Easy Money, the Opiate of the American Economy

With growth slowing, the Fed may have to pump even more cash into the economy with diminishing results.
By Peter Morici ,

NEW YORK (

TheStreet

) -- Much like a drug addict, the U.S. economy is hooked on the

Fed's

easy money policies.

Since the financial crisis, the Fed has pumped trillions of dollars into banks and financial markets -- first, by buying banks' troubled real estate loans and then by purchasing long-term Treasuries and mortgage-backed securities to push down mortgage rates.

This rescued Wall Street banks from near-death experiences, while federal regulators shuttered more than 480 smaller banks. Unable to cope with more cumbersome regulation, many other regional banks sold out to bigger institutions.

Bank consolidation reduces competition for deposits and drives down CD rates. Retired Americans who rely on interest from savings to help pay bills have taken an enormous loss. At resorts around the country, for example, many once-prosperous seniors are tending bar and waiting on tables.

Yield-hungry investors have scarfed up the junk bonds of troubled companies. Should the Fed permit interest rates to rise, defaults would burn investors in a replay of the financial crisis.

Homebuyers, farmers and speculators, armed with cheap mortgages, have bid up home and agricultural land values, and should the Fed let mortgage rates rise, many would not be able to sell properties as needed and ultimately would default on loans.

Smaller businesses can't get credit from disappearing regional banks. Smaller real estate developers are selling out to big national builders, which can access the bond market to finance projects. Reduced competition pushes up new home prices, but when cheap money goes away, those megabuilders will be unable to sell options-laden homes, and some will default on their bonds.

Easy money made the economy function somewhat better for a brief period. From the beginning of the recovery through September of last year, GDP grew at a modest 2.2%.

But like an addict, the economy now needs ever larger doses to stay on task. Last September, the Fed nearly doubled purchases of long-term securities, but growth has since slowed to about 1%.

Early in June, Chairman Ben Bernanke caused panic by merely stating that as the economy improved the Fed would scale back securities purchases. Two weeks later, forced to backtrack, he stated easy money would continue as long as it takes. That may be forever.

The White House and Congress have done little to fix what caused the Great Recession: a growing trade deficit with China that saps demand for U.S. goods and destroys jobs; dysfunctional federal policies that invest in bogus alternative energy schemes and limit drilling for oil offshore; burdensome business regulations that raise the cost of new projects; and bank reforms that enrich the Wall Street Banks, while starving America's biggest jobs creators -- small businesses -- of credit.

Easy money is the opiate of the American economy. It has few prospects for genuine improvement as long as President Obama pursues a left-wing agenda, conservatives in the House indulge in the fantasy that free markets can solve every malady of mankind right down to Athletes' foot; and senators posture like toga-clad aristocrats attending the games on Mount Olympus.

With growth slowing, the Fed may have to pump even more cash into the economy with diminishing results. Sooner or later, the recovery could falter, and much like Europe, a few pockets will prosper, but much of the rest of the country, like Spain and Italy, will sink into double-digit unemployment.

Follow @PMorici1

This article is commentary by an independent contributor, separate from TheStreet's regular news coverage.

Professor Peter Morici, of the Robert H. Smith School of Business at the University of Maryland, is a recognized expert on economic policy and international economics. Prior to joining the university, he served as director of the Office of Economics at the U.S. International Trade Commission. He is the author of 18 books and monographs and has published widely in leading public policy and business journals, including the Harvard Business Review and Foreign Policy. Morici has lectured and offered executive programs at more than 100 institutions, including Columbia University, the Harvard Business School and Oxford University. His views are frequently featured on CNN, CBS, BBC, FOX, ABC, CNBC, NPR, NPB and national broadcast networks around the world.

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