I'm just going to get to the point right away. "Helicopter Ben" Bernanke's quantitative easing campaign has been a massive failure.
On the surface, it sounds like a great idea. Crank up the printing presses, and flood the financial system with cheap money. Fund managers realize that it's unwise to fight the Fed's bubble machine, and everyone rushes to buy stocks. Rising stock prices boost consumer sentiment, and the euphoria on Wall Street inspires Main Street to keep spending money we don't have.
Sadly, this is a flawed policy based on the misguided belief that a rising stock market will boost economic activity...
Consider this: The S&P 500 index has rallied more than 90% from its March 2009 lows, one of the biggest rallies in stock market history.
Now, if the stock market did in fact drive economic activity, you'd expect a picture of rainbows and unicorns. Instead, we're faced with a situation where food stamp usage is up 57% since 2007, with 15 million jobs lost over the same period.
It should come as no surprise that there's very little evidence to suggest that stock market fluctuations have a significant wealth effect. Variations in the housing market, by contrast, have far more significant effects upon consumption.
The bottom line: A rising and robust stock market is a byproduct of a healthy economy, not the source of it. By using quantitative easing to stimulate the stock market, the Fed has been treating the symptoms, not the causes--effectively putting the cart in front of the horse.
Economic demand is stimulated by investing in infrastructure, education and entrepreneurship. And perhaps more importantly, the probability of economic growth is maximized by removing the political barriers that prevent decisive action during times of crisis, as former Treasury Secretary Larry Summers wrote over the weekend.
More stimulus is needed, but the stimulus needs to be allocated to projects that actually create jobs and close the competitive gap between America and its economic competitors. If you can revitalize the economy, the stock market will follow...
Both sides of the fiscal debate must realize that we now have a window of opportunity to kick-start these infrastructure projects, as Summers points out. Long-term interest rates are below 3%, and construction unemployment stands at 20%.
The time has come to start rebuilding America into a real, sustainable and competitive economy. To do this, we'll have to allocate stimulus to people who actually need jobs, instead of propping up hedge fund managers looking for their next big bonus. It's time to get the horse in front of the cart again...