Ben Bernanke: Send In The Clowns

Federal Reserve Chairman Ben Bernanke is starting to sound like a circus barker.  Listen.  "Step right up and watch me create money out of thin air.  See the nation's daring central bank gobble up trillions of dollars in government bonds.  You'll be amazed as interest rates plunge to death-defying levels."

The bearded money magician with the Federal Reserve System has an array of dazzling tricks up his sleeve.  Quantitative Easing.  QE II. Operation Twist.  Son of Operation Twist.  His economic wonk jargon is enough to pull the wool over the eyes of an insomniac.

Most Americans have long ago tuned out Bernanke.  The Fed's actions seem incomprehensible because the media has made only a superficial attempt to explain the policy.  For the most part, reporters parrot the Fed's mind-numbing policy gibberish without adding an ounce of perspective.

Here is what every American needs to know about the Federal Reserve's efforts to boost economic recovery by flooding the country with easy money.

What is the Fed doing?  Since 2009, the Fed has shelled out nearly $3 trillion to purchase financial assets, primarily government bonds.  In most cases, the Fed acquires the securities from banks and other private sector businesses.  The Fed's action drives down interest rates by putting more money in circulation.  More dollars means credit is easier to get and its cheaper.  At least that's the theory.

What's the difference between Quantitative Easing and Operation Twist?  With QE, the Fed purchased mostly long-term bonds in hopes of lowering long-term interest rates.  Under Operation Twist, the Fed unloaded short-term bonds it owned and used the proceeds to purchase long-term bonds.

Where does the Fed get all that money?  The Obama Administration bristles when Republicans charge the Fed is printing money. Technically, they are correct.  There are no printing presses churning out greenbacks to fund the Fed's purchases.  It is more accurate to say money is created electronically with the click of a computer mouse. The Fed "credits" banks and other sellers with trillions of dollars as if real money had changed hands.  The Fed just invents money.  They are the only ones who can do that.

All that money floating around must be a good thing?  It depends. Wall Street loves it because when interest rates nosedive it makes stocks more attractive to investors.  The big banks are giddy because they have more money to lend to businesses and individuals. However, it hasn't proven a boon to small businesses and ordinary citizens. Banks have become stingy in lending to anyone except big businesses. The small fry borrowers are considered too risky.  Many banks also are parking the funds in their reserves to shore up their financial health instead of lending the money.  No one benefits from that except the banks.  Because many banks have hoarded the money, the economy remains lethargic despite the trillions injected into the financial system.

Who has been hurt by the Fed's buying binge?  Primarily, seniors and retired folks on fixed incomes.  When the supply of money increases, banks and other financial institutions pay lower rates on Certificates of Deposit, Money Market Accounts and passbook savings. Typically, seniors and retirees prefer these relative safe investments over the riskier stock market.  The returns today are minuscule because the Fed has intentionally driven down interest rates.  As a result, more seniors and retirees are being forced to take part-time or full-time jobs to supplement their income.

Is the Fed program working?  Bernanke's supporters claim the Fed has saved the economy from skidding off the cliff.  But with interest rates already at zero, the economy has not responded as optimists had forecast.  Job creation and unemployment remain moribund.  Japan tried a similar easy money blueprint without any significant uptick in their economy.  Normally, the U.S. recovers faster from a recession. The economic rebound hasn't happened.  By that yardstick, the Fed's scheme has failed.

Despite the sketchy track record of bond purchases, Bernanke is already sending up trial balloons for a third round of QE after June's disappointing employment numbers.  The chairman, a Republican first appointed by President George W. Bush, seems to have an eye on the November elections and his current boss' (President Obama) political future.

Americans should understand the Fed's money spigot has a catastrophic downside.  Those rolling waves of dollars eventually will trigger an inflation tsunami once the economy improves.  The result will be spikes in prices for goods and services along with runaway interest rates.

The menace of too much money oscillating in the economy is reason enough for Bernanke bring down the tent on the Fed's failed policy that makes a mockery out of fiscal responsibility.