• With: Dan Henninger; Jason Riley, Kim Strassel, Mary Anastasia O'Grady, Matt Kaminski

    O'GRADY: Yes. So that doesn't seem to be a big --


    GIGOT: A triumph.


    O'GRADY: Yes, a success. And also, I think you should point out that poverty is not up from last year. But since 2007, it's up to more than 2 percentage points. So people are poorer than they were in 2007.

    GIGOT: The other point I would make is that inequality has increased. And remember, what is the big -- has been the big focus of this administration? Reducing inequality. But when you don't focus on growth, you get less growth and you get more inequality. You focus on growth, you do better by everybody.

    When we come back, stocks hit a four-year high this week on news that the Fed is planning its biggest stimulus yet. Your 401K might be you up, but is it good for the economy, long-term?


    GIGOT: Stocks soared to a four-year high on Thursday after Federal Reserve Chairman Ben Bernanke announced a new round of so-called quantitative easing, its third since the financial crisis began.

    So, we're going to turn to our monetary expert, Mary O'Grady, to explain briefly what Ben Bernanke proposed to do.

    O'GRADY: Ben Bernanke is trying to stimulate the U.S. economy. And in QE3, what he will do is create money and use that money to buy mortgage- backed securities.

    GIGOT: What is it supposed to accomplish?

    O'GRADY: The goal is to push down long-term interest rates. And by doing that, he thinks that people who have -- investors who would otherwise be buying bonds and capturing a higher interest rate will say, oh, there's no return there, I'm going to go and look for something that gives me a higher return. And he's hoping they will employ that capital in a real economy and that will stimulate growth.

    GIGOT: OK, so, third time the charm here, Dan? He tried it twice. Might have worked arguably the first time to get us out of the panic. the second time, not much obviously. What about this time?

    HENNINGER: What reason is there to believe it would happen this time?

    GIGOT: This time he said it's unlimited. It's not going to end --

    HENNINGER: So what?

    GIGOT: -- after a year. We're going to $40 billion a month right now. if that doesn't work, we'll buy another 40. And we'll buy another and another until it finally works.

    HENNINGER: Two things have to happen that haven't happened in the last four years. Banks have to take this money and start lending it to productive projects.

    GIGOT: Instead of sitting on their balance sheets.

    HENNINGER: And borrowers have to take risks by taking out loans and putting them into productive projects. Why hasn't that already been happening the past four years? There's no reason why banks shouldn't be lending and borrowers shouldn't be borrowing.

    GIGOT: So that --


    HENNINGER: There is a reason, and that's because they're uncertain about whether they will make money on both sides of the loan.

    GIGOT: Because of the tax -- the tax policy --

    HENNINGER: Right.

    GIGOT: -- regulatory policy and other government policies which are separate from monetary policy?

    OK, but, Mary, the stock market is jubilant. Really. It's happy days are here again on Wall Street again. Why is Wall Street so happy?

    O'GRADY: Well, I should point out that this isn't the first time we've seen this phenomena. And we know that when the Fed has an easy money policy, often times you get what we call asset inflation. You get a lot of money going there. But the problem is that, as Dan says, it doesn't seem to be affecting the real economy. And the risks, quite apart from whether Bernanke can actually achieve what he wants, and we see that that's not working, there are also costs. There are consequences to it. And those come in the form of, first of all, the federal government is borrowing at very cheap rates and has no motivation to, you know, basically become more disciplined.

    GIGOT: If it's free money, you might spend a little more.

    O'GRADY: Exactly.


    O'GRADY: If you're in the government.

    GIGOT: Right.

    O'GRADY: And then there are investors who, you know, they might want to say, oh, I have to lock in those low rates. But now they hear from Ben Bernanke that, I don't have to do anything because rates are going to be low for several years, and so I don't have to take any risks. I'm not sure about the economy. I see lots of uncertainty there. So I think that it delays -- it reduces the incentives to actually go out and take risks. And lastly, it punishes savers.


    GIGOT: Who get low rates.

    O'GRADY: Yes.

    GIGOT: Also, we saw with the second round of Q.E., that is really did help the stock market for a time, but it also went into other asset prices. Because when you create new money, you can't really guarantee --