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Why is the US Economic Recovery so Lame?
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(September 16, 2012) The news from the Fed’s meeting at Jackson Hole last week was the launch of a third round of Quantitative Easing, that ghastly euphemism for ‘printing more money.’ QEIII will be a new $40 billion per month buy-up of mortgage-backed securities, to be added to the current $45 billion/month "Twist" purchases. We are supposed to believe this will help get the economy moving.
If at first you don’t succeed, according to the logic of the Federal Reserve, then try the same thing again and again until…well, until what? Who knows? This latest shuffle is basically a commmitment without a defined end. More certain is the promise by the Fed that interest rates shall continue to remain low at least until mid-2015.

Buying up financial instruments, both the solid and questionable varieties, has been Fed’s repeated course of action since this financial and economic crisis first broke in 2008. This policy has been a boon to banks and other financial institutions, who have now once again been awarded, by our benevolent government, piles of cash and “Get Out of Trouble” cards (at the expense, eventually, of taxpayers and dollar-holders).

Every action taken by chairman Ben Bernanke and the Federal Reserve Board is thoroughly planned out, well-reasoned, and based on time-honored economic truisms. That doesn’t necessarily mean that anything works as advertised. For instance, the Federal Reserve throws hundreds of billions of dollars at banks, guaranteeing higher profits for those banks, on the hope that they will loan that money out, thereby 'sharing the wealth,' an action which, it is further hoped, will rev up the economy to some degree. At best, this policy looks like reckless abandon. At worse, it resembles what used to be called graft.

The Economist, in an article entitled “The Mystery of Jackson Hole – Central bankers wonder why success eludes them” (September 8, 2012) ponders the question facing the Federal Reserve Board: Despite all its efforts, why is the US economy still barely limping along? They write:

Imagine the world’s best specialists in a particular disease have convened to study a serious and intractable case. The offer competing diagnoses and treatments. Yet preying on their minds is a discomfiting fact: nothing they have done has worked, and they don’t know why. That sums up the atmosphere at the annual economic symposium in Jackson Hole, Wyoming, convened by the Federal Reserve Bank of Kansas City and attended by central bankers and economists from around the world. Near the end, Donald Kohn, who retired in 2010 after 40 years with the Fed, asked, “What’s holding the economy back (despite) such accommodative monetary money policy for so long?” There was no lack of theories. But, as Mr. Kohn admitted, none is entirely satisfactory.

Of course, pinpointing the exact causes of a lousy economy is virtually impossible, although the Fed’s economic team might disagree. Economics certainly looks like a science, with all its numbers, equations, graphs, charts, and the like. But economic activity is human behavior, involving personal intelligence and psychology, perception biases, luck and happenstance, the behavioral tendencies of crowds, and dozens of other unquantifiable factors. Can we realistically expect economists to explain, much less predict, anything that people do?

But common sense tells us that a lack of business activity defines why our economy is performing so miserably. And if we take a look at the financial positions and spending habits of the majority of US citizens, both working and retired, we see two simple reasons why consumer demand is so weak:

Reason number One: People don’t have much, if any, money.

For our economy, things were drastically different from the mid-1990s through 2007, an era when the tens of millions of people who owned homes had money showered upon them. Their (theoretical) net worth was increasing almost every year, thus encouraging more consumer spending. Many took advantage of continually falling long-term interest rates to refinance and extract much of their value appreciation, thus freeing up money to be spent on home improvements, autos, vacations, or whatever. Residential real estate was a tremendous financial boon for millions of people. The US is not typically a nation of savers, so much of that money was spent, supporting lots of business.

Today, the real estate ‘party’ is no longer even visible in the rear view mirror, and refinancing to free up spending money just isn't happening in this real estate market. Today, even for those homeowners who were not serial refinanciers, the psychological boost which came from simply watching their biggest asset grow in value, is now gone. In a market of falling home prices, homeowners feel poorer (and they are!). Naturally, they spend less money.

An even less prosperous-feeling group are those who own homes, yet are underwater in their mortgages (over ten million currently), and actually have negative equity in their homes. But they are more fortunate than those who have lost their homes already, or are stuck in the worldly limbo of foreclosure proceedings, which can drag out for months or longer.

But it’s not only middle and upper class homeowners who are worse off than they were five years ago. People who have dollars in substantial quantities are being offered virtually the lowest interest rates in history on their money. Which leads us to:

Reason number Two: People who do have money, don’t have much, if any, income.

The stringent regime of low interest rates that Treasury and the Fed have purposefully engineered have drastically cut the incomes of two groups: retirees who feel safest with money in the bank, and traditionally have been able to earn some interest on that money, and the wealthy and/or ‘semi-retired’ who also have money, and depend on bonds, certificates of deposit, or other ways of loaning funds at interest in order to earn income. Without a safe source of income, they are reluctant to tap their nest eggs to buy autos, vacations, consumer goods or services.

It almost goes without saying that people with money are an economy's major spenders, and the sheer size of their demand can help drive that economy. In past centuries, savers could earn an average of 3% to 5% on their money, and that income could be spent, without them having to draw down their capital. Should we be surprised that today, with interest rates at a mere fraction of their historical levels, this economic class is spending so much less? This legion of older savers are “Bernanke’s Tightwads” – people who, without a safe source of income, refuse to spend their way to a better standard of living. Current interest rates simply don't allow them to.

From the Wall Street Journal’s editorial page ‘Review and Outlook,’ of 9/14/12, entitled “Bernanke Unbounded:”

The irony is that, with this historic and open-ended easing, Mr. Bernanke is also tacitly admitting how lousy the Obama-Bernanke economy really is. For all the back-slapping by the Fed and the White House about how they’ve saved us from a Great Depression, four years later the Fed is acknowledging that the recovery is rotten, that jobs creation stinks, and that their policies haven’t helped the middle class. But, hey, it’s great for Wall Street.

 

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