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For recovery, raise rates
Waterbury Republican-American ^ | August 15, 2010 | Editorial

Posted on 08/15/2010 6:46:17 PM PDT by Graybeard58

Even before there was an Obama administration, there was the hue and cry for the government to "do something" to stimulate the economy reeling from the Chris Dodd Bear Market and Recession. But there also were voices warning that stimulating the economy the way Barack Obama and congressional Democrats intended — massive government borrowing to fund massive spending on government employees and infrastructure; government interference in commerce; microscopic interest rates — was failure waiting to happen.

Those voices recalled how Japan stimulated its economy 10 times after the credit bubble burst in 1990. Each time, Japan ramped up government spending and borrowing; interest rates were reduced to almost zero. Investment, consumption and economic growth never rose above anemic, however. Government debt got so out of control that the Bank of Japan couldn't raise interest rates because it might have collapsed the government buried under a mountain of debt. Japan's "Lost Decade" is now in its third decade because it has been unable to escape the economic doldrums.

The lesson lost on the Obama administration is government can't produce prosperity. After trillions in deficit spending, its economic program has failed. Look around: All signs point now to stagnation or worse, yet the push is for further Keynesian pump-priming, only this time with recession-fanning tax increases on entrepreneurs.

The Fed pledges to keep short-term rates near zero. But as John C. Michaelson of Imperium Partners Group of New York City detailed recently in an excellent Wall Street Journal op-ed, the Fed's strategy has "pernicious consequences," as recent history proves. Low rates depress investment returns, so companies must divert money for operating expenses to meet their pension obligations; that leads to job losses and pay cuts that reduce consumer spending. Governments that increase payments to their pension funds to make up for lost investment income exacerbate their budget crises; those that carry these losses as unfunded liabilities worsen future crises.

Banks are discouraged from lending to job-producing companies because they can invest their near-zero-interest loans in zero-risk government bonds. Low rates also failed to produce the promised spike in consumer spending because shell-shocked Americans are deathly afraid the recession may deepen and the government's response will make things even worse. This same fear and loathing has companies, even those making record profits, sitting on their cash reserves, now estimated at nearly $2 trillion.

Mr. Michaelson says it's obvious the United States is near the jaws of the Japan trap. His counterintuitive way out is to raise short-term rates so "more funds will flow to borrowers who will invest them in job-creating activities and increase consumption. And from a recovery perspective, increased returns on cash will cause Americans to feel more confident about their economic future." This would begin a spiral of business expansion, job creation, and higher consumer confidence and consumption that would draw the bulk of that $2 trillion off the sidelines and generate trillions in economic activity.

He is not alone in believing the Obama administration has not put America on the road to recovery. But it appears the only way to get the government to follow his road map is to change the government. That's why America has elections and why elections are important.


TOPICS: Business/Economy; Editorial; Government
KEYWORDS: bernanke; business; deflation; economy; federalreserve; greatrecession; interest; rates; thefed

1 posted on 08/15/2010 6:46:18 PM PDT by Graybeard58
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To: JPG; Pining_4_TX; jamndad5; Biggirl; rejoicing; rightly_dividing; iopscusa; kalee; Lovergirl; ...

Ping to a Republican-American Editorial.

If you want on or off this ping list, let me know.


2 posted on 08/15/2010 6:47:44 PM PDT by Graybeard58 (Nobody reads tag lines.)
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To: Graybeard58

I vote with Michaelson.


3 posted on 08/15/2010 6:48:42 PM PDT by Pelham (Islam, the mortal enemy of the free world)
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To: Graybeard58

It the Fed raises rates, we will instantly be in an inflationary spiral as businesses try to spend the trillion dollars in cash reserves they have on their books right now.


4 posted on 08/15/2010 6:52:22 PM PDT by Brilliant
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To: Toddsterpatriot

If you were on FOMC, would you vote to raise the rate?


5 posted on 08/15/2010 6:52:34 PM PDT by aposiopetic
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To: aposiopetic

Only after the Republicans retake the House.


6 posted on 08/15/2010 7:01:07 PM PDT by Toddsterpatriot (Math is hard. Harder if you're stupid.)
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To: Graybeard58; ding_dong_daddy_from_dumas; stephenjohnbanker; DoughtyOne; rabscuttle385; mkjessup; ...
RE :” The Fed pledges to keep short-term rates near zero. But as John C. Michaelson of Imperium Partners Group of New York City detailed recently in an excellent Wall Street Journal op-ed, the Fed's strategy has “pernicious consequences,” as recent history proves. Low rates depress investment returns, so companies must divert money for operating expenses to meet their pension obligations; that leads to job losses and pay cuts that reduce consumer spending. Governments that increase payments to their pension funds to make up for lost investment income exacerbate their budget crises; those that carry these losses as unfunded liabilities worsen future crises.

