Dunkelberg: More Fed Easing Will Only Help Big Banks, Not Employment

Federal Reserve
Federal Reserve

Several Fed regional bank presidents are lobbying for QE3 (explain this) to stimulate employment growth (apparently inflation is not currently a concern).

When asked for details as to just how buying another trillion or so in financial assets will do this, much hand-waving occurs.

With interest rates at historically low levels, it is reasonable to ask just how this will create new jobs. Who hasn’t taken out a mortgage already (refinancing is not much of a job creator at this point)? Would a 25bp reduction really spur a lot of new investment spending? I can’t imagine that loan committees would suddenly approve more loans if rates fell (or if the Fed stopped paying 25bp on excess reserves).

Interest rates are in the denominator of the valuation equation, but it’s the numerators that don’t look good (expected cash flow, profits etc.) and the path that Washington has us on is a major contributor to this.

In a recent National Federation of Independent Businesspoll on “Problems and Priorities” (done about every 5 years), it was not surprise to see rising health care costs in the top position, a place it has held for 25 years. But is second place was uncertainty about the economy and in fourth place was uncertainty about economic policy! More owners expect business conditions to be worse in 6 months than expect them to improve and about as many firms expect real sales volumes to fall as expect them to rise, a very weak situation. Only 5% of the owners think the current period a good one for business expansion and plans to make capital outlays are historically very low. How is QE3 going to change this?

Here are a few relevant observations:

  1. Over 60% small business owners have no interest in a loan (and over 30% get all the credit they want).
  2. Expectations for sales growth and the economy are very poor and loans can’t be repaid without new revenue that the debt-financed investment (in equipment or workers) must produce.
  3. Interest rates actually paid by small businesses have not responded proportionately to the sharp decline in Treasury yields (i.e. the Fed can’t get rates on Main Street to fall). The average rate reported on one year money by NFIB owners has averaged 6% for years even though the yield on the 1 year Treasury has been under 25bp.

So, the Fed is not “out of bullets”, there is no limit to the volume of assets it can buy (short of a supply constraint), the problem is that the bullets will not hit the target (employment), or as one colleague characterized it, the bullets are blanks. The large banks, of course, will benefit, not from "banking" but from "trading".

In the meantime, savers are taking a beating. Conservative, naïve savers who want to at least secure their capital are stuck with negative real returns and face the prospect of capital losses in the future if interest rates rise and they need to liquidate some of their Treasury bonds. Our national preoccupation with subsidizing debtors at the expense of savers is damaging to our long-term need for real investment and improved productivity.

Our current fiscal/monetary policy mix is way out of whack, setting us up for who knows what kind of problems in the future. Encouraging the Fed to distort this imbalance even further is counterproductive.

William Dunkelberg is an Economic Strategist, Boenning & Scattergood and Chief Economist, National Federation of Independent Business.