Fed Stimulus Policy Is Counterproductive: Economist
The Fed’s stimulus-oriented policy is counterproductive to its mission: boosting jobs and small business confidence, David Malpass, president of Encima Global, an economic research and consulting firm, told CNBC on Monday.
“Should the Fed be borrowing $600 billion from banks—banks that otherwise would lend to small businesses and dump it into the federal government?” he said. “It doesn’t make sense; it’s not necessary. And it diverts attention from what should be going on, which is the government getting its act in order.”
Malpass is one of 23 economists, former government officials, and political strategists that sent an open letter to Fed Chairman Ben Bernankesaying the Fed’s large-scale asset purchase plan should be “reconsidered and discontinued.”
The Fed’s recent purchase of Treasuries risks dollar debasement, inflation and global divestment out of the United States, said Malpass, who served as deputy assistant treasury secretary under Ronald Reagan.
“Look, the world is appalled at quantitative easing and everybody is trying to get their money out of the United States," he said. "Around the world, the central banks and governments really know this is hurting the United States. They want the United States to be growing and they don’t think this is the approach that should be taken.”
Still, some credit the Fed's first round of liquidity injections in stemming a complete financial meltdown in 2009, and in fact, a second round may actually benefit the economy with few down-side risks, said Kevin Ferry, co-founder of Cronus Futures Management.
"The fact is the Fed did a very good job recapitalizing the banks and setting up the structure to come out of a big problem," said Ferry.
"If it only creates excess reserves, it's pretty much doing nothing. But it actually has very little downside risk effects," Ferry went on to say. "It's like a big toxic waste dump of nothing. From a risk-management standpoint the Fed probably finds itself in a better position than [do] the critics. I'm not a fan of this, don't get me wrong. Once they've deliberated and decided to go this way, you got to realize that potential benefits do exist."