From the beginning I've been an open supporter of Bernanke's decision to pursue quantitative easing as a strategy for promoting short term liquidity and long term growth, because at the time it made plenty of sense. America's financial institutions squandered their initial recapitalization funds on private jets and executive severance packages with taxpayer dollars against the behest of the FED . QE meant that the Federal Reserve was going to handle the situation personally, taking on fair levels of risk in the hope that with enough cash on hand, banks would start lending and Americans could finally get back to work. Three years and two trillion dollars later, Corporate America sits comfortably atop a Mount Olympus of inelastic demand with bulging balance sheets of billions in low interest cash and millions of unemployed jobseekers. As the FED gears up to push $40 billion or more a month onto the economy I grow more concerned, because giving bankers money without any legal authority to make them use it just isn't working. So what's the world's most powerful banker to do when all his cards are on the table? Simple, he takes them back.
Instead of continuing to put billions in new cash on the market for corporate America to stockpile, Bernanke should give a pop quiz of sorts for the financial system to
- Determine whether or not continued injections of cheap capital are required to provide liquidity for credit markets
- Ascertain the true cash position and capital reserves of systemically relevant financial institutions
- Create conditions that would dminish Wall Street's confidence in accelerated levels of monetary stimulus.
To conduct such a test, the Federal Reserve should reduce its monthly asset purchases from $40 billion per month, to $15 billion while simultaneously raising the Federal Funds Rate target range from its current 0.00-0.25 percent to 0.75-1.00 percent. This strategy contracts the stream of government capital flowing into the economy while making the borrowing of money from Federal Reserve Banks more expensive. Ideally, the FED would initiate changes at the beginning of Q2-2013 and continue them until the end of Q3.