Aftermath

Let us assume, as Ben Bernanke apparently has, that the new Republican majority in the house is sincere in its desire to reduce the deficit by cutting government spending without raising any taxes. What will that mean?

Primarily, it will mean continued economic stagnation. Bernanke has suggested for months that monetary policy alone is incapable of getting business to start spending and hiring again. The $600 billion of quantitative easing announced yesterday — $900 billion, if you include the reinvestment of returns from mortgage-backed securities — is best compared to a "hail Mary" pass in the final seconds of a football game. It probably won't work, and it may turn out that the negatives outweigh the positives, but the Fed had to try something.

Both short-term and long-term interest rates already are super low. Big businesses are sitting on piles of cash, and really don't need more. There's no reason to expand if the demand for your product isn't there. Smaller businesses, which need loans primarily to tide them over until the economy improves, can't get them from the banks. Banks don't lend money to businesses that aren't making money, and they won't be making money until demand picks up.

The greatest benefits from this new round of quantitative easing will accrue to the financial industry. Since the Fed is not allowed to lend money directly to Treasury, it has to go through intermediaries like Goldman-Sachs and Morgan Stanley. Those intermediaries, of course, collect substantial fees for their "services," fees which help to swell executive bonuses. In the meanwhile, our trading partners will be understandably miffed at us for devaluing our currency again, and will find ways to retaliate.

The greatest risk is that the Fed inadvertently will create more inflation than it means to, without boosting business activity. Some of us are old enough to remember the stagflation of the seventies. It wasn't fun.

In the meanwhile, it's clear there won't be any meaningful fiscal policy coming out of a divided Congress — if we manage to avert total gridlock, it will be a minor miracle.