Mitt Romney Is Off Base on QE3 Criticism

NEW YORK ( TheStreet) -- Mitt Romney has twisted himself into an awkward position when it comes to the bold stimulus plan announced by the Federal Reserve this week.

In a speech to New York City donors on Friday, Romney said in reference to QE3 that the course for America was to foster economic growth, not print more money.

"We're not going to have to look for the sugar high that comes with QE3 or QE4 or QE5 or QE6," Romney said, according to Bloomberg. "The real course ahead for America is to encourage the growth of our economy, not just to go out there and print more money."

To say that the country needs to simply encourage growth -- Romney didn't specify what he meant, but he likely was referring to a more favorable regulatory environment and less burdensome taxation -- does not mean monetary policy operates extraneously from economic progress.

Fed Chairman Ben Bernanke specifically said on Thursday that its the central bank's new program to purchase $40 billion of mortgage-backed securities each month would "remain appropriate for a considerable time after the economic recovery strengthens." The central bank also extended Operation Twist, a program that buys longer-term securities as the shorter-dated ones mature each month.

Romney, who comes from the world of private equity, likely understands the Fed's decision, and it would be unfair to assume that QE3 will be a successful program. In fact, many analysts continue to question the impact of QE2.

"There's a good chance with the Fed on the margins, pushing treasury mortgage yields to levels below where they would otherwise be in an unfettered markets ... that investors are going to go into corporate debt and then push investors from corporate debt into lower quality corporate debt," said said Robert Tipp, chief investment strategist at Prudential Fixed Income. "And people on the margins getting pushed into equities and so on it pushes people out the risk spectrum as investors."

More simply, part of the Fed's hope is that these moves will buoy investor wealth and decrease the cost of raising money. Bernanke is also attempting to reduce the cost of capital for corporations to make projects more attractive to invest in.

The Romney campaign used the Fed's new monetary policy announcement to claim that it confirmed Obama's economic policies had failed.

"After four years of stagnant growth, falling incomes, rising costs, and persistently high unemployment, the American economy doesn't need more artificial and ineffective measures," Lanhee Chen, Romney's policy director, said in a statement.

Not all Republicans agree with Romney's approach.

"The Fed has had a decades history of independence from politics, and I think that the Fed acted when they felt they should act, and not when anyone else said they should act," said Jim Denton, a Nevada-based Republican political consultant. "I remember when President George H.W. Bush was upset with former Fed Chairman Alan Greenspan because he wouldn't lower interest rates during the election."

The Fed downplayed the possibility of easing in the early part of the summer as investors magnified their calls for the central bank to step in to combat the elevated unemployment rate. The worry among many analysts was that if Bernanke and his team waited too long, Americans would see a late 2012 move as purely political -- something that would benefit President Barack Obama.

It's unlikely that QE3 will have a noticeable impact on the economy before the election, and The Washington Post's Chris Cillizza pointed out that "economic-minded" Republican and Democratic strategists don't think the monetary stimulus will influence the presidential race.

Many voters and market analysts may side with Romney, though on slightly different grounds.

"Clearly, the effectiveness of each quantitative easing looks to me that each time they do it it's less and less effective," said Allan Flader, a financial adviser at RBC Wealth Management. "They keep making money plentiful; the economic term is 'marginal utility,' where you're coming out of the desert and you're really thirsty so that first glass of water you'd pay $1 million for, but the 100th glass of water you might only pay a penny for."

Flader said he thinks there is a declining benefit with each round of easing. Short-term, the U.S. dollar will take a hit as new cash is expected to enter the economy, which theoretically makes the U.S. currency cheaper. A serious long-term risk of all this easing is a spike in inflation.

Bernanke, a premier economics scholar on inflation who is a well-read student of the Great Depression, has made it his mission to eliminate any risk of inflation during this abysmal economic period. More monetary stimulus, critics contend, could result in wild inflation some years down the road when the economy finally turns the corner. The Fed even stated in its Thursday minutes that it would end the open-ended mortgage-backed securities buying until economic improvement was achieved in the context of price stability.

Prior to this decision, the Fed had repeatedly stated it would keep inflation below 2%. When asked in a press conference on Thursday if he would allow inflation to crest above that 2% threshold, Bernanke said he could not disclose more details.

"The important thing for me was the fact that this was open-ended, so really I think the message was loud and clear that they are going to do whatever they can ... to try and create growth, or stimulate growth, in the economy," said Will Rhind, managing director at ETF Securities U.S.

Bernanke, though, has reminded politicians that there is only so much the Fed can do to prop up the economy, and that legislators must try to reverse economic troubles through fiscal policy changes as well.

Romney's campaign has rightly blamed inaction in Washington for economic troubles. The irony is that this blame typically falls on Obama and Democrats, even though it has been House Republicans and Senate Democrats who have killed each other's budgets.

This is the political game that voters should expect. Democrats and Obama blame "uncooperative" Republicans, while Romney and the GOP criticize their stubborn opponents.

But Romney's decision to politicize the Fed's decision this week, instead of slam Democrats for fiscal inaction, is a tough position to win, especially when markets, and monetary critics applauded the newest plan.

-- Written by Joe Deaux in New York.

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