Warning: why cheaper money won't mean more jobs
Can the Fed rescue the economy by making money even cheaper than it already is? A debate is being played out in the Fed about whether it should return to so-called 鈥渜uantitative easing鈥� 鈥� buying more mortgage-backed securities, Treasury bills, and other bonds - in order to lower the cost of capital still further.
The sad reality is cheaper money won鈥檛 work. Individuals aren鈥檛 borrowing because they鈥檙e still under a huge debt load. And as their homes drop in value and their jobs and wages continue to disappear, they鈥檙e not in a position to borrow. Small businesses aren鈥檛 borrowing because they have no reason to expand. Retail business is down, construction is down, even manufacturing suppliers are losing ground.
That leaves large corporations. They鈥檒l be happy to borrow more at even lower rates than now 鈥� even though they鈥檙e already sitting on mountains of money.
But this big-business borrowing won鈥檛 create new jobs. To the contrary, large corporations have been investing their cash to pare back their payrolls. They鈥檝e been buying new factories and facilities abroad (China, Brazil, India), and new labor-replacing software at home.
If Bernanke and company make it even cheaper to borrow, they鈥檒l be subsidizing a third corporate strategy for creating more profits but fewer jobs 鈥� mergers and acquisitions.
The M&A wave has already started. Continental and United Airlines just got approval to merge. Biotech giant Genzyme is on the auction block after Sanofi-Aventis announced a $18.5 billion bid. On Friday, 3Par, a data storage company, accepted a $1.8 billion takeover offer from Dell 鈥� one day after Hewlett-packard raised its offer. Campbell Soup is eyeing parts of United Biscuits, BHP Billiton has put in a takeover bid for Potash, Oracle or H-P are likely to pay up to $1.5 billion for security software maker ArcSight. Bain Capital is expected to acaquire Air Medical Group for almost $1 billion. The insurance industry is headed for the biggest merger boom in recent history.
Who wins from all this? If history is a guide, shareholders of acquired companies do better than shareholders of companies doing the acquiring. Top executives who end up running bigger corporations get fatter pay packages. And Wall Street and big-name corporate law firms who engineer the M&As reap a bundle.
Who loses? Large numbers of ordinary workers will lose their jobs. After all, the purpose M&As is to create greater economies of scale and more 鈥渟ynergies.鈥� Translated: More pink slips.
Last week at the Fed鈥檚 annual confab in Jackson Hole, Ben Bernanke insisted the Fed will do what鈥檚 necessary to increase consumer and business spending in order to keep the economy growing. But cheaper money won鈥檛 necessarily create the kind of spending that generates more jobs. In fact, right now it鈥檚 having the opposite effect. When consumers and small businesses can鈥檛 and won鈥檛 borrow more, big businesses use cheap money to bid up the prices of corporate assets and cut payrolls.
What we need now is more jobs, not bigger corporations. And that means focusing on the demand side of the economy, not the supply side.
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