Ron Paul says that Quantitative Easing ... also known as QE ... is a "detachment from reality" and that the Fed plan won't work.
On Thursday the Texas libertarian congressman who is known for his free market ideas bashed the Federal Reserve's latest stimulus plan.
The Federal Open Market Committee only hours earlier had announced that the Federal Reserve will purchase $40 billion a month in mortgage-backed securities indefinitely (MBS) from financial institutions, will keep interest rates at zero percent until at least 2015, will make additional purchases if the employment picture doesn't improve, and in general will maintain an stimulative policy for a "considerable time."
The announcement sent stock and commodities prices soaring, and the U.S. dollar plummetting, as the Fed gave a clear indication that ZIRP (zero-interest rate policies) and monetary stimulus will be the new normal going forward.
Although the announcement would seem to fall short of the expectations many had — that the Fed would make asset purchases totaling upwards of $400 billion over the coming months — the open-ended nature of the Fed's latest action makes it clear that more monetary stimulus is not only possible, but probable.
So what exactly did the Fed just do ... what is this whole policy all about? Well, Quantitative easing (QE) is an unconventional monetary policy used by central banks to stimulate the national economy when conventional monetary policy has become ineffective. A central bank implements quantitative easing by buying financial assets from commercial banks and other private institutions with newly created money, in order to inject a pre-determined quantity of money into the economy. This is distinguished from the more usual policy of buying or selling government bonds to keep market interest rates at a specified target value. Quantitative easing increases the excess reserves of the banks, and raises the prices of the financial assets bought, which lowers their yield.
In response to today's announcement from the Federal Reserve, Congressman Ron Paul issued the following statement:
"No one is surprised by the Fed's action today to inject even more money into the economy through additional asset purchases. The Fed's only solution for every problem is to print more money and provide more liquidity. Mr. Bernanke and Fed governors appear not to understand that our current economic malaise resulted directly because of the excessive credit the Fed already pumped into the system.
"For all of its vaunted policy tools, the Fed now finds itself repeating the same basic action over and over in an attempt to prime the economy with more debt and credit. But this latest decision to provide more quantitative easing will only prolong our economic stagnation, corrupt market signals, and encourage even more misallocation and malinvestment of resources. Rather than stimulating a real recovery by focusing on a strong dollar and market interest rates, the Fed's announcement today shows a disastrous detachment from reality on the part of our central bank. Any further quantitative easing from the Fed, in whatever form, will only make our next economic crash that much more serious."
What is QE3? This: