Avoiding the Abyss: The National Economic Rescue Initiative

First, the good news: The Congressional midterms, gubernatorial races, and various state and local electoral contests resulted in the large-scale, unmistakable repudiation of the political tax-and-spend culture that so many of us were hoping for.

Now for the bad news: The distance between where we are and a genuine long-term national fiscal and economic recovery is daunting. This is no time for disengagement.

Many Americans have begun to recognize just how deep the short-term and long-term financial holes we face really are. Others, sadly including many politicians who won key races last week and their party overlords, still don't seem to get it.

The near-term situation is scary enough, and needs to be stabilized soon, or, as I said a month ago, there won't be a long-term. But even if we satisfactorily resolve the short-term, the long-term problems we face are intimidating at levels most people have only begun to absorb.

Focusing on the short-term for a bit: Fiscal 2010, which ended on September 30, was the second time the U.S. government ran an annual deficit of well over $1 trillion. Fiscal 2009 was the first. As I noted two weeks ago, this year's real spending deficit was worse than the first. Some departments went hog-wild. Spending at the Department of Education was up 30%. Spending increases at the Energy Department and the EPA (36%) were ridiculous. I could go on and on.

Federal collections on the whole came in barely higher than a year earlier, and were still about 20% lower than fiscal 2008 before subtracting IRS stimulus payments. Tax collections in most categories were down. The only reason receipts increased was that collections from the Federal Reserve increased by $42 billion.

Federal Reserve collections ... what's that all about? It's about Ben Bernanke performing the 21st century's equivalent of printing money. The Fed calls it "Quantitative Easing" (QE).

Properly employed, QE can be a stabilizing mechanism to keep an economy from nose-diving and assist it as it recovers. The Fed creates money out of nothing and invests it in government bonds, mortgage-backed securities, and corporate bonds for a while. It is supposed to wind down those investments when condition warrant.

The trouble is that conditions don't warrant pulling back, because a) there hasn't been a meaningful recovery, and b) fiscal policy is a scandalous mess. What little economic improvement has occurred has not been enough to put people back to work. Unemployment has been stuck at over 9% for the longest period since the Great Depression.

Because of the deficits created by fiscal policy and the weak recovery that has accompanied it, the Fed can't pull back on QE without significantly disrupting the economy. We can argue all day and night about whether the pullback should happen, but the fact is that at least for now Bernanke & Co. are determined not to let it happen, even as the administration continues to push for more historically ineffective stimulus and continued trillion-dollar deficits. The Fed has embarked on "QE2," a second round of quantitative easing that will increase the Fed's investment portfolio by another $600 billion.