QE3, the media ignored the political implications of this latest plan to print massive amounts of new money to boost the stock market.
The presidential election was eight weeks away and the Fed boss had jumped in to boost Obama. Apart from the risk inherent in such aggressive monetary expansion when interests rates are already at records lows. Bernanke has hurt the Fed’s reputation for being politically neutral.
Fed chairman flooded the economy with money in 1972 to make sure Richard Nixon was reelected.
He doesn’t like Krugman beating him up! QE3 follows two earlier fed actions to do the same. (QE3 stands for “quantitative easing”). Those actions inflated the stock market but failed to help the economy much or raise domestic demand appreciably. The dollar has weakened; losing 18% of its value against a basket of commodities in the 13 months after QE2 was announced in June 2010. Since Bernanke revealed his QE3 plans the dollar has dropped 6% from it’s July high.
QE3 calls for buying $40 billion in mortgage bonds monthly and to continue doing so until there’s a significant drop in joblessness. Interest rates are to be kept near zero at least through 2015.
The massive money injections could lead to a series of bursting financial bubbles and a Japan like scenario of economic lethargy. The fed’s loss of its reputation for integrity—that is, staying out of politics—is real and alarming.
The euro is stronger against the dollar. And the fed’s trustworthiness, at least for the time being is shot. That’s what happens when an institution known for basing its decisions on economic factors alone lets politics intrude.