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You are here:Home>>Strategic Research & Analysis>>Bernanke’s Quantitative Easing may not be the panacea to US economic downturn
Saturday, 29 January 2011 02:01

Bernanke’s Quantitative Easing may not be the panacea to US economic downturn

Written by Emeka Chiakwelu
Fed Chairman Ben Bernanke Fed Chairman Ben Bernanke london evening standard

Quantitative Easing may not turn around the US economy, without fundamental changes

Quantitative Easing as a last resort of a monetary policy has its limitations. When the economy is in bad shape bedeviled with high unemployment, large debts and deficits, the power of Quantitative Easing might likely become waned. This can be attributed to the recent Fed’s Chairman Bernanke meddling in the capital market with $600 billion to buy up Treasury bonds in the open market.

The idea is to stimulate the weaken economy by buying up government securities which in turn will lower the bond interest rate. The exercise will supposedly make more money available to American households to spend in order to increase economic activity and tame the lingering recession.

Lately the idea of stimulating the economy has not been the monopoly embellished only by the Federal Reserve Bank; the executive arm of the government has tried it with $800 billion Obama’s stimulus and with the most recent tax cut bill signed into the law by the president. It is beginning to look that nothing works and therefore nobody can blame Chairman Ben Bernanke for trying to do something in the face of high unemployment rate of almost 10 percent and the slumping economy, together with the probability of deflation lurking around the corner.

Even with the best of intention, it looks like the exercise is in futility because instead of the interest rate coming down, reverse is the case and the bond interest rate is surging higher. The marketers and bond holders are rushing to dispose their bonds due to their perceived waning confidence in the economy and in the market. The crust of the matter is large deficits and the increasing American debts are becoming a serious issue that cannot be easily deflected.

Quantitative Easing by itself is not the panacea to US economic downturn. United States has financial and structural imbalances that must be sufficiently be addressed for any of these fiscal and monetary policies to become functional and productive. The issue of debts, deficits and spending must be addressed at the rudimentary level. Spending must be minimal zed especially wasteful spending that does not generate and enable wealth creation.

The tax codes must be addressed; to impel and to attract foreign investments and to give solace to local industries. The manufacturing industries are needed in the country where semi-skilled and unskilled labor can be employed. The high unemployment of 9.4 percent cannot be allowed to linger for a long time and employment benefits cannot replace a real job that pays a livable income with its perks and security.

On international level many American competitors especially China and India will see the quantitative easing as part of the emerging currency war, whereby America is deliberately lowering the value of its dollar to stimulate her export.

The risk involves with the pumping of large sums of money into the monetary base comes with the danger of inflation. With higher spending and over liquefying of the capital market opens the door to higher inflationary trend in the economy with almost zero interest rate. Moreover, other nations including BRICS nations might see it as currency manipulation to favors America’s export.

Since the formation of Federal Reserve Bank, it has played a significant role in the economic development. The monetary policy has been applied by the chairman of the Reserve Bank to regulate the economy by tinkering with the interest rate and by so doing control inflation and economic expansion or contraction, as the case might be.

Federal Reserve Bank can now deduce that the application of extra monetary policy especially quantitative easing has it limitation in the presence of overwhelming structural and financial imbalances. The pursue of full employment as was mandate by the congress to the Bernanke’s Federal Reserve Bank may not be realize because there are so many factors involve for affirmative  economic output, with subsequent  lower unemployment. The executive arm of the government with its fiscal policy has a major role to play and congress must make prudent laws for full employment policy to be realized by the chairman of the Federal Reserve Bank.

Emeka Chiakwelu is the principal Policy Strategist at Afripol. Africa Political and Economic Strategic Center (Afripol) is foremost a public policy center whose fundamental objective is to broaden the parameters of public policy debates in Africa. To advocate, promote and encourage free enterprise, democracy, sustainable green environment, human rights, conflict resolutions, transparency and probity in Africa.

 

 

 

 

 

 

 

Last modified on Saturday, 29 January 2011 02:15

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