By: Dan Weil
February 17, 2014
Former FDIC Chairman William Isaac has strong objections both to the Federal Reserve’s quantitative easing (QE) and its commitment to keep short-term interest rates near zero.
“QE has not been helpful to the economy. In fact, it’s impeding growth, and it’s a terrible tax on senior citizens who are trying to have income for their retirement,” he told John Bachman on “America’s Forum” on Newsmax TV.
“They just can’t find a way to earn money unless they want to jump into the stock market, and a lot of people are afraid to do that.”
Isaac, now a senior managing director at FTI Consulting, was unimpressed with new Fed Chief Janet Yellen’s pledge this week to keep short-term rates low for the foreseeable future.
The markets ought to have to guess a little bit what Fed policy is right now,” he said.
“The Fed is so dominant in the market with all of its QE purchases, with its pledge to keep interest rates low for the foreseeable future, that the market really isn’t having an opportunity to clear — to reach bottoms and go to new heights. The Fed is in charge of the markets, and that’s just not healthy. The markets need to allocate resources, not the Federal Reserve.”
The Fed is at risk of creating bubbles, Isaac says. “Farmland prices have been going up at an unsustainable rate for a number of years now. And if you look around, you’ll see evidence of bubbles in different markets for goods and services,” he said.
“That’s the risk of the Fed being so dominant in these markets, that you create misallocation of resources.”
Isaac thinks the Fed should keep tapering its QE, but not announce it to the public. “Just let the markets start to operate as they always have for years, make them guess about what Fed policy is rather than feeding the markets whatever they want to hear.”
The Fed’s monetary policy is “way too transparent,” Isaac said. “Markets operate best when different people make different bets based upon different judgments about what’s going to happen.” It’s not a free market now because the Fed is announcing everything that it’s doing, he says.
“It is a Fed-dominated market, and it’s responding to the Fed’s words and actions instead of to economic activity,” Isaac said. “That’s why the stock market scares me. I don’t know if it’s properly valued or not, and I don’t know if gold is properly valued or not, because the Fed is so dominating these markets.”
The Fed is discouraging people from taking loans, Isaac says. “The Fed is telling us the economy is so bad and it’s going to be so bad for so long that we’re going to keep rates low for the next, let’s say two or three years,” he said.
“Now, what incentive do I have to go out and borrow today versus a year from now or two years from now? I have none.”
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