by Robert Reich

Can the Federal Reserve 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 "quantitative easing" -- buying more mortgage-backed securities, Treasury bills and other bonds -- in order to lower the cost of capital still further.

The sad reality is that cheaper money won't work. Individuals aren't borrowing because they're still under a huge debt load. And as their homes drop in value and their jobs and wages continue to disappear, they're not in a position to borrow. Small businesses aren't 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'll be happy to borrow more at even lower rates than now -- even though they're already sitting on mountains of money.

But this big-business borrowing won't create new jobs. To the contrary, large corporations have been investing their cash to pare back their payrolls. They've been buying new factories and facilities abroad (China, Brazil, India), and new labor-replacing software at home.

If Fed Chairman Ben Bernanke and company make it even cheaper to borrow, they'll be subsidizing a third corporate strategy for creating more profits but fewer jobs -- 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 $2 billion takeover offer from Hewlett-Packard, which has been in a bidding war against Dell. Campbell Soup is eyeing parts of United Biscuits. BHP Billiton has put in a takeover bid for Potash. Either Oracle or HP is likely to pay up to $1.5 billion for security software maker ArcSight. Bain Capital is expected to acquire 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 of M&As is to create greater economies of scale and more "synergies." Translated: more pink slips.

Last week at the Fed's annual confab in Jackson Hole, Wyo., Bernanke insisted the Fed will do what's necessary to increase consumer and business spending in order to keep the economy growing. But cheaper money won't necessarily create the kind of spending that generates more jobs. In fact, right now it's having the opposite effect. When consumers and small businesses can't and won't 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.


Robert Reich, former U.S. Secretary of Labor, is professor of public policy at the University of California at Berkeley. His book is "Aftershock: The Next Economy and America's Future"

Why Cheaper Money Won't Mean More Jobs