Is Bernanke Doing Enough to Save the Recovery?

Surprise! Fed Chair Ben Bernanke's much-awaited speech today didn't give away much. Markets tumbled on fallen hopes that he'd offer the sputtering recovery yet another bond-buying boost.
There was no grand announcement of QE3, another round of the monetary stimulus that's been keeping markets afloat. But given the heat Bernanke's been getting lately for stoking inflation and sinking the dollar, it's not hard to understand why. The last round of quantitative easing sent shock waves across emerging markets, where politicians and economists have been blaming the Fed for driving up prices abroad. That's because QE2 depressed the value of the U.S. dollar, which sent a flood of investors abroad in search of higher-yielding assets. Of course, the dollar decline helped U.S. growth a bit by making our exports cheaper. But according to Bernanke, that wasn't the intended effect. The purpose, according to the Fed, was to stimulate U.S. demand. And yet, a quick reminder on how that's supposed to work reveals it hasn't done any good.

In theory, lowering long-term Treasury rates lowers mortgage rates and boosts equity on people's homes by allowing them to refinance. As the yields on long-term bonds sink, investors pile into equities with higher returns, which is supposed to lift household incomes and, by extension, consumer confidence and spending. U.S. businesses, meanwhile, are supposed to respond to lower borrowing costs by increasing investment and hiring.
But six months later, we've got higher unemployment, lower consumer confidence, and rising foreign frustration with our central bank. So why are the markets clamoring for more? Because the way the markets see it, QE3 means more cheap money and more room to buy riskier assets. But a money-fueled rise in asset prices only puts the average American more at risk. "You have to worry about whether what goes up will eventually come down," says University of Chicago economist Raghuram Rajan. Rising commodity prices amid a sinking dollar have also led U.S. consumers to recoil.
The rise in asset prices also translates into higher corporate profits for big U.S. firms. But that bump in profits hasn't helped their hiring for several reasons. Big publicly-traded companies are no longer the drivers of U.S. employment. When those companies grow, they're investing and hiring abroad. It's the smaller, newer firms that do most of the U.S. hiring. And where does the funding for a lot of small businesses come from? Personal savings, family and friends, and borrowing against business owners' homes. With rising unemployment and high commodities prices cutting into personal savings, there's little another round of QE could do to fix that.
At this stage, the solution to the recovery isn't juicing up the markets or boosting corporate profits. It's convincing U.S. businesses to put their cash to work. And whether markets like it or not, that's not Bernanke's job.