Banks are discouraged from lending to job-producing companies because they can invest their near-zero-interest loans in zero-risk government bonds. Low rates also failed to produce the promised spike in consumer spending because shell-shocked Americans are deathly afraid the recession may deepen and the government's response will make things even worse. This same fear and loathing has companies, even those making record profits, sitting on their cash reserves, now estimated at nearly $2 trillion. “

Sounds like Peter Schiff

Super Low interest rates boost the stock market and some sales like home and cars but has long term consequences that are bad, as well as those above.

Why the F#$%%$ does the federal government pay more interest on bonds than the federal reserve is charging for the money?? Is it long term vs short term?

7 posted on 08/15/2010 7:01:43 PM PDT by sickoflibs ("It's not the taxes, the redistribution is the federal spending=tax delayed")
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To: aposiopetic

If the Fed just raises interest rates it will be catastrophic in this economy with this President, Congress and Cabinet full of radical left wing activists. I think it would be great to have a rate floor that is something above zero, but right now I have no idea how we could get there.

We need a cogent plan from the Fed and the Administration that makes sense, along with a modest (1/4 point?) increase in interest rates to begin repairing things; but I don’t see any kind of deep thinking along those lines coming out of Ben Bernancke or Premier Hussein any time soon.


8 posted on 08/15/2010 7:04:35 PM PDT by Bean Counter (Now what kind of a geroo are you anyway?)
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To: Graybeard58; neverdem; patton; hobbes1; NeoCaveman; CholeraJoe; AFPhys

So when has Keynesian economic theory ever worked?

And why is it a credible theory? Why are its “religious zealots” awarded Nobel Economic Prizes?


9 posted on 08/15/2010 7:04:42 PM PDT by Robert A. Cook, PE (I can only donate monthly, but socialists' ABBCNNBCBS continue to lie every day!)
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To: sickoflibs
Why the F#$%%$ does the federal government pay more interest on bonds than the federal reserve is charging for the money??

They don't, until you get to 3 year and longer Treasuries.

10 posted on 08/15/2010 7:06:25 PM PDT by Toddsterpatriot (Math is hard. Harder if you're stupid.)
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To: aposiopetic

Now, now ... mustn’t put our resident cheerleader in a bind.


11 posted on 08/15/2010 7:08:29 PM PDT by RegulatorCountry
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To: Toddsterpatriot

We dont know what the terms are of the money the banks are getting from the fed do we? Or is the bank gambling that interest rates will stay low, the terms of the bond.


12 posted on 08/15/2010 7:12:45 PM PDT by sickoflibs ("It's not the taxes, the redistribution is the federal spending=tax delayed")
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To: Toddsterpatriot

Sorry, forgot the ‘?’


13 posted on 08/15/2010 7:13:43 PM PDT by sickoflibs ("It's not the taxes, the redistribution is the federal spending=tax delayed")
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To: Robert A. Cook, PE
"So when has Keynesian economic theory ever worked?"

We have Kenyanesian Economics, which has never been known to work..

14 posted on 08/15/2010 7:16:40 PM PDT by Paladin2
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To: sickoflibs
We dont know what the terms are of the money the banks are getting from the fed do we?

The discount rate is 0.75% (up to 1.25%) and the term is overnight to a few weeks.

15 posted on 08/15/2010 7:19:13 PM PDT by Toddsterpatriot (Math is hard. Harder if you're stupid.)
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To: Robert A. Cook, PE

Our zero rate policy has been effectively a “tax” on savers and retirees for the benefit of speculators.

Savings = investment. Savings require higher interest rates.


16 posted on 08/15/2010 7:27:50 PM PDT by NeoCaveman (Defeat Dingy Harry Reid)
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To: Robert A. Cook, PE

Never. It isn’t. Politics.

Any other questions?


17 posted on 08/15/2010 7:38:33 PM PDT by patton (Obama has replaced "Res Publica" with "Quod licet Jovi non licet bovi.")
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To: Graybeard58

So we watched Japan fail using the Obama plan and went ahead and did it anyway.

Did Obama and his suckbutts in the Congress want us to fail?

Insanity is trying the same thing and expecting a new result.


18 posted on 08/15/2010 7:46:03 PM PDT by Venturer
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To: Toddsterpatriot

So banks have so renew the loans to the fed every two weeks when they loan it to the federal government per t-bill bonds for two years?


19 posted on 08/15/2010 7:46:40 PM PDT by sickoflibs ("It's not the taxes, the redistribution is the federal spending=tax delayed")
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To: NeoCaveman
Our zero rate policy has been effectively a “tax” on savers and retirees for the benefit of speculators. Savings = investment. Savings require higher interest rates.

If interest rates are lowered, people need more principal to compensate. Thus, potential retirees and other savers are holding on to those jobs and accumulating more cash to compensate.

The feds have put themselves in quite a bind. How will they ever pay the interest on the accumulated debt if the interest rates get real?

