The Fed Should Hire A Mechanic

As the Fed debates what form of QE to launch on the world and whatever new communication strategies they are going to employ, maybe they should sit back and figure out why their policies seem to be doing so little.

The Fed is clearly trying to stimulate the economy. As much as I disagree with many of their policies, I do believe their intentions were to boost the economy and not just help banks make easy money. In spite of their intentions, they have failed and I think it is because they are clinging to two flawed assumptions.

The Wealth Effect

The Fed seems to have an unwavering belief in the wealth effect. They believe that if they can just increase stock prices, people will feel better and spend more. This may have been the case at one time, but there are several reasons why it isn’t working. The most obvious flaw (which has been reported on www.zerohedge.com [8]) is that the wealth is now far too concentrated to benefit the economy as a whole. Relatively few people own most of the shares. The benefit of an increasing stock market just goes to too few people. We are just off record highs of food stamp recipients, but the number is shocking. Somewhere around 45 million people are getting food stamps. It doesn’t take a PhD in economics to figure out that people using food stamps to survive are unlikely to get too excited about stocks being up 15% or even 30%.

So the poor don’t care about the wealth effect.

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