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July 16, 2010

End Quantitative Easing and Boost the Economy

 “Few people doubt that fear played a role in the financial crisis of 2008, but few people are discussing how the same actors who projected fear in 2008 can help the economy by projecting confidence in 2010.”
As the economy continues to struggle, the Federal Reserve has continued to maintain its policy of easy rates and massive money creation.  Beginning in late 2008, the Fed purchased one trillion dollars worth of illiquid assets in exchange for pumping cash into the economy.  The Federal Reserve ended its purchase of these bad assets in April.  The Fed will continue to hold these assets for at least the next 12 months and it’s still working to figure out how to dispose of these assets.
Some may assume that fear has nothing to do with the current economic struggles, but quick research would show the contrary.  As we can see from articles written in September, November, and one at the first of this month, companies are holding on to record amounts of cash.  Currently, there is one trillion dollars in idle cash sitting on corporate balance sheets.  The reason that companies are holding this money is simple, fear.
So, what can the Federal Reserve do to decrease fear and get companies investing again?  They can start by selling the troubled assets on their balance sheet.  While companies would take the assets in exchange for cash (effectively decreasing the money supply), they would be obtaining assets that generate a cash flow and profits.  As we can see from this article, the Federal Reserve has already capitalized on some of these profits.  Why can’t we get these assets back into privately-owned hands?
The unwinding of quantitative easing can create a confidence that will lead to companies investing their idle cash in equipment, jobs, and growth.  Furthermore, I have a tough time believing that the end of QE at this stage will hurt the economy.  If companies do not want to buy bad assets, they don’t have to, effectively leaving them on the Fed’s balance sheet.  
Ending quantitative easing would remove excess money from the economy that can cause inflation in the future.  Thomas Hoenig, a Federal Reserve governor mentioned in the last Fed statement that a continuation of easy money would create imbalances in the country’s capital structure.  Ending QE will go far to keep inflation and capital imbalances from occurring.
Overall, it’s time for the federal government to start withdrawing from the day-to-day operations of the economy and allow the markets to operate on their own.  Unwinding QE is clearly the next rational step to allowing the economy to stand on its own.  Continuing QE will go further to promote uncertainty, fear, and building those imbalances.

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