My most recent column incited a robust and welcome discussion. But few of my many critics, including Paul Krugman on his blog and many commenters on DealBook, seem to have engaged with my main point.
My piece was not celebrating hedge fund managers. It was not predicting inflation and imminently rising rates or a debt crisis. Nor was the main point to rehash who got the financial crisis right or not.
Lastly, the main point was not to dwell on the Federal Reserve’s credibility problem, though I think that’s important.
What was my main point? We are four years into the One Percent’s recovery. Now, we are in Round 3 of quantitative easing, the formal term for the Fed injecting hundreds of billions of dollars into the economy by purchasing longer-term assets like Treasury bonds and Fannie Mae and Freddie Mac paper. What’s that giving us? Overvalued stocks. Private equity firms racing to buy up Arizona real estate. Junk bond yields at record lows. Ratings shopping on structured financial products.
These are dangerous signs of prebubble activity.
But, much more important, quantitative easing is not giving us a self-sustaining recovery and job creation. As I put it in the column, hedge fund managers “can read markets, and they can see that the Fed isn’t engineering the hiring, inflation and recovery it would like.†There’s been a breakdown in the connection between wages and productivity. Labor participation is desperately low.
So are we moving from the bust to the bubble and missing the recovery for average people?
And if so, why?
Many people argue that we need more fiscal stimulus. That’s persuasive, but it’s clearly not happening with today’s Washington.
In response to my column, people have said: What else should the Fed do? Things would be far worse if the Fed weren’t buying $85 billion in bonds a month. Look at Europe, whose monetary policy has been almost as big a disaster as its fiscal policy.
But how long do we have to wait? How much more wealthy do the One Percent get to become through speculation â€" how much house flipping do private equity firms get to do â€" before we see some sustained improvement in the rest of the economy?
And could it be that with a heavily indebted populace and a dysfunctional banking system still unable to lend effectively, that this round of quantitative easing is having a counterproductive effect? As evidence that the banking system transmission mechanism isn’t working well, small businesses are having a hard time borrowing, according to a recent New York Fed poll.
One solution is that the Fed needs to have a heavy regulatory hand to limit speculative activities. Perhaps regulators should raise margin requirements for stocks. Put the ratings agencies on notice that they are watching out for any loosening of criteria. Make these efforts public and keep talking about them.
And then, maybe quantitative easing needs to be refocused away from long-term Treasuries and housing. Maybe the Fed could figure out a way to buy student debt or municipal bonds to support infrastructure.
If quantitative easing is necessary, it should support investment, not speculation.
