutions. Putting money in consumers pockets is the one and only way to jump start the American economy. QE won't do that. If interest rates near zero for almost two years haven't convinced consumers to borrow money for homes, cars and other big ticket items, then easing credit further won't matter one iota.

While Bernanke continues to defend the Fed's policy shift, others have not been kind in their assessment of the central bank. The German finance minister hit the nail on the head when he said, "With all due respect, U.S. policy is clueless." Can we get an "Amen" to that?

Bernanke, once hailed as a genius molded in the image of his predecessor Alan Greenspan, has charted a controversial new path for economic recovery. His approach does not have history on its side. Other nations that have infamously tried versions of QE are Zimbabwe and Germany. In both cases, hyperinflation gutted the economies of the countries.

The new incoming Congress needs to reign in Bernanke before his strategy implodes, dragging the U.S. economy into decades of soaring inflation, staggering deficits and high unemployment.