Why Another Stimulus is Now a Bad and Dangerous Policy

Federal Reserve Chairman Ben Bernanke is calling for another economic stimulus package.

Federal Reserve Chairman Ben Bernanke told Congress Monday a fresh round of government stimulus is a good idea because there's a risk the country's economic weakness could last for some time. AP

Bernanke's remarks before the House Budget Committee marked his first endorsement of another round of energizing stimulus, something that Democrats on Capitol Hill have been pushing.

One of the many negatives of the Wall Street bailout was that it would make calls like this even more likely. It's times like this that I remind everyone what the definition of insanity is...doing the same thing over and over and expecting a different result. The last stimulus passed in the summer did absolutely nothing to jump start the economy. Now, the economy is in worse shape and the powers that be think this stimulus package would be any different. Frankly, if all it took to jump start an ailing economy was for the government to print and send out money, we would no longer have any debates about the proper role of government in economic stimulus. Everytime the economy weakened, the Federal Reserve would simply print money and send it out to the folks. Of course, it isn't that simple.

The main problem with an economic stimulus package is that it gives people extra money for one month. Give someone an extra $600 one month and they will spend it. So what? What will they do the next month? If our economy was so "strong" that all it took was one month of everyone spending an extra $600, then Barack Obama is significantly overstating the economic challenge we face.

The main problem with the stimulus check is that it doesn't come from out of the air. What is given to the public is spent by the government itself. That means that the government, now in deficit, gets even more in deficit. Governments going into deficit can be a small problem or it could be a large problem. If inflation and the deficit are under control, then it is a small problem. If, on the other hand, the government is already taking on a large deficit, then anymore only puts unnecessary inflationary pressure. That's what this stimulus is going to do. We are about to take on $750 billion in new debt from the Wall Street bailout. Now, we are going to take on more debt with this stimulus. All this will do is weaken the Dollar, increase interest rates, and make things more expensive.

Furthermore, the stimulus idea is made even more dangerous with this idea.

Now that the US consumer has finally hit the wall, there’s growing speculation the Federal Reserve will push its interest rate pedal to the floor.

September’s 1.2 percent decline in retail sales and downward revisions in the two previous months virtually assure the first quarterly decline in consumer spending in 17 years. That's something economists have been worrying about for some time, when it appeared the government’s fiscal stimulus package was having a limited effect.

“I've said since the summer that a ‘dark period’ of economic data lie ahead,” Miller & Tabak’s chief bond market analyst Tony Crescenzi told clients in a note.

Short term rates are already at dangerously low levels. Now, Bernanke is thinking about going even lower. At the same time, the Treasury will print new money. This is all terribly inflationary. The short term effect of such moves is to increase long term rates like the U.S. Treasury bonds and along with them mortgage bonds.

In other words, all of this stimulus will push mortgage rates higher. That will make it even more difficult to get an affordable mortgage. That will put even more pressure on the housing market. Ultimately, everyone in the government needs to realize one thing. There is no stimulus without a stable housing market. If a stimulus puts downward pressure on housing it is counter productive one. A stimulus package that prints money only pushes mortgage rates higher because the market views such action as inflationary. It's rather pointless to give people $600 if by giving it to them, you also raise mortgage rates by a quarter to a half a percent.

Had we not had the previous "stimulus" of the previous central bank rate cuts, mortgage rates would likely be below 5.5% right now. We would be going through a mini refinancing boom that might have on its own stimulated the market. Instead, the central bank cut its short term rate along with a coordinated effort by most central banks. This pushed mortgage rates higher. Now, not but three weeks later, the central bank sees its previous action as not enough and wants to cut it even further. The reality is that this is exactly how Alan Greenspan wound up cutting the central rate so much that the Fed Funds Rate fell below one percent, and in my opinion this lead directly to the mortgage crisis that is now gripping our nation. There is at some point a diminishing return on stimulus and we long ago reached it. Rather than piling up stimulus on top of stimulus maybe the government should analyze just how much previous stimulus has helped.