The Broken Lever Of Monetary Policy

Includes: DIA, QQQ, SPY
by: Financial Sense

By Cris Sheridan

The U.S. recession officially ended in June 2009 and yet, after five years of record monetary stimulus and near zero interest rates, the U.S. economy is still barely growing. What's the problem?

According to renowned economist Dr. Woody Brock, author and founder of the economic think tank Strategic Economic Decisions, the reason is very simple.

Monetary policy, which is conducted by the Federal Reserve, cannot by itself create jobs and stabilize the economy.

If you "only tweak the Fed funds rate knob or QE - you only use monetary policy - it doesn't matter if you have minus ten interest rates, you aren't going to have the recovery you need...period," he said in a recent interview with Financial Sense.

Dr. Brock says the over-reliance on monetary policy is a huge mistake and will only cause further economic harm. Given how far policymakers have strayed and the obvious failures of the Fed to stimulate growth, Dr. Brock says we are now witnessing what he calls "the collapse of macroeconomics."

Let's explain why this is such a big deal.

First proven in 1953 by the Dutch economist Jan Tinbergen and then formalized mathematically by Kenneth Arrow in 1970, "if an economy has n-goals like full employment, price stability and growth - you have then, say, three goals - you have to be using simultaneously a minimum of three policy levers."

Monetary policy, Dr. Brock points out, is only one of those three and, by itself, can do very little. Furthermore, by over-relying on it to do what it can't, policymakers are only setting us up for another massive housing and stock market bubble.

The only way to unleash productive economic growth and get people back to work after a major contraction is to use the other two levers - fiscal and deregulatory policy - in addition to monetary policy.

Unfortunately, this is macroeconomics 101 and should be well understood by economic advisers and U.S. policymakers. So why then are we leaning so heavily on the Fed to answer all our economic problems? Misguided thinking and political gridlock.

In terms of fiscal policy, he says, the U.S. should be investing on "job creating, productivity hiking, growth magnifying projects" - like new oil refineries, bridges, a cyberattack-proof electric grid and other highly needed infrastructure projects that will pay for themselves down the road.

But this isn't enough. We also need to simultaneously deregulate the business sector. Dr. Brock explains:

"It takes 40 permits to open restaurants in big cities many small people can afford the time for lawyers or for the money involved and the waiting time to get all those permits, which used to be 4 in number? 85,000 pages of new regulations under the Obama administration in the Federal Register... if you want jobs and growth and young people hired, if you want productivity growth that comes from investment spending, then you want proper fiscal policy, which we have not used at all... you want monetary policy in moderation, and then you want deregulated policy whereby you make it rational for people to start businesses and get out there and hussle."

Will funneling billions of dollars into the banking system help save the economy? No. That lever is now broken. As the Fed removes its hand from the market, question is, will policymakers wake up and start using the other two?