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BACON: Bernanke’s raid on the middle class

Fed action will reward the profligate and punish the prudent

- The Washington Times - Monday, November 22, 2010

Twenty-four conservative economists and writers have published an open letter calling upon the Federal Reserve to abandon a second round of "quantitative easement" that entails borrowing another $600 billion in U.S. Treasury bonds. "The planned asset purchases risk currency debasement and inflation, and we do not think they will achieve the Fed's objective of promoting employment," says the statement under the name of Economic Policies for the 21st Century.

The economists are hardly alone in their thinking. The Fed's plan has been excoriated abroad, the financial blogosphere is seething with negative reviews, and Republican congressmen are jumping on the bandwagon. But their appeal may fall flat.

The plan, the economists say, "risks" currency debasement and inflation. Does that mean economists think it will cause inflation but they're not certain? They "don't think" quantitative easing will promote employment. Does that mean there's a chance, however small, that the plan might work?

Such weasel words undermine the political message. Liberal economists will respond with counterarguments, sowing so much confusion over the arcane aspects of the monetary and banking system that most people won't be able to follow the debate much less make up their minds about it.

Here's one fact that is indisputable: The intent of Quantitative Easing 2 (QE2), as Fed Chairman Ben Bernanke's initiative is known, is to push intermediate- and long-term interest rates even lower than they already are. Here is a conclusion that can be stated with certainty: Lower interest rates will bail out the profligate and punish the prudent.

The ranks of the profligate include the world's largest debtor, the U.S. government, and the irresponsible risk-takers, namely the big banks and investment houses, that helped finance trillions of dollars of residential and commercial real-estate projects that either have gone bad or soon will. Lower interest rates will reduce the United States' borrowing costs by billions of dollars a year, masking the dangers of an ever-escalating debt, and will pump up the profitability of the very same banks that plunged the world economy into a recession.

Who pays for QE2? The middle-class stiffs who have worked all their lives, played by the rules, refrained from borrowing money they could not repay and socked away money for retirement.

Who pays for QE2? Seniors, whose bank certificates of deposit, money-market funds and other short-term financial investments now generate yields of less than 1 percent - less than the 2 percent inflation rate Mr. Bernanke is targeting. They're better off putting their money under the mattress. At least they can get to it any time of day or night.

Who pays for QE2? Baby boomers who struggle to save enough money to fund their retirement. Building a nest egg isn't easy when the supposed "miracle of compound interest" is compounding at the rate of a half-percent per year.

Who pays for QE2? State and municipal governments that find themselves falling further behind in their pension obligations because, after years of near-zero interest rates, the return on their investments is falling below projections. If local governments go belly up, they can blame more than public employee unions - they can blame Mr. Bernanke.

Who pays for QE2? Insurance companies that sold annuities guaranteeing minimum rates of return, never imagining that the Federal Reserve would keep interest rates so low for so long. A couple more years like this and annuities will start self-destructing. That's bad news if you own stock in insurance companies, even worse if you counted on receiving the annuity payments you were promised.

To add insult to injury, interest rates aren't even what's holding back economic growth. Rates are already low by historical standards. Americans are paring consumer spending because they're trying to pay down the debt accumulated over 30 years of excessive borrowing. Nudging the 10-year Treasury bond from 2.75 percent to 2.25 percent will not encourage anyone to spend and borrow more. Indeed, one could argue that a better way to increase consumer spending power is to increaseinterest rates, thus putting more money in the hands of consumers with savings.

If economists or Republicans want to make political hay from QE2, they should give voice to the millions of Americans whose wealth is silently plundered by Mr. Bernanke's near-zero interest-rate policy. They know they're getting fleeced - no weasel words about it. What they need is someone to stand up for them.

James A. Bacon is author of the newly released book "Boomergeddon" (Oaklea Press, 2010) and publishes a blog by the same name.

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