Feature

Business columns: Easy money will make matters worse

The Fed's proposed cure could be worse than the disease, said Joseph Stiglitz in The Wall Street Journal.

Joseph StiglitzThe Wall Street Journal

The Federal Reserve is on the verge of making a serious mistake, said Joseph Stiglitz. To prevent “the economy from sinking into a Japanese-style malaise,” the Fed is contemplating another round of “quantitative easing”—i.e., aggressively pumping money into the financial system by making massive purchases of U.S. Treasury securities. This proposed cure could be worse than the disease.

The purchases might well drive long-term interest rates lower, as intended, but lower rates won’t suddenly inspire banks to shower loans on small and medium-size businesses. Those businesses—“the source of job creation in most economies”—still lack adequate loan collateral, in part because the value of the most common collateral, real estate, has plummeted. Similarly, lower rates may drive down the value of the dollar, but a cheap dollar alone won’t magically boost U.S. exports. Other countries will compete by devaluing their own currencies, sparking a race to the bottom that benefits no one.

In short, quantitative easing will fail. “The money simply won’t go where it’s needed” and could unleash “global volatility, a currency war, and a global financial market that is increasingly fragmented and distorted.” That’s a rescue the Fed will long regret.

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