For the last year, the Gazelle Index has taken a consistent position–no more quantitative easing! That is, further quantitative easing by the Federal Reserve is not needed because it would be useless. What good can low interest rates do that has not already been accomplished.
Will they help consumers borrow more? No! Will they encourage businesses to invest more? No! Will they allow home owners to do more refinancing? No! Will they make home mortgages more accessible? No! Will they help the economy to grow faster? No! Then what good are they?
Low interest rates will make more money available to large corporations and large banks to borrow, just in case they should need it. That is the only outcome of QE3 and its not a credible reason to use the scarce resources of the FED, especially since those resources are better used when we are in an urgent crisis.
Once again, here are the main reasons why the FED should forget about QE3.
- Low interest rates do not matter if banks are not willing to lend to consumers and small businesses, and corporations that are able to borrow money will not lend or invest it.
- The greatest beneficiaries of the lowest rate policy are the corporations that need money the least.
- Lower interest rates do not provide a sufficient reward to lenders for taking on riskier loans and home mortgages. Therefore home mortgages, consumer loans and small-business loans may be easier to get if rates were higher.
- By keeping short-term interest rates pegged near zero and pushing long-term rates below 2%, the FED is advertising that it has no faith in the recovery. If it does not have faith in the economy, they why should anyone else have confidence?
- The current recovery has lasted more than three years. Therefore, one can expect the economy to enter a new recession sometime within the next one to two years. If that happens, the FED must have resources to fight it.
- QE3 would only add to the cash hoards of corporations, without making a dent in economic growth.
The best thing the FED can do for now is sit on the sideline and wait for the actions it has taken in the past to have their full effect. Doing nothing is sometimes the best action of all.
Last modified: August 16, 2012