Is QE3 Ethical?

Last week, the Federal Reserve announced it would engage in bond buying in a new effort to stimulate the economy.  Officially, this is “QE3,” or the third round of “quantitative easing.”

What that means is that the Fed will increase the money supply in order to drive down interest rates and make it easier for Americans to borrow and spend. For QE3, the Fed said it would buy $40 billion of bonds a month of indefinitely. And that’s on top of an additional $45 billion a month the Fed is spending on another program to stimulate the economy (it will continue to do this until the end of 2012.)

But let’s be honest: there are both ethical and practical problems involved with expanding the money supply. Most people don’t think about the ethics of inflation, but it’s our duty as Christians to recognize the ethical implications of our central bank’s economic actions.

First, it’s clear that QE1 and QE2 didn’t work. Even though the Fed has dumped over $2.3 trillion into the economy since 2008, unemployment is still officially over 8 percent – and there is reason to believe that is an over-optimistic number. The Fed has kept its target interest rate down close to zero for close to four years. When the Japanese tried this, they got a “lost decade” of economic stagnation.

Second, increasing the money supply amounts to a kind of massive deception.  It induces people to think and act as though money is more readily available for business investment and spending than it actually is. That has damaging consequences.

When the Federal Reserve pushes down interest rates, the prices of assets like stocks or housing are artificially pushed up… for a time. But a painful “correction” eventually follows. In other words, those assets that are overvalued suddenly lose their value quickly: think real estate prices in 2008. After all, it was the Fed’s money creation that was largely responsible for the artificial increase in housing prices leading up to the housing bust in 2007-2008.

In this interview, Dr. Jeffrey Herbener of Grove City College explains the economic consequences of policies like QE3. And in lesson 9 of Economics for Everybody, R.C. Sproul Jr. discusses the problem of inflation, showing that the ultimate effect of money creation is to undermine the value of money. As Sproul points out, economist John Maynard Keynes seemed to understand the consequences of inflation, (even though his later policy suggestions led to more of it). Keynes wrote,

Lenin is said to have declared that the best way to destroy the capitalist system was to debauch the currency. By a continuing process of inflation, governments can confiscate secretly and unobserved an important part of the wealth of their citizens. By this method, they not only confiscate but they confiscate arbitrarily, and while the process impoverishes many, it actually enriches some. Lenin was certainly right. There’s no subtler, no surer means of overturning the existing basis of the society than to debauch their currency. The process engages all the hidden forces of economic law on the side of destruction, and does it in a manner which not one man in a million is able to diagnose.

But QE3 is not just a matter of unwise economic policy.  It is also a problem of creating injustice in the sense of Leviticus 19:35-36.  This is where God condemns distorting a fundamental measure the enables people to trade fairly within an economy.

You shall do no wrong in judgment, in measures of length or weight or quantity. You shall have just balances, just weights, a just ephah, and a just hin: I am the LORD your God, who brought you out of the land of Egypt. (Leviticus 19:35-36 ESV)

In our modern world, that fundamental measure is manipulating interest rates and prices in an effort to induce an entire economy to change the patterns of its spending. Some, who benefit from the government’s access to newly created dollars, will be enriched by the policy, but many others suffer from higher prices. As we have already seen with QE1 and QE2, the ultimate effect of QE3 will be waste and destruction.