It seems we truly do refuse to learn from history.
After first repeating the mistakes of the 1930s-- allowing passive tightening of the money supply, and exploding the size of gov't internvention in the economy-- our gov't is now shifting to the mistakes of the 1970s.
No one at the FED seems to be wondering why $85 billion a month in money printing hasn't had much of a positive effect on the economy. Yet the policy continues, free of limitations by a requirement to be effective. Shall we not ask if this is the correct policy if the economy seems not to respond?
My view is that monetary policy is necessary but not sufficient tool to aid in recovery. The FED cannot heal an economy-- it can only make that healing easier or more difficult by providing the conditions. It's like a wounded person going to a hospital: the conditions for healing can be improved, the environment optimized as much as possible, but hospitals do not heal. Bodies heal themselves, if they are able.
The best picture I can come up with is the image of a baby being force fed by one parent while the other has his hands around the throat in a death grip. The Fed is force-feeding; the Federal Government is choking the life from our economy.
The record highs of the stock market in recent months indicate a bad thing, not a good thing. The persistence of low interest rates provides our proof.
Many people mistakenly thing of interest rates as a thermostat-- the Fed sets interest rates, and uses that as a means to adjust the economy. But the Fed really only sets ONE rate-- the Federal Funds rate. The rest of the interest rates are set by the markets, only loosely connected, if at all, to the Fed's rate setting.
For example, mortgage rates would spike if there was a sudden surge in mortgage lending demand. Those mortgage lenders might not pay a penny more in interest for the chunks of money they borrow from Fannie Mae or Freddie Mac-- but they would certainly see wider profit margins by being able to charge higher interest rates to their customers. The market demand for mortgages would support the higher interest rates.
Interest rates are powerful indicators, more like thermometers than thermostats. This fact supports the assessment of Fed actions intended to create inflation ("stimulate" the economy via "quantiative easing"-- money printing).
The several rounds of QE have failed to produce much in the way of economic stimulus. QE1 failed, so we got another QE (QE2) under the ad-hoc approach of the Bernanke Fed. QE2 also failed, so they decided that QE-perpetual was the right step, where they would just keep printing money ($85 billion per month) until something promising happened.
In spite of all this extra money being created, interest rates remain stuck inthe basement, near zero in real terms. The view of interest-rates-as-thermostat- would tell us that the FED is trying to create inflation. Our corrected understanding of interest-rates-as-thermometer shows us that the FED is utterly failing to create inflation of the kind it's hoping for.
Why has FED stimulus been so ineffective? The short answer is that the Federal government has hampered it from having the desired effect. Ignorant politicians racing to show how much "they care" (with other people's money) create one program after another, layering additional bureacracy on top of the existing mess until a behemoth so large and incomprehensible exists. No one understands all its machinations.
The result is that the signals from the economy that would indicate problem areas get buried under the mess.
People lose hope. They turn to the gov't for help because politicians lie to them and say that they can fix it with new programs and more clever dealings. Oblivious voters vote them in, hoping for solutions that never come. When the solutions prove ineffective or counterproductive, the politicians say that they need MORE power and MORE money to fix the problem.
And on it goes.