What will the Federal Reserve's massive $900 billion plan actually accomplish? As HuffPost's Shahien Nasiripour pointed out yesterday, the Fed's new announced program has been a part of a long pattern of filling corporate coffers with cash, while squeezing savers and retirees with low interest rates.
The theory, it seems, is that the money the Fed adds to the system will find its way from corporations and banks to the lives of everyday people.
Fed chief Ben Bernanke has taken to the op-ed pages to defend his monetary stimulus package, arguing that the central bank's decision to buy $600 billion in long-term securities (as a part of a $900 plan), which it also snatched up in 2008 and 2009, will have a host of beneficial effects on the economy. The program equates to the Fed buying an average of $110 billion in government debt every month, the AP notes in a round-up of the program's mechanics.
What can you expect from this monthly flood of money? Bernanke, in a Washington Post op-ed, suggests the move will boost everything from housing to the stock market and consumer spending:
Here's Bernanke:
This approach eased financial conditions in the past and, so far, looks to be effective again. Stock prices rose and long-term interest rates fell when investors began to anticipate the most recent action. Easier financial conditions will promote economic growth. For example, lower mortgage rates will make housing more affordable and allow more homeowners to refinance. Lower corporate bond rates will encourage investment. And higher stock prices will boost consumer wealth and help increase confidence, which can also spur spending. Increased spending will lead to higher incomes and profits that, in a virtuous circle, will further support economic expansion.
But it's unclear just how much of an effect this Fed's plan will have. Goldman Sachs's top economist, for one, thinks the massive plan will add just 5 percent to U.S. GDP. Reuters columnist John Kemp, for his part, thinks the stimulus created by the plan will be "marginal." And, crucially, low rates and an upturn in the stock market don't necessarily equate to actual hiring. Here's Nasiripour from his report on the pitfalls of the Fed's zero-interest rate policy:
"Walmart, for example, spent $9.1 billion on capital expenditures in the 2008 fiscal year, the company said in an Oct. 13 presentation for investors and analysts. That dropped to $5.8 billion in 2009, and $6.6 billion in 2010.
In 2006, 71 percent of the company's cash went to capital expenditures and acquisitions, while 29 percent went towards share repurchases and dividends, Walmart noted in a separate Oct. 13 presentation. That's now flipped.
Over the last 12 months, 43 percent of the firm's cash has gone towards building the company and hiring more workers. Fifty-seven percent went to shareholders.
In other words, the world's largest retailer isn't using the majority of its free cash to build or hire on a large scale. Rather, it's giving it back to shareholders."