Kick the habit of begging for new stimulus

























The Fed minutes from their most recent meeting have just been released, and talking heads in the media are debating whether the Fed needs to "do more" to stimulate the economy. Many pundits are calling for a third round of asset-buying by the Fed in order to increase Fed balance sheets -- a process known as "quantitative easing" which we explained in detail in this previous post -- the possibility of which is colloquially referred to as "QE3."

We believe the markets need to kick their long-time "Fed addiction," in which many on Wall Street and in the financial media look to the Fed to steer the economy and to take "bold action" at every bump in the road.

Granted, an unemployment rate at 9% is no mere bump in the road -- it is a disgrace -- but as we have frequently explained, stimulating consumption through various forms of easy monetary policy does not truly create the need to hire among business owners. To do that, the government should remove roadblocks to growth, lower corporate income tax rates, and get rid of regulations which make hiring more costly than beneficial to business owners.

The Fed is not the savior of the economy, and Fed stimulus can be like a drug to which the markets have been addicted for far too long. In fact, we would argue that this addiction to the Fed goes back at least to the tenure of the previous Fed Chairman, Alan Greenspan, who became known as "The Maestro" on Wall Street among those who felt that he always knew what to do in order to direct the "unruly" economy like a master conductor in control of a symphony orchestra.

While it would no doubt cause pain and outrage on the Street, we would like nothing better than to hear the current Fed Chairman declare, "I am going to give you a stable dollar and nothing more -- QE1 and QE2 were probably more harmful than beneficial, and you are not going to get a QE3. The economy knows how to grow itself, if we just give businesses a stable dollar." It's not his job to lower tax rates or repeal burdensome regulations, but if Congress wanted to follow such a declaration with legislative actions along those lines, we would welcome those moves as well.

Of course, the markets might well react with a temporary plunge upon learning that the Fed Chairman was no longer in the business of providing them with their regular stimulus "fix" whenever they started to crave it. The reaction might become quite ugly, but we truly believe that such a detox would be beneficial, and that after the rage and the withdrawal symptoms wore off, everyone would be a whole lot better for it.

Unfortunately, such a scenario is not very likely to ever take place, based on what we have observed during the tenure of the current Fed Chairman. But we believe investors should thoroughly understand the position we have outlined above, and should remember that the Fed does not grow the economy, the next time they hear someone on the financial news basing their arguments on the assumptions that it does.