Ben Bernanke made an enormous blunder when he pegged the future of his Quantitative Easing program to the nation’s unemployment rate.
And now his ill-conceived words are not only biting him in the behind but will continue to nip at the hind quarters of his successor, Janet Yellen.
The Federal Reserve’s Open Market Committee meets Dec. 17 and 18 — next Tuesday and Wednesday — in what could be a crucial meeting for QE, an untested, highly dangerous bond-buying/money-printing program that Bernanke instituted when he and the rest of Washington thought the nation’s banking system was in peril.
Now, six years later, the banking system is seemingly in better shape but QE has done little for the nation’s economy.
And the extraordinarily low interest rates that QE produced have caused the largest wealth redistribution in the history of mankind.
Those who’ve saved and rely on interest income are being screwed. Those wealthy enough and courageous enough to put their money into the stock market have seen their wealth soar.
In fact, the Fed says household net worth rose $1.9 trillion — $917 billion from the appreciation in the stock market and the rest from price increases in real estate.
Next week the Fed will have to decide if it should continue QE’s monthly purchase of $85 billion of government bonds and mortgage- backed securities. If it decides to scale back — “taper” is the phrase Wall Street prefers — then the Fed risks angering Wall Street and seeing all that equity wealth go kaflooey.
If it keeps QE bond purchases at the current levels it risks bankrupting the a large portion of the American population — savers whose interest income has gone, and continues to go — to prop up America’s banks.
This represents nothing more than a secret tax on a large portion of the American public.
Fairness aside, the Fed has another problem. Also among those receiving inadequate returns on their investments are buyers of government bonds. While Washington itself has benefited greatly from QE’s ultra-low rates, the holders of America’s $17 trillion in debt are getting screwed.
The biggest screwing is being felt by the Chinese government, which holds over $1 trillion in US debt and has recently been making noise about not purchasing any more.
I was one of the very few who didn’t think the Fed was going to taper QE last September and my reasoning was simple: The economy during the summertime wasn’t going to look strong enough to justify such a move.
And I was right. Wall Street was shocked when the Fed decided to continue buying $85 billion in bonds and mortgages at its September meeting.
The Fed also didn’t make any changes in October, including at an unscheduled meeting early in the month when the nation was rocked by the government shutdown.
The discussion at December’s meeting is likely to be a whole lot more exciting.
The Fed could use the 203,000 jobs announced last Friday for November and the upward revision in the third-quarter GDP figure to an annual rate of 3.6 percent (from 2.8 percent) as its excuse to taper QE.
But the Fed, obviously, understands how weak the US economy really is.
That GDP revision was an anomaly caused by a buildup in business inventories that’ll be reversed next quarter. The 203,000 job growth in November was probably mostly the result of a faulty seasonal adjustment. An even bigger anomaly took place in November 2012, when 247,000 jobs were reported created.
Those 247,000 jobs didn’t represent a sustained increase in job growth.
When it meets next week, the Fed will also undoubtedly consider the fact that there is still a record number of households receiving food stamps and the employment-to-population ratio remains at a 30-year low.
Even worse, the nation’s Gross Domestic Income (GDI) figure is growing at only a 1.3 percent annual rate. GDI growth should be roughly the equivalent of GDP expansion — since money needs to be made (GDI) in order for goods and services to be bought (GDP).
And right now those figures are so vastly different that either GDI or GDP has to be wrong.
But Bernanke’s biggest problem is the unemployment rate — which dropped from 7.3 percent to 7 percent in last Friday’s November figure.
Understand that the 203,000 new jobs in November and at 7 percent unemployment rate are still not great.
Why would Bernanke dislike these figures? Because the Fed chairman first said that a 6.5 percent unemployment rate would be the trigger for a tapering of QE.
But last June Bernanke opened his yap again and said 7 percent is where the Fed expected the unemployment rate to be when it ended its QE purchases.
So now Bernanke is stuck! The jobless rate is at 7 percent and he hasn’t even started reducing the Fed’s bond purchases.
My guess: the Fed talks tough next week but doesn’t taper QE. That would take more courage than Bernanke has at this point in his tenure. He’ll let Yellen worry about it next year.