THE BLOG

The Fed

10/04/2013 09:04 am ET | Updated Jan 23, 2014

William McChesney Martin, who served as Chairman of the Federal Reserve under five presidents, said the primary purpose of the Fed was to take away the punch bowl just when the party got going good.

One can only wonder what Martin, who died in 1998, would think of the Fed's quantitative easing policy today. In Martin's time, the Fed could reliably generate economic growth by cutting interest rates, which encouraged spending and investment. But then the Fed would have to hike them again -- take away the punch bowl -- when inflation began to rise. It was a regular routine.

Fast forward to the present time. Today the Fed is holding interest rates as close to zero as it dares, and is buying up $45 billion in Treasuries and another $40 billion in mortgage backed securities every month in an effort to pump vast sums of money into the economy ostensibly to augment economic growth and job creation. The trouble is -- we have seen meager results in terms of job creation. The banks are doing well, as is the stock market, but unemployment remains stubbornly high and growth anemic. Some contend the economy would be worse off without the Fed's intervention, but that is damning with faint praise.

What can be proven is that the Fed has accumulated more than $3.3 trillion in assets in its quantitative easing program. The Fed does not need to use taxpayer money for these purchases. Rather it just conjures up the money out of thin air like a magician pulling a rabbit from a hat. Common sense suggests this economic legerdemain cannot continue indefinitely, but we are embarked into terra incognita and no one can reliably predict what the consequences may be.

Even more troubling in my book is that this unprecedented expansion of power and influence by the Fed has been accomplished with minimal public discussion. As our normal system of government has become dysfunctional, the Fed has become the only game in town. For better or worse, the absence of any short or long term fiscal and budget policy has put all of the economic weight on the Fed's shoulders. The government shutdown underscores why the Fed has to fill the gap in economic leadership.

But now we are left to wonder what comes next. How will Bernanke, or more likely his successor, back away from this addiction to magic money without spooking financial markets and setting us up for another downturn? We definitely need an exit plan from quantitative easing before we become too addicted to it and it leads to a new round of economic instability.

Jerry Jasinowski, an economist and author, served as President of the National Association of Manufacturers for 14 years and later The Manufacturing Institute. Jerry is available for speaking engagements. October 2013