The Fed goes political

Now the spigot is open — wide open. QE III is here. And the Fed is about to become a campaign issue, whether it likes it or not.

Chairman Ben Bernanke announced Thursday that the Fed would spend $40 billion a month on mortgage-backed securities with no set date to end those purchases.

???If the outlook for the labor market does not improve substantially, the committee will continue its purchases of agency mortgage-backed securities, undertake additional asset purchases and employ its other policy tools as appropriate,??? said the Fed in a statement.

The Fed???s action is primarily aimed at the short term. Though there is no sign of inflation, rising food and gas prices have created inflation fears among Americans. People don’t care about price indexes they care about prices. Printing money won’t be popular.

The perception will almost certainly be that the Fed is trying to bail out Washington, and specifically the Obama administration. At one point, the Fed was polling behind the IRS in popularity, and open-ended money printing can only corrode confidence in the institution even further. Voters are going to have a tough time compartmentalizing monetary policy from Obama policy — and in many ways it’s the same.

There was QE I and II,  Operation Twist, and a trillion-dollar stimulus — and another trillion-dollar yearly Keynesian deficit the federal government runs  — and the economy has still stalled. Making the counterfactual argument that it could have all been worse is a tough sell, and arguable.

Dr. Esmael Adibi, Director of the A. Gary Anderson Center for Economic Research at Chapman University, told Human Events that he believes QE III is unnecessary. ???It is not going to help the economy. If the goal is to create jobs it???s not going to do much. If the goal is to run up stock prices then maybe it will work in the short term. But, in the end, earnings are what is important, and they are based on the real economy.???

Like the Supreme Court, or any other institution we like to pretend is independent, the Federal Reserve is not immune from political pressure. The Fed has run out of tools. It???s exhausted it???s ability to act beyond printing money. And act it does, even though many economists argue that it???s uncertainty regarding public policy and debt, rather than liquidity, that’s driving economic troubles.

The timing of the act will certainly open the Fed to more political criticism. Last year, Senate Minority Leader Mitch McConnell (R-Ky.), House Speaker John Boehner (R-Ohio), Sen. Jon Kyl (R-Ariz.) and House Majority Leader Eric Cantor (R-Va.) wrote a letter to Bernanke, laying our growing conservative concern about the Fed: “It is not clear that the recent round of quantitative easing undertaken by the Federal Reserve has facilitated economic growth or reduced the unemployment rate.” It isn’t.

A few months ago Ron Paul???s Audit the Fed bill passed the House by a 327-98 vote, with 89 Democrats joining Republicans. If the Republicans take the Senate, and it is plausible that they could, we would almost certainly see movement against the Fed.

The Fed has aligned itself with ideologically with the administration and it is making  some of the most important policy decisions in the nation. So why shouldn’t we politicize the bank? As I argued a few years back:  “Politics — however ugly and despicable it gets — is the best way for us to sift through these concerns. If politics is good enough to decide war, health care and education policy, it’s good enough for the Fed.”

We’re talking about a major policy undertaking here. ???The idea here from their point of view is to keep interest rates low enough so they can revitalize the housing market,” says Adibi. ???The fear is that if they do not engage in securities, interest rates will creep up and the little recovery you???re seeing in the housing market will fade.???

The secondary — or maybe primary reason — according to Adibi, is to pump markets. If the stock market does well, it will improve consumer confidence, you???ll feel better about your retirement plan and portfolio and that, they hope, will stimulate the economy.

It hasn???t worked so far.