By Michael K. Farr
Washington and Naples
Collier County, like many counties around the country, has experienced somewhat of an economic revival over the past year or two. Houses are selling again, restaurants are full, art galleries are busy, people are spending money and confidence is returning to the region.
The unemployment rate in the region is down over 3 percent in the past year alone (to an estimated 8.6 percent in January), and numerous other metrics suggest an economic rebound is afoot. New business licenses increased 34 percent in 2011 after falling for four straight years; new residential building permits rose 21 percent in 2011; tourism rose 6.1 percent; hotel occupancy was up 5 percent and visitor spending increased 8.5 percent; and property values, while still declining, are projected to fall just 3.6 percent in 2012.
Naples charter fishing captain, Jon Manderscheid of Fishead Charters said, "I've never been so busy. I'm booked mornings and afternoons and am turning business away." Manderscheid charges $450 for a half-day of fishing.
All this economic activity was certainly not a foregone conclusion just two or three years ago. Amid the renewed optimism, it is easy to forget that we endured the worst recession since the Great Depression. And while we still have our ongoing challenges ahead (high unemployment and continued housing pressures come to mind), our economic stabilization in such a short period of time can be largely attributed to aggressive and resolute action by Ben Bernanke and the Fed.
Bernanke's monetary easing has successfully primed the economic pump, creating the conditions necessary for better growth across Collier County and the rest of the country. But now that the pump has been primed, it is time for Bernanke to stand aside. The Fed succeeded in rescuing us from crisis; it should not attempt to rescue us from all consequences.
The Fed's Quantitative Easing, which refers to the large-scale purchase of bonds by the central bank in an effort to reduce long-term interest rates, was designed to achieve a couple objectives. First, the bond purchases add liquidity to the banking system so that banks will increase lending activity and stimulate economic growth. Second, lower interest rates force investors into riskier assets in search of better returns, driving up the prices of these assets.
While bank lending is just now beginning to rebound, it is clear that the Fed has achieved its objective with respect to asset prices. The major stock indices are up over 100 percent from their March 2009 lows, and housing prices are beginning to stabilize thanks to very low mortgage rates. Armed with portfolio gains, many consumers are coming out of their shells to spend once again.
Ultimately, however, the Fed's monetary policy (and resulting higher asset prices) alone cannot deliver us from evil. Higher stock and housing values feel really good for those of us fortunate enough to benefit, but a more widespread economic recovery needs a much firmer foundation. This foundation must include large-scale job growth, expanding incomes, a clearing of the foreclosure backlogs, higher savings rates, improved access to credit, and improved confidence. These things cannot be achieved through monetary policy alone, no matter how aggressive.
The root of our economic problems is too much debt. Therefore, the economy can only return to a state of sustainable growth through a long, slow process of consumer and government deleveraging. This process also cannot be expedited by loose monetary policy. In fact, it can be argued that low interest rates are counterproductive as they encourage the assumption of more debt and can lead to new asset bubbles and more widespread inflationary pressures. Moreover, the Fed has created a problem of moral hazard with investors expecting additional Fed action whenever markets swoon. With the housing bubble so fresh in everyone's minds, the Fed's continued "pedal-to-the-metal" approach to monetary policy is confounding.
The Fed's monetary manipulation cannot go on forever. It would be nice if the Fed could simply use monetary policy to return us to full employment and economic health. However, this is impossible. Nobody can predict when, but the unregulated nature of the Fed's limitless printing press will at some point undermine the value of the dollar and ignite an inflationary surge.
It seems likely that we are nearing the end of the Fed's "highly accommodative stance" for monetary policy. Recent increases in bond yields represent the writing on the wall. We cannot continue to receive positive employment and other economic data while also receiving the promise of indefinite Fed support.
We are unsure Collier County residents or the markets are prepared for a reversal in Fed policy. Are you?
Farr is president and majority owner of Farr, Miller & Washington, LLC. He is chairman of the investment committee and is responsible for overseeing the day-to-day activities of the firm. Prior, was a principal with Alex. Brown & Sons. He is a contributor for CNBC and a recurring commentator/guest for network news and business programs.