Opinion: No call for a ‘sugar high’ stimulus from the Federal Reserve

This is not a nation that lacks in liquidity. It is a nation that lacks in leadership and certainty.

Federal Reserve Chairman Ben Bernanke has made it reasonably clear that he is ready and likely to pursue a new round of quantitative easing.   

This is the current nomenclature for printing money. It is a decision that seems to be based on the chairman’s belief that the Fed can help with the unemployment problem in America, and our anemic economic performance, by expanding once again the money floating round the economy.    


Bernanke (along with former Treasury Secretary Henry Paulson) deserves great praise for saving the nation — and the world for that matter — from what would have been a cataclysmic economic collapse in 2008 and 2009.   

He acted with exceptional creativity and went well outside the box, relative to historical actions that the Fed has taken. It was a time when bold action was needed and he delivered.

Now, however, is a different time.   

The crisis has abated considerably, at least for us, if not for Europe. The problems we face today involve an economy that is treading water and that has developed the potential of a long term, Japan-like stagnation that could lead to an unacceptable structural unemployment level.  

The Fed is obviously grappling with its role in trying to address these problems. It is, by statute, directed to protect the currency and promote full employment. The second part of this mandate is the one that seems to have taken precedence in the last few months and is the reason QE3 is being considered. 

This is ironic, because the second directive was put in as a political statement by Congress, almost an afterthought tied to some members’ desire to get out a nice press release.  

It should not be — and until recent times it never was — the primary responsibility of the Fed. The first, and most important, activity of the Fed should be protecting the integrity of the dollar and avoiding inflation.

It is safe to say that without doing this you cannot get effective economic growth that creates jobs anyway.

Now the Fed has put itself in a corner.    

It has created an expectation in the markets for a QE3, and if it fails to follow through, then the markets will react negatively. The economy will most likely slow as a result of the drop in the markets.  

Yet if it goes forward with QE3, the Fed will actually be undermining the actions necessary to get some sustainable long-term growth while at the same time potentially creating a down-the-road problem with inflation.  

The reason QE3 will be counterproductive to a long-term improvement in our nation’s economic  growth is simple.   

It is not a lack of liquidity that is restraining our nation’s job engine.  It is a lack of certainty about fiscal policy.   

Specifically, people who have cash to invest are guarding it because they do not know where the federal government is going on spending, deficits, tax policy and regulations. They are fairly sure that if it does act, it will choose badly.   

This applies not only to businesses, which are flush with cash, but also to individuals — especially members of the baby boom generation who are trying to protect the assets they will need to live on in retirement.  

They are concluding the only way to do that is to keep their savings in cash, even though they are losing money doing so, because federal government policies have created significant angst as to where one can make a safe investment.

By pursuing a course of QE3, the Fed aggravates long-term problems.  

It is akin to giving the nation, and the markets, a sugar high. It may cause a brief jolt of activity, but that will be replaced by the reality that the underlying problems are not being addressed. Stagnation will return.   

The Fed could play a much more positive role by stating that it is no longer going to help mask the ineptness and inaction of this administration and Congress on the core issue of fixing our fiscal policies.  

It could simply tell the elected government that we cannot afford its misfeasance and that if we want to ignite the economy and boost employment, we need to get our federal fiscal house in order. That’s done by putting in place specific policies that reduce the debt over the long run and rein in the unaffordable cost of the entitlements — especially in the area of healthcare — that are driving the deficits and unsustainable growth in the size of the government.  

Rather than triggering a sugar high that covers the failures of the elected policymakers, the Fed should tell those policymakers it is time for them to act.  

People are waiting. Businesses are waiting. The liquidity to generate tremendous investment is waiting.    

Judd Gregg is a former governor and three-term senator from New Hampshire who served as chairman and ranking member of the Senate Budget Committee and as ranking member of the Senate Appropriations subcommittee on Foreign Operations. He also is an international adviser to Goldman Sachs.