(LIN) - Lately, there have been quite a few buzzwords thrown around: Bernanke, QE3, The Fed.
While many may not understand the complete implications of these terms, that hasn't stopped their use alongside political buzzwords: Election 2012, political strategy, President Barack Obama.
The talk about the Fed is relevant given last week's news of the Federal Reserve's plan to buy $40 billion a month in mortgage-backed securities.
The QE plan – known as quantitative easing – is the Federal Reserve's way of putting more money into the economy and making it easier for banks to buy and sell mortgage-backed securities. The first – QE1 – happened in 2009 at a time where the rise of a credit implosion and economic collapse were real possibilities. QE2 followed in 2010.
While the effects of the QE3 announcement could almost instantaneously be seen on Wall Street as stock prices soared, time will only tell how the plan will affect the economy.
However, relating the Fed talk to election talk is completely irrelevant.
While the president does appoint the Federal Reserve chairman, any other reference to this year's election simply does not have a place in the argument.
For starters, the Federal Reserve is a private entity, separate of the government. It is comprised of a Board of Governors who have spent much of their lives in the private sector as heads of banks and financial institutions. These governors are vested in the Fed's success not just because their personal success depends on it, but the financial health of America does.
Although Bernanke does have to answer to Congress, President Obama does not sign off on any measure of the Federal Reserve. Obama does not have a say in the Fed buying $4 worth of bonds or $40 billion.
Even still, many link the Fed's decision to boost the economy as a strategy to inflate economic number in the president's favor, or to set Bernanke up for reappointment in 2014.
Here's why that logic is flawed.
The Fed did what the Fed had to do.
By providing more liquidity, the Fed hopes banks will have an easier time selling the mortgages they create to investment bankers, thus allowing banks to have an easier time creating additional mortgages. This puts more families in homes and tends to have a positive effect on the unemployment rate, as those two figures tend to trend with each other over time. Historically, the unemployment rate decreases as the demand for new homes rise. Also, the Fed hopes that by lowering interest rates, homeowners may have the ability to refinance their homes easier. If more people can refinance, more spending can take place in the private sector, also driving job creation.
These are lofty and, quite frankly, expensive goals. They will not happen overnight, nor are they guaranteed to happen at all.
Yes, it is possible that an immediate decrease in unemployment could occur, making one person in the spotlight – be it President Obama or Bernanke – look successful. But true success is measured over time. The effects of QE3 may not even be seen until 12-18 months down the road, long after this election is over.
Calculated decisions are not determined flippantly by one man at the Federal Reserve just because it's an election year. A group of people who understand the intricacies of our economy far more than the average Joe weighed the risk and reward and reached the decision by vote.
The Federal Reserve operates under the Dual Mandate, which keeps them primarily focused on two things: Lowering and stabilizing inflation levels while keeping unemployment rates low.
The Fed used quantitative easing as a solution for rising unemployment in 2009, 2010 and Operation Twist in 2011: All non-presidential election years. They did this to help stabilize the economy, not to get anyone elected.
While there are plenty of hot topics to debate and rake candidates over the coals this election season, one thing is clear. Foreign policy, health care and abortion are all fair game. Debt and deficit game plans and even congressional spending are valid talking points.
But for the sake of sounding like you have any understanding of how the Federal Reserve works, leave Ben Bernanke out of it.
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