On Friday, Congressman Ron Paul, chairman of the House Subcommittee on Domestic Monetary Policy, invited James Grant and Lewis Lehrman to explore the unintended consequences of the Federal Reserve’s latest plan to install Quantitative Easing Number Three (QE3). The Fed’s announcement on September 13 that it would embark on an “open-ended” program to purchase mortgage-backed securities raised concerns about the long-term impact such a program would have on consumers, savers, and investors.
Grant, editor of Grant’s Interest Rate Observer, noted that “prices are the mechanism by which the economy operates” and when the Fed manipulates interest rates, it interferes with prices. In other words, the Fed, by its actions, is engaging in “financial price control” with predictable outcomes, distortions, and consequences:
- First, such activity subsidizes speculative activities, as investors seeking higher returns on their capital are forced into making higher risk investments, increasing the chances that they will lose some or all of their capital.
- Second, the Fed’s program raises the prices of commodities, as speculators and investors seek a “safe haven” in investments that can’t be inflated or expanded at the wish of a governing board.
- Third, this action by the Fed punishes savers and wage earners. Savers receive lower and lower rates of interest on their savings, disrupting plans for home buying and retirement. Wage earners have less incentive to save as the value of their savings becomes more questionable as the dollar loses value.
- Fourth, Grant pointed out that the Fed’s plan interferes with international trade, which depends on price predictability over time.
But most importantly, according to Grant, the Fed’s willingness to continue to purchase government securities allows Congress to put off the “day of reckoning” — dealing with the inevitable consequences of