Federal Reserve Chairman Ben Bernanke continues to defend the $600 billion quantitative easing program despite widespread criticism.
Because banks are still dealing with toxic assets, especially in the real-estate sector, former hedge-fund manager and author Andy Kessler writes in The Wall Street Journal.
"Without another $600 billion floating through the economy, Mr. Bernanke must believe that real estate (residential and commercial) would quickly drop, endangering banks," Kessler writes.
In a normal recovery, stock prices rise on expectations of higher corporate profits, and then companies use those higher stock prices to raise money and hire workers who then spend and fuel recovery.
Before that happens, however, the economy must fix what caused the recession in the first place, by using excess inventory or tightening credit to tame inflation.
This time around, however, banks are still stuffed with toxic real-estate loans and derivatives.
"But what about the trillion in bank reserves sitting at the Fed and earning 0.25 percent interest? Why isn't it being lent out? Perhaps because it's needed to offset unrealized losses on these fouled loans," Kessler writes.
"Like it or not, banks are still weak, and another panic may be on its way."
Bernanke has defended quantitative easing, saying that it's necessary to spur recovery and has added that more stimulus measures may be needed.
"A fiscal program that combines near-term measures to enhance growth with strong confidence-inducing steps to reduce longer-term structural (budget) deficits would be an important complement to the policies of the Federal Reserve," says Bernanke, according to the Associated Press.
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