Here we go again! In recent years the U.S. Federal Reserve (Fed) has embarked on a journey of extreme measures never before seen to try to buoy a flailing economy. Fed purchases of U.S. treasuries and mortgage-backed securities have pushed interest rates to historical lows, effectively pushing money out of fixed income assets into the stock market and real estate.
Now, not to be outdone, Mario Draghi, the head of the European Central Bank, recently announced another unprecedented measure. Instead of banks making a small amount of interest on their reserves, they will be charged money to store them. The idea is again to push money out into the system, in the belief that this will help drive the European recovery.
Of course, the stock markets love it! But, will it work?
Years ago, I remember Ben Bernanke, the Fed chairman at the time, telling Congress that monetary policy (control of short-term interest rates and money printing for asset purchases) had a limited role in the recovery of the economy, and the fiscal policy and other government action was required to aid recovery.
The government has remained hopelessly gridlocked, so what did Ben do? He did more money printing. What was the net result? A wealthier 1 percent, a stagnant middle class, anemic GDP growth (negative in the first quarter of 2014), and a Fed balance sheet of about five to six times the previous peak value.
President Obama, speaking of the U.S. military in a West Point graduation ceremony, recently said, “Just because we have the best hammer does not mean that every problem is a nail.” In their context, I was not thrilled with his choice of words. However, I think our Fed and the European Central Bank should find Obama’s statement to be words of wisdom.
At what point will these brilliant people realize that maybe their prescription (liquidity) will not heal the patient (economy) but may result in a terrible hangover (CRASH)?
As Mohamed El-Erian said recently on CNBC, “There are very few spare tires left on this car, and this car is navigating a bumpy road.” The blowout of the last tire may leave the world stranded in a financial desert.