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Every time there's talk about the Federal Reserve stepping in with further monetary stimulus, investors' reaction is something akin to a crowded schoolyard after somebody's announced that the ice cream truck is coming by with free treats for everyone.

On that topic, last weekend I was interested to read the view of Christina Romer -- Cal Berkley professor and former chair of the Council of Economic Advisers. Her point of view could be boiled down to this: Do more, Fed, and do it now.

Romer's larger point was that the Fed seems to be limiting itself because of a reluctant Congress and the threat of inflation. Neither, in her view, should be roadblocks, as the Fed is an independent body for a reason -- and, thus, can (and should) tell Congress to kiss off when necessary -- and because inflation is at a comfortable level. Since the Fed's mandate is both stable prices and maximum employment, it's high time it pulled some more levers. Or, as Romer put it:

More fundamentally, the Fed’s dual mandate doesn’t say it should care about unemployment only so long as inflation is at or below the target. It’s supposed to care about both equally. If inflation is at the target and unemployment is way above, it’s sensible to risk a little inflation to bring down unemployment.

But I can't help but wonder: Would further monetary easing really do much of anything? Or, at least, would it do enough to justify the risks?

I'm inclined to think not.

To date, the Fed has acted mightily as far as dousing the economy via low rates and asset purchases. But due to the nature of monetary policy, further impact from Fed easing will be mitigated by at least two issues.

First, the banks are major gatekeepers here. The Fed can loosen policy, but if banks like Bank of America (NYSE: BAC  ) , JPMorgan Chase (NYSE: JPM  ) , and Citigroup (NYSE: C  ) feel that the better outlet for cheap capital is low-risk securities or other, non-economically-stimulating avenues, then the Fed succeeds in doing little beyond en-richening banks and bankers. And the threat is real -- banks can make bundles of money on the un-riskiest of investments when they can secure nearly free capital.

But even if the banks are willing to lend and willing to lend cheaply -- which is one ideal outcome of looser Fed policy -- there needs to be borrowers on the other end that are excited about putting capital to use in the economy. That's a hard sell when businesses are still feeling psychologically weak-kneed and glass-jawed.

To be fair, if the Fed does charge the market with a big asset-buying spree, pushing down the yields on safe assets, it could nudge other buyers -- mutual funds, hedge funds, pension funds, etc. -- to riskier assets. That could push up stock indexes like the Dow Jones (INDEX: ^DJI  ) and S&P 500 (INDEX: ^GSPC  ) , make people feel wealthier, and encourage spending and boost the economy that way. Maybe that sounds a little like black magic, but it's a legitimate and likely impact.

But the concern is how big of an impact that could really have at this point. The classic (cliche?) imagery that wonks like to use is pushing on a string -- that is, the Fed can push, push, push, but there's really very little that it can do now.

The problem is that the Fed wasn't meant to be the only front in combating a sputtering economy. Ideally, monetary policy would work alongside fiscal policy -- that is, government spending -- to help reignite the economy. That's not happening. In fact, the government is actively working against that end, pushing for reduced spending and balanced budgets at precisely the wrong time. And that "fiscal cliff" that's on the tip of everyone's tongue? More of the same.

It's not as if Congress is coming out of left field -- many Americans share the same view. In fact, I'd be surprised if I don't see a few comments below telling me what an unbelievable moron I am for suggesting that government spending is the answer right now. Whether it's the ill-conceived view that the government's budget is somehow like the standard household budget, a belief that there's some glory at the other end of economic penance and austerity, or a dogged faith in the absolute power of the market's invisible hand, there are a lot of folks that think government spending is the absolute wrong move.

Not that they have much to worry about. A sea change in congressional views on fiscal stimulus seems about as likely as a Donald Trump presidency (where would he put the tanning beds anyway?).

Maybe the economic signals will get to the point where the Fed feels compelled to do something. Or maybe it won't. Either way, the prospect isn't nearly as exciting as many investors seem to think.

The Motley Fool owns shares of Bank of America, Citigroup, and JPMorgan Chase. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. Try any of our Foolish newsletter services free for 30 days.

Fool contributor Matt Koppenheffer owns shares of Bank of America, but does not have a financial interest in any of the other companies mentioned. You can check out what Matt is keeping an eye on by visiting his CAPS portfolio, or you can follow Matt on Twitter @KoppTheFool or Facebook. The Fool’s disclosure policy prefers dividends over a sharp stick in the eye.

Read/Post Comments (2) | Recommend This Article (7)

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Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On June 16, 2012, at 12:56 AM, SammyP1 wrote:

    I just want to be the first to comment that you are NOT an unbelievable moron for suggesting that government spending is the answer. The evidence is clear that austerity does not work. Look at Europe. America needs more fiscal stimulus - tax cuts and/or direct government investment in the economy. We can argue about whether tax cuts or spending are a more effective means of stimulus, but it is asinine to argue that actively taking money out of the economy will somehow grow the economy.

  • Report this Comment On June 16, 2012, at 1:31 PM, artheen wrote:

    I love this analogy.....

    The Fed is blowing in a balloon that is in a plane.

    Everyone in the plane is in-covenienced by the bigger balloon depending on their proximity to the balloon but, People inside the balloon get a bigger room to play. The confines (size) and the direction of the plane are controlled by the Govt. which seems to be happy as long it stays in the air.....

    The plane seems to be flying on Auto-Pilot which has locked out the Pilot (the President) of the process which decides the planes direction and whether he can pull a super lever that can magically increase size of the plane....

    If you are in the plane enjoy the part of the flight while it lasts, if you are outside and watching, dread the day where and how it lands......

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