Conservatives love to point to the sentiments of the business sector when complaining about Democrats and their policies. They often cite business surveys showing greater than fifty percent saying regulations are a reason why they aren’t hiring, while ignoring other responses in those surveys where those same businesses say that when having to rank their many reasons for not hiring, an uncertain economy in the near future tops the list, while regulations hit the middle or bottom.
If the stock market happens to be down when it benefits them politically, they’ll note that, too. But you won’t ever see them stay true to their interest in measuring the correctness of government policy by looking at the business sector’s response as a leading indicator, because all too often, the business sector tends to love Democratic policy.
Especially when it comes to economic stimulus.
Case in point, the Federal Reserve announced a third round of quantitative easing (the government buying its own debt, or the debt of others) this afternoon, and the markets shot up like a rocket. Just like they always do. In fact, the DOW has jumped several times in the past few months just on the rumor that the Fed was going to do another round of QE.
News came out about the plan a little before noon on the east coast. The DOW had opened this morning at 13,329 and was hovering near 13,353, up about 24 points, around noon. By 2:30, it had surged to 13,567, up 238 points. The S&P 500 and Nasdaq are both up today.
The business sector has spoken (and done this before). It wants QE, and thinks it will help the economy grow, even if conservatives think that printing money is the road to hell that’s going to destroy us all. Big Business thinks this is precisely the shot in the arm that the economy needs to restore the growth we had earlier in the year and last year, and maybe even exceed it.
Now, there are a lot of things worth mentioning. It’s a complex, octopus-like issue. The timing of this action is very awkward for the Obama administration. The Fed has had the opportunity to do this many times and sat on its hands instead, as the economy continued to sag and slow. So why now? Any boost to the economy we’ll get from this will come in the end of September and October, which will show up in the job report released in the first week of November, smack dab in the middle of the election.
Is this move political?
I don’t know, and neither do the people who will scream it is as loudly as they can. The only people who do know and ever will know, are Ben Bernanke and his staff, and President Obama and his staff and advisers. Surely many conservatives will make this allegation, and without any proof, because they are doing what they think the Fed will be guilty of: they’ll be saying it for political gain, not because it matters or because it’s true.
And it doesn’t matter. So what if this round of QE helps President Obama politically? It will only help him if it helps the economy, and if it helps the economy, who gives a fuck about the politics? If it does help and it is for political gain, it’ll help whoever wins the election far more than it’ll help Obama this year, and the person it’s harming this year is a person who already has come out against it, and would have been wrong.
So isn’t the harm justified, regardless?
As for what the Fed is actually doing, I’d love to hear what Paul Krugman has to say about this. He’s been calling for more QE and knows what all of this means. But for now, since he has the day off, this sounds pretty good to me. Because it’s aimed directly at the economy’s dead and dying tissue:
The Wall Street Journal says that unlike the first two rounds of Quantitative Easing, this time the Fed will focus solely on buying mortgage-backed securities. [..]
“The Committee is concerned that, without further policy accommodation, economic growth might not be strong enough to generate sustained improvement in labor market conditions,” the Federal Open Market Committee said. Remember the Fed has a dual mandate from Congress: keep inflation and the unemployment rate in check. [..]
“If the outlook for the labor market does not improve substantially, the Committee will continue its purchases of agency mortgage-backed securities, undertake additional asset purchases, and employ its other policy tools as appropriate until such improvement is achieved in a context of price stability,” the Fed said. That last line means that the Fed promises to tweak this program if inflation begins to be a problem. (source)
That one point can’t be repeated enough. The Fed exists to softly manage the economy, which includes employment, not just interest rates. It hasn’t been doing half that job for a while now, after dropping interest rates nearly to zero, there was little else it could do to manage rates. All that was left was what it can do to boost employment (which isn’t all that much either), and it has been ignoring that mandate for a long time.
Speculate about the reasons why if you wish, there are quite a few, but I suspect that politics tops the list. The Fed doesn’t want to be seen as carrying out the political will of the President, and on top of that, I think Bernanke is far too timid anyway. If so, this is a much needed step away from allowing decisions to be determined by whether they can be seen as political, and towards ground-based economics. We’ll have to wait until November for the jobs report, and October for other leading indicators like the housing market and consumer confidence to find out if this has helped or not, though.
One thing to consider is that the Fed has promised at least $480 billion worth of bond purchases over the next 12 months, which obviously puts the bulk of the program under the purview of the next President; a program that could be killed by whoever is nominated to run the Fed by a President Romney. Although if the program works, and Obama loses, Romney could be stuck with it anyway as it would politically impossible to dump it.
That would forever burst the right-wing fantasy (contradicted by a century of macroeconomics) that expanding the monetary base in a liquidity trap is bad, as opposed to actually helpful.
Something else to consider: there are two (probably more) good reasons for Mitt Romney to criticize QE3. The obvious one is that he opposes it on political grounds (which ought to disqualify his opinion). Another is that he genuinely thinks it’ll harm the economy. But it’s also possible that he’ll oppose it on more practical grounds: it’ll work, and harm his campaign. That kind of cynicism has already been displayed by Romney criticizing Obamacare in very harsh terms when it’s identical to what he advocated for and helped make law in Massachusetts.
So don’t just listen to what the Romney campaign and its surrogates say today, and this week. Try to think about why they are saying it. Who would benefit from QE3 working, and who would be harmed. Who would benefit from it failing, and who would benefit.
Here are some details on what’s going on from people more informed than I am.