Why is the Federal Reserve’s long-standing “easy money” policy a bad idea for the American economy’s long-term health? Former FDIC chair Sheila Bair offers a pretty good analogy in the pages of the latest Fortune magazine.
When I was growing up in the 1960s, my dad, a doctor, was worried about the increasing use of narcotics among young people. He decided to take preemptive action with his two grade-school daughters by showing us a film depicting a heroin addict in withdrawal. My sis and I sat wide-eyed and open-mouthed as we watched a young man, strapped to a gurney, tremble and convulse, scream, throw up, and foam at the mouth (really) as his body fiercely fought detoxification. The film had its desired effect. To this day I’m loath to consume any drug more mood altering than a Benadryl.
As we anticipate our eventual withdrawal from the Fed’s bond-buying spree, I just can’t put the image of that convulsing young man out of my head. I fear that the Fed’s quantitative easing has acted like a narcotic over the past several years, putting our economy into a dreamy, feel-good state of near-zero interest rates and lofty stock and bond prices, even as its corpus — the part that actually makes and sells stuff — has been ailing. So I’m glad that the Fed is reducing the dosage, because it’s time we find out if the body economic has truly healed or whether it has underlying diseases that still need to be treated.
Unfortunately, the withdrawal symptoms could be severe.
