Former FDIC Chief Isaac to Moneynews: Fed’s Tactics ‘Counterproductive’ to Recovery

Thursday, 20 Dec 2012 02:08 PM

By Forrest Jones and Kathleen Walter

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The Federal Reserve’s repeated moves to stimulate the economy are doing more harm than good by encouraging companies to put off borrowing and forcing senior citizens to keep working, said William Isaac, former chairman of the FDIC and currently a senior managing director of FTI Consulting.

Since 2008, the Fed has taken repeated steps to stimulate the economy.

Stimulus tools have included slashing benchmark interest rates to rock-bottom levels to more unorthodox measures such as quantitative easing (QE), under which Fed buys bonds such as Treasurys or mortgage debt held by banks, pumping the financial system full of liquidity in the process to make sure borrowing costs stay low across the economy.

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The Fed is currently running its third round of QE in which it is buying $85 billion in mortgage-backed securities and Treasury holdings a month from banks.

A first and second round of QE injected over $2 trillion into the economy in the past few years.

Side effects to such policies include rising stock prices, a weaker dollar and mounting inflationary pressures.

The Fed has also said interest rates will stay low until the unemployment rate drops to 6.5 percent from its current level of 7.7 percent, provided inflation rates don’t climb above 2.5 percent, meaning loose policies will stay in place for a while.

Initial easing rounds carried out during the 2008 financial crisis were merited, but recent stimulus measures are doing more harm than good in that by keeping borrowing costs low and telling the nation it will stay that way, the Fed is giving companies room to put off borrowing and investing, which is the goal behind QE in the first place.

“I think these QE programs that they have been wheeling out every few months are not effective. In fact, I think they are counterproductive,” Isaac told Newsmax TV in an exclusive interview.

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“If you are a borrower or somebody who is thinking about borrowing to build a plant or something, you would logically say ‘there is no rush — I don’t have to do this now, because rates are going to be low for the next two or three years,’” he said, noting that less monetary intervention would allow markets and the economy to correct and heal on their own.

Higher interest rates, or least higher than the near-zero rates in place today, might actually spur investing.

“If the markets were allowed to operate, people would be concerned that rates are going to go up and people would be borrowing money and trying to make their investments while the time is right,” Isaac stated.

Low rates and loose policies penalize savers as well, especially retirees, who live off the interest from their nest eggs.

“Now they can’t get enough income so it’s really penalizing people who played by the rules throughout their lives and have amassed some money to retire on,” he explained.

With little investment income, more and more seniors are forced to work, holding jobs otherwise filled by recent graduates.

“They can’t get the income, they are not retiring, which is clogging up the job market — people coming out of college can’t get jobs because people who are in their 60s are still working,” Isaac said.

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