Fed’s Short Term QE3 Fix May Cause Economy’s Long Term Demise

The Fed’s decision last week to resume monetary easing with Quantitative Easing 3 (QE3) is unprecedented in both its timing and duration, and is a clear indication that our economy is in dire straits. It is a direct contradiction to the assertions from President Obama and former President Clinton that our economy is on a slow path to recovery. Who should you believe, politicians trying to eke out a win for their party, or Fed head Ben Bernanke, a leading expert on the economy and the Great Depression?

Ironically, the move by the Fed may actually help re-elect President Obama. The flood of new money expected will increase real estate and stock market prices and may create the illusion that American wealth is increasing and that the economy is indeed recovering. However, all that new money will also devalue the dollar and thereby increase the cost of oil and other dollar-denominated commodities, which costs will increase headwinds for the recovery.

The re-election of the President is also likely to dampen the prospects for a long term recovery too, as the President apparently intends to “stay the course” and continue policies that have thus far failed to produce meaningful economic growth. In addition, given the President’s apparent inability to work with congress, it is unlikely that there will be the required entitlement, regulatory and tax reforms needed to affect meaningful reductions to the budget deficit and the national public debt, reductions necessary for a sustained and long term economic recovery.

Ben Bernanke certainly knows all that. So why would he announce QE3 now and risk politicizing the Fed with presidential politics? Why risk causing the re-election of an incumbent President who has thus far proven ineffectual in spurring an economic recovery? Why not continue a “ready to act when necessary” posture that has kept markets stable for the past several months?

Cynics believe Mr. Bernanke’s move was a deliberate attempt to re-elect the President, so he too can keep his job, which is certainly safer with a second Obama administration than it would be with a Romney win. However, given all the recent evidence of a global economic slowdown, it is just as plausible that Mr. Bernanke fears that without the swift, decisive and unprecedented action he took last week, the US economy would be risking a major economic backslide sometime this fall. In that scenario, it is understandable that Mr. Bernanke would be unwilling to wait to act and even be willing to risk assisting the re-election of the President. Further, he would be risking the long term success of his own QE3 program and long term recovery in order to stabilize the economy during the economically significant last quarter of the year.