I know one of the reasons for the low interest rates was so the stock market looked more desirable. It probably backfired. Responsible people concerned about their financial well being are likely to avoid the risk taking if they need more savings to generate any meaningful cash.

20 posted on 08/15/2010 7:56:04 PM PDT by grania ("Won't get fooled again")
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To: grania
The feds have put themselves in quite a bind. How will they ever pay the interest on the accumulated debt if the interest rates get real?

They can't.

Then again I don't know if they think more than 2 years ahead anyways.

21 posted on 08/15/2010 8:06:33 PM PDT by NeoCaveman (Defeat Dingy Harry Reid)
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To: sickoflibs
So banks have so renew the loans to the fed every two weeks

So banks have so renew the loans to FROM the fed every two weeks

when they loan it to the federal government per t-bill bonds for two years?

Whether they buy a 1 month yielding 0.137%, a 3 month yielding 0.155%, a 6 month yielding 0.185%, a 1 year yielding 0.238%, a 2 year yielding 0.533% or they keep the money as excess reserves, they'd have to renew a loan from the Fed.

22 posted on 08/15/2010 8:55:59 PM PDT by Toddsterpatriot (Math is hard. Harder if you're stupid.)
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To: Graybeard58
Ok. Let me get this straight. I'm a business guy and I borrow money. The cost of that money is going up as interest rates rise. I'm supposed to borrow more and pay more interest? NOT! My costs go up as interest costs increase. So... I lay somebody off to cover the higher cost of money... Obama/Geithner/Summers/Krugman...idiots all...
23 posted on 08/15/2010 9:09:37 PM PDT by April Lexington (Study the constitution so you know what they are taking away!)
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To: Graybeard58
This is just another stupid wealth transfer scheme. Take more from the productive class in the form of higher interest costs and give that money to bond holders (grannies) who live better. Just like taxing and redistributing to po folk... What is mine becomes yours, thanks to government efforts. Only the free market should be allowed to set interest rates. And... we don't have one of those because the supply of money (Federal Reserve printing) is now infinite...
24 posted on 08/15/2010 9:12:14 PM PDT by April Lexington (Study the constitution so you know what they are taking away!)
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To: Paladin2

8<)


25 posted on 08/15/2010 9:29:53 PM PDT by Robert A. Cook, PE (I can only donate monthly, but socialists' ABBCNNBCBS continue to lie every day!)
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To: Bean Counter

The cogent plan is this:
- End regulations that make no sense
- End subsidies that make no sense
- Repeal Obamacare, which makes no sense
- Avoid tax hikes; Extend all the tax cuts
- Drill here, drill now
- replace corp income tax with business transfer tax and import tax
- allow for full expensing of R&D and investment
- eliminate any interest mortgage deduction
- tort reform
- jaw bone businesses to buy American and find out ways to keep production in the USA

the economy will rebound and with it, demand for credit.


26 posted on 08/15/2010 9:52:30 PM PDT by WOSG (OPERATION RESTORE AMERICAN FREEDOM - NOVEMBER, 2010 - DO YOUR PART!)
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To: sickoflibs; stephenjohnbanker; DoughtyOne; rabscuttle385; mkjessup; Toddsterpatriot

Does it seem to you that Republicans and Dems are both hoping that the other party will be in power when interest rates go up?


27 posted on 08/15/2010 10:00:45 PM PDT by ding_dong_daddy_from_dumas (Lt. Col. Ralph Peters: Obama is the dog who caught the fire truck!)
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To: ding_dong_daddy_from_dumas
Rising interest rates usually mean a strengthening economy.
28 posted on 08/15/2010 10:04:32 PM PDT by Toddsterpatriot (Math is hard. Harder if you're stupid.)
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To: Toddsterpatriot
Rising interest rates usually mean a strengthening economy.

I was thinking of the Jimmy Carter economy 1978-1980.

29 posted on 08/15/2010 10:12:45 PM PDT by ding_dong_daddy_from_dumas (Lt. Col. Ralph Peters: Obama is the dog who caught the fire truck!)
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To: ding_dong_daddy_from_dumas

30 posted on 08/15/2010 10:29:16 PM PDT by Toddsterpatriot (Math is hard. Harder if you're stupid.)
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To: Pelham

The thing is, there are millions of variable rate mortgages out there with people barely making the payments.

If rates start to rise, there will be another wave of foreclosures and bank failures as a result.

The morons in government have built a catch 22 situation were all paths out have very bad consequences.


31 posted on 08/15/2010 11:41:33 PM PDT by DB
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To: DB

A reduction of principal reflective of real market value combined with a government backed, assumable bargain rate refi for every legitimately acquired mortgage that is underwater, in exchange for a majority of any future appreciation upon resale, would have been far, far cheaper than the tens of trillions we’re into thus far. It would have stabilized the initial trigger for the financial crisis as well.


32 posted on 08/15/2010 11:53:29 PM PDT by RegulatorCountry
