Fed's Bond-Buying Policy Creates Asset Bubble

by John M. Curtis
(310) 204-8700

Copyright January 4, 2013
All Rights Reserved.                                      

             Speaking at the American Economic Assn.’s annual conference in Philadelphia, the city’s own Fed President Charles Plosser expressed concerns about the Fed’s $75 billion a month bond buying program known as QE3.  Known as quantitative easing or treasury bond-buying, Federal Reserve Board Chairman Ben S. Bernanke started emergency CPR on the economy in November 2008 to counteract the effects of the worst economic downturn since the Great Recession.  Despite dubbed the Great Recession started in 2007 but worsening in 2008, Bernanke took draconic steps to prevent another Great Depression.  When the venerable 158-year-old investment house Lehman Brothers filed for Chapter 11 bankruptcy Sept. 13, 2008, the economic went into a nosedive of historic proportions, taking the Dow Jones Industrials down from 14,164 in Oct. 17, 2007 to 6,443 March 6, 2009.

             Opposed to quantitative easing, Plosser expressed worry that the stock market had inflated to bubble proportions under Bernanke’s artificial stimulus of quantitative easing.  Citing the stock markets biggest gain since 1997, Plosser believes it’s time for the Fed to back off the throttle on its $75 billion a month bond buying program.  “I think we need to be concerned about the possibility,” said Plosser, referring to the current equity bubble that has taken the Dow to Friday’s record close of 16,449.  What Plosser isn’t considering is that unemployment continues to run 7.2%, with Congress refusing to approve another continuation of extended unemployment benefits.  Plosser and other conservative on the Fed’s Open Market Committee believe the current bond-buying program has inflated the stock and real estate markets, fulfilling Yale economics Professor and recent Nobel laureate Robert Shiller’s dire predictions.

             Shiller’s Cyclically Adjusted Price-to-Earnings-Ration [CAPER] predicts stock market and real estate bubbles.  “The Fed is aggressively trying to study asset classes, leverage” that might lead to another bubble, like the real estate collapse in 2008.  Since starting QE1 in 2008, Bernanke has ignored skeptics concerns about fueling inflation, focusing instead on lowering the nation’s unemployment rate.  While Plosser and some of his like-minded colleagues on the Fed’s Open Market Committee believes market are headed for a fall, Bernanke has been focusing smartly on promoting stock market growth to lower the unemployment rate.  Bernanke’s anti-depression strategies have resulted in one of the biggest increases in employment since former President Bill Clinton dropped the unemployment rate to 4% in 1998.  Clinton’s lower unemployment balanced the U.S. budget in 1998, creating a $236 billion surplus in 2000.

             If Plosser got his way and stopped QE3, Wall Street would go into a new tailspin, bumping up today’s $7.2% unemployment rate back to double-digits, not seen since 2010.  Crashing the U.S. stock market would force publicly traded companies into massive layoffs, the same scenario that eviscerated the jobs market starting in 2008, eventually driving the unemployment rate in Jan. 2010 to over 10%.  While Plosser said he’d opposes the FOMC a continuation of QE3, 67-year-old incoming Fed Chairman Janet Yellen told the Senate Budget Committee at her Nov. 14, 2013 confirmation hearling that she’d continue Bernanke’s policy until the unemployment rate dropped to 6%.  Plosser and other conservatives worry about the Fed raising the national debt threw its bond purchases.  Buying treasuries keeps the banks liquid, allowing their brokerage houses to keep buying equities.

             Keeping the stock market growing is essential to employers putting cash-on-the-line to keep expanding payrolls.  Pulling the rug out from underneath banks by stopping treasury purchases would quickly stall the economy.  It’s no accident that Wall Street had its best performance since Clinton occupied the Oval Office in 1997.  Considered an icon for balancing the budget and creating the largest budget surpluses in U.S. history, Clinton backs the Fed’s treasury buying policies.  Concerns about how QE3 raising the debt ceiling need to be counterbalanced against how the bond-buying program lowers the unemployment rate, federal budget deficits and eventually leads back to budget surpluses.  Adding more government and private sector jobs all reduce the unemployment rate and federal budget deficits.  Cutting off the federal spigot would raise the unemployment rates and federal deficits.

 John M. Curtis writes politically neutral commentary analyzing spin in national and global news.  He's editor of OnlineColumnist.com.and author of Dodging the Bullet and Operation Charisma.