Economic downturn not to be trivialized, Fed’s monetary policies critical to success
This letter is in response to the article printed on Thursday, Nov. 8 in The Daily Gamecock on quantitative easing, or QE3. The author not only overly simplifies the terms of QE3, he doesn’t articulate an understanding of finance past a pocketbook perspective. He mentions, “the Fed threatens our economic security [by injecting] money into the economy leading to many unintended consequences.” First off, any action can lead to unintended consequences, and when making an argument, one should use definite terms, not vague threats.
If the author is worried about the unemployment rate, then deflating the currency, not inflation, would add to the problem. Deflation was a major contributor to the Great Depression, resulting in rates from 15-20 percent unemployment. We also saw huge amounts of deflation after the 2008 financial crisis, when deflation was at 2 percent, one of the reasons for the current high unemployment. The problem is that with deflation, there simply is not enough money to go around and since the money people hold today will be worth more tomorrow, they do not spend it. The author warns of “rapid inflation,” again using vague terms to frighten the reader. The inflation levels in the US are currently at 2 percent and we’re currently in a 12-month average downward-moving trend. The author argues the Fed will have to increase its interest rates to “very high levels” to “pull this excess money out of the economy.” However, he never provides a reason behind pulling the money out of the economy, assuming that this is the most reasonable course of action. He also never defines what “very high levels” actually are.
One of the main problems QE3 tries to address is the lack money in the economy to begin with. While I agree that the interest rates may be higher in the future -— they are currently at historical lows, falling below 1 percent — by increasing these interest rates, we would only be returning to the typical rates. He later argues that people will be unable to borrow money due to “exorbitant interest rates” and again, leaves this term undefined. I would recommend that the author asks his parents and neighbors how easy it currently is to get a home loan; Many qualified first-time buyers are still being turned away because of the sub-prime mortgage crisis of 2008. I have a hard time believing that putting more money into the hands of banks to lend out for home loans will further restrict their loaning abilities.
The entire point of QE3 is to give an entire economy the ability to borrow and spend, and to get the economy to begin investing in the stock market again. To assume that you have the intellectual upper hand over the board of directors at the Federal Reserve as well as Chairman Ben Bernanke is laughable. I suggest that the author study this topic past its layman-level explanation and saying that “hard work” is the only way out of this recession is trivializing, almost to the point that it’s offensive.
— James Aiken, Fourth-year business student