Fed Could Push Economy Into Another Recession

Washington policymakers—and their colleagues abroad—have pursued reckless and irresponsible economic policies. The chickens are coming home to roost, and the Federal Reserve could easily push America into another recession.

Prior to the 2008 financial meltdown, governments in the United States, Europe and Japan piled up debt to finance social programs they could not afford, and encouraged private individuals to borrow too much against real estate. All this to maintain consumer spending and modest growth, when government regulators meddling in virtually every business and hiring decision curbed private investment.

China, instead of implementing needed market reforms, artificially suppressed the value of the yuan, subsidized domestic industries with easy credit and protected them from foreign competition. Those boosted exports and accelerated the decline of manufacturing in western economies.

When the credit bubbles burst, western leaders uniformly scapegoated the banks. And they further expanded social spending, failed to reform oppressive business regulations and appeased China on currency manipulation and protectionism that together were holding up growth in the first place.

With the banks now constrained by examiners peeking over their every shoulder and less inclined to lend, central banks recklessly printed money to pump liquidity directly into credit markets. For example, quantitative easing has boosted Bank of Japan holdings to a whopping 75 percent of GDP.

In Japan and Europe, monetary authorities have now pushed interest rates below zero—banks now charge large depositors for the privilege of stashing cash—and have joined China in pushing their currencies down against the dollar.

Cheap currencies boosted exports a bit but absent more fundamental reforms, those can’t resurrect growth.

U.S. growth during the Bush-Obama era is about half that accomplished during the Reagan-Clinton years and again appears to be faltering. Jobs creation may still look good for now but hiring decisions tend to lag changes in broader conditions and could quickly go south.