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The narcotic effects of easy money

Easy money is a painkiller, not a cure. The U.S. economy has unaddressed woes that neither President Obama and his liberal friends nor Speaker Boehner and his Tea Party rebels are willing to admit or address.

The new normal—growth at 2 percent, Wall Street grabbing massive wealth and creeping impoverishment on Main Street—is nothing new. President Bush’s recovery was equally anemic and the benefits similarly lopsided.

Prior to the financial crisis, ordinary Americans borrowed from banks to finance a spending binge, and housing and stock prices rocketed. When homeowners and car buyers couldn’t make payments, the housing market crashed and retirement accounts tanked with stock prices.

This time, the Obama administration has racked up huge federal deficits and the Federal Reserve has helped finance those by buying massive amounts of long-term Treasury securities and bonds issued by government-owned Fannie Mae and Freddie Mac.

Easy money is like a narcotic drug -- it can make a terrible toothache feel better but it won’t fix it. Taken long enough, it becomes addictive and wrecks your health.

All the while, the underlying causes of weak private sector growth go unaddressed -- China’s protectionism that steals American manufacturing jobs, bans on offshore drilling that keep America dependent on oil imports and tied down in endless Middle East wars, health care costs as much as double those in Europe that make exports uncompetitive, an increasing concentration of bank deposits at large Wall Street institutions not much interested in lending to small businesses, burdensome regulations that raise the cost of investing and jobs creation, and an IRS witch hunt against reform-minded entrepreneurs who dare speak publicly.

Nothing the Obama administration nor the right wing in the House proposes does squat to fix those. Instead, they reflexively quarrel and cling to ideological remedies patterned after past failures.

In the face of all this, the Fed has been purchasing about $85 billion each month in long-term bonds to push down borrowing rates and boost the housing and auto industries.

Wider benefits—for example, banks lending cheap money to small businesses—have not materialized, because entrepreneurs are too terrorized by government regulators and a politicized IRS to invest, and the big banks would rather gamble with the money than make honest loans. J.P. Morgan’s admission of wrongdoing in the infamous "London Whale" is just the tip of near criminal activity in Manhattan.

At its most recent policymaking meeting, the Federal Reserve was expected to begin dialing back on bond purchases but balked, because economic growth and the jobs market have simply not improved as much as Chairman Ben Bernanke anticipated.

The fact is those won’t adequately improve until the president stops campaigning and starts seeking pragmatic and less anti-business solutions, and the GOP stops clinging to myths like health savings accounts can replace ObamaCare and bring down the prices of medical costs.

Easy money is like a narcotic drug -- it can make a terrible toothache feel better but it won’t fix it. Taken long enough, it becomes addictive and wrecks your health.

Cheap money is causing housing prices in many markets to overinflate, stock prices to rise and many companies with failing business models to stay afloat by selling junk bonds to investors betting they can collect some quick returns and sell out before those businesses and bonds fail.

Now if the Fed stops buying all those bonds and lets interest rates rise, new bubbles will burst in the housing and stock markets, mortgages will again fail and bankruptcy courts will be jammed by failing enterprises.

Meanwhile, healthy growth does not happen. Since January, the economy has added 815 thousand part time positions but only some 35 thousand more Americans report finding full time work.

The Fed’s easy money policies won’t fix much, but it can’t stop printing money, lest the economy collapses altogether.

Peter Morici is an economist and professor at the Smith School of Business, University of Maryland, and widely published columnist. He is the five time winner of the MarketWatch best forecaster award. Follow him on Twitter @PMorici1.