Ron Paul: Fed QE3 announcement shows ‘disastrous detachment from reality’

On Thursday, the Federal Reserve announced an initiative to flush even more stimulus into the economy. The central bank’s policy, known as quantitative easing, will result in buying $40 billion worth of mortgage-backed securities each month, but there is no end date as the Fed will analyze the results in the next few months.

A day later, the Federal Reserve began to make its purchases and is expected to buy $23 billion for the remainder of the month.  According to the Fed’s official statement, the bond-buying measures will apply “downward pressure on longer-term interest rates, support mortgage markets, and help to make broader financial conditions more accommodative.”

The third wave of QE will co-exist alongside Operation Twist.  This existing one-year-old strategy consists of purchasing $400 billion of bonds with maturities of six to 30 years and sells bonds with maturities of less than three years.

In the end, the primary goal of the Fed is to maintain artificially low interest rates and mortgage rates, though interest rates have been hovering at zero for quite some time now.  This, according to proponents of the central banking system, will ignite more spending and more jobs.

Will this monetary policy succeed?  Texas Republican Congressman Ron Paul, who has been a crusader against the Fed for more than 30 years, issued a statement Friday on the news, in which he said it was “no surprise” and criticized the action to print more money and provide more liquidity.

“Mr. Bernanke and Fed governors appear not to understand that our current economic malaise resulted directly because of the excessive credit the Fed already pumped into the system,” said the three-time presidential candidate and chair of the House Domestic Monetary Policy Subcommittee.

“For all of its vaunted policy tools, the Fed now finds itself repeating the same basic action over and over in an attempt to prime the economy with more debt and credit. But this latest decision to provide more quantitative easing will only prolong our economic stagnation, corrupt market signals, and encourage even more misallocation and malinvestment of resources.”

Instead of inflating the money supply and devaluing the nation’s currency, the bestselling author of “End the Fed” said the real recovery should be focused on a stronger U.S. dollar and market interest rates.  Instead, the libertarian-leaning representative and ardent supporter of Austrian Economics argues that the policy announcement suggests a “disastrous detachment from reality.”

“Any further quantitative easing from the Fed, in whatever form, will only make our next economic crash that much more serious,” concluded Paul, who has been championing an audit of the Fed.

Is Paul correct in his assessment that it won’t provide much economic growth?  CNN reported the same day as the QE3 statement that it won’t have much of a positive effect on the economy.

Catherine Mann, a Brandeis University finance professor and former Federal Reserve economist, told the news agency that even though the Fed’s attempts are to grow the economy at a faster rate, the “ability of QE to do that is extraordinary limited.”

Furthermore, a CNNMoney survey found that a majority of economists and investors concurred that there shouldn’t be a QE3.  The study found that an overwhelming 93 percent of investment strategists don’t think the Federal Reserve should have more stimulus, while more than three-quarters (77 percent) of economists also agreed that the Fed should avoid further stimulus.

Although they agreed it would most likely boost the stock market, it wouldn’t do much for the overall economy.

During the morning trading session at the New York Stock Exchange (NYSE), the Dow Jones Industrial Average fell 28 points, the S&P 500 declined nearly three points and the Nasdaq was dropping by eight points.  In the Monday morning session, gold was holding steady at a seven-month higher after the Fed announcement at $1,770.40 an ounce.

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