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Does anybody in Washington read their memos? Part One.

15 Sep

 MEMORANDUM

TO:  Ben Bernanke

FROM: John D’Oh

SUBJECT: The economy

Ben, to paraphrase Ronald Reagan, “there you go again”.  By that I mean your announcement that the Fed will engage in QE whatever (what are we up to now?), buying $40 billion in mortgage-backed securities a month for the indefinite future. Sounds like a good deal if you happen to be a large financial firm that owns lots of mortgage-backed securities which willingly purchased them on the open market but now finds its securities underwater.

While you are busy bailing out the big firms, allegedly to help the little guy, let me make this easy for you. I’m a little guy and I have 100 shares of GE that will never get back to my purchase price of $40/share. Ben, can you give me a call and we can talk? Surely the Fed has $4,000.00 to buy my stock from me? Awesome!  At least I will take that money and actually put it into the real economy, unlike the big firms that take the money and put it back on deposit at the Fed.

Ben, seriously, it is time to give it up. Let me walk you through this. I’ll keep it simple for you, because I know that you were an economics professor and that an economist is someone who tries to figure out why something that works in reality doesn’t work in theory.

The Fed’s endless policy of quantitative easing (which in English means debasing the currency by creating more money than the economy needs) has created low interest rates. Cool! I actually refinanced my house at a low rate. Way cool! Now I can buy gas that is almost $4/gallon because our currency is worthless. See how that works, Ben? Create too much money and prices go up. Did the Fed think about that whilst contemplating the latest move?  No? Oops.

Here is how this shapes up for the little guy. Say a retiree living off investment income puts money into a 1-year CD and is lucky to get 1%. On top of that someone has to pay taxes. Talk about adding insult to injury! If someone is in the combined federal and state bracket of 20% (15% tax at the federal level and 5% state tax) that leaves our CD investor with a return of 0.8% for the whole year! Hot dog! If the retiree puts $1,000.00 into the CD after a year he will have earned enough to buy a hot dog! (hold the relish).

But wait, it gets better! Don’t forget inflation! Yes, that pesky monetary critter that you, Ben, seem intent upon creating to prop up housing prices and hence, the values of the outstanding mortgages on those houses. Got a clue for you, Ben. It is so not working!

Anyway, back to our CD investor. If inflation is running at 1.7% annually then the real return to the investor, after taxes and inflation is negative 0.9%.  Kind of a bummer, huh? Especially if someone cannot get in on the Fed’s mortgage-backed securities buying gravy train and is just trying to get by on savings while paying for $4 gas. Now imagine that happening to all the savings accounts in America and what happens over time as the invested capital is wasting away. I am no economist but I am guessing that is a bad thing.

Let me summarize this for you, Ben. The Fed’s attempt to manipulate interest rates to help the financial markets has failed. It has actually debased our currency (hence $4 gas and $1,800/oz gold) while lowering interest rates so low that only the most credit worthy borrowers can get a loan. That has limited the ability to borrow to start businesses, etc. and is hurting the economy. In short, government intervention in the marketplace has failed. Again.

Did you ever teach that in your economics classes?

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Posted by on September 15, 2012 in politics

 

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