QE2: Return of the Bernanke

Brett Cook, Staff Writer

Last month the Federal Reserve initiated its second round of “quantitative easing” (QE2), announcing its intent to purchase $600 billion dollars in long-term U.S. Treasury bonds. The ostensible purpose of QE2 is to “stimulate” the economy by expanding the money supply and lowering long-term Treasury yields. This will, predictably, end in utter failure. Bear with me through the initial tedium.

Round 1 (QE1) occurred in 2009 when the Fed decided that it would be a good idea to purchase over $1 trillion dollars of the toxic fallout from the housing crisis—that is, deadweight mortgage-backed securities and debt from the GSEs (Fannie Mae and Freddie Mac) that securitized them. This, along with the infamous $787 billion “stimulus bill”, was the only thing that stood between us and a post-apocalyptic world riddled with surly, unscrupulous, leather-clad motorcycle gangs—or so we were told.

QE1 was a disaster. Solution? “Let’s do it again”. This sequel might be worse…

Here is the Fed’s reasoning for QE2: The economy is bad because banks aren’t lending. What are the banks doing? They’re borrowing money from the Fed at 0.25% and buying long-term U.S. Treasuries, which currently yield over 3%. The Fed decided that it could put an end to this funny-business by crowding banks out of the Treasury market, forcing them to lend instead. Genius.

Except for the fact that over 150 banks have failed in 2010. Now, I’m no financial expert, but when banks are failing en masse, it doesn’t seem like a good idea to cut off their last reliable source of income (long-term U.S. Treasuries)—unless, of course, you want them to fail…

Maybe that’s it: Maybe the Bernanke thinks that the only way to get banks to start lending again is to put them out of business—a bold strategy, to be sure. Let’s see how it plays out for him.

If the above made little to no sense to you, fear not. This simply means that you are a normal, rational human being. The inanity is by design. After all, as Andrew Jackson remarked, “if the people only understood…our money and banking system, there would be a revolution before morning.”

That’s simply unacceptable. So, a vast lexicon of comically absurd euphemisms such as “quantitative easing”—which simply means printing money—are invented to make the actions of the Fed seem as confounding as humanly possible. There really are few things that stupefy the average American into a state of ready prostration more effectively than esoteric economic drivel.

The fact of that matter is that it really isn’t all that complicated. The Fed exists to finance government spending. That’s all. Governments can only get so far by borrowing and confiscating. I mean, when you’re trying to erect the largest nanny state in human history while simultaneously maintaining troops in over 150 countries—including 2 wars—direct confiscation simply doesn’t cut it. Confiscation through inflation is the way to go.

Fortunately, there are some glimmers of sunshine amidst the gloom. With the arrival of the 112th Congress, Ron Paul was recently guaranteed the Chair of the House Sub-Committee on Domestic Monetary Policy. This means that Dr. Paul will be grilling Fed officials, including the Bernanke, on a weekly basis. While this might not end up bringing about any substantive change, it will, at the very least, provide a steady stream of highly entertaining and “lolz”-inducing youtube videos.

I should mention here that John Boehner, the Republican leader of the House, fought to prevent Ron Paul from getting this position. Make no illusion: Republicans are just as fervently pro-Fed as the Democrats. The Fed is the Federal Government’s best friend. A politician denouncing the Fed would be akin to a piglet denouncing his mother’s teat (the choice of animal was entirely deliberate). Ron Paul just happens to be an exceptionally wise, virtuous, and principled man. Go Ron Paul.

We live in an age of unfathomable government profligacy. Many people rightly denounce the reckless spending and then spend their lives focusing on eliminating individual government programs. Sometimes it works; sometimes it doesn’t. But when it does work, 5 more government programs/agencies emerge. This is a grand and sad game of whack-a-mole; a hydra battle; scooping water out of a sinking cruise liner with a teaspoon; pissing into the wind… I’ll stop.

Suffice it to say that blindly attacking government spending while ignoring the source is a tragic exercise in supreme futility. And we’re going to keep turning in this cruel, stinking hamster wheel until we acknowledge it.

End the Fed.

*** Editors Note. This was originally intended to go into the January 2011 edition of the California Review, however there was an excess of content and some articles had to be moved to the blog.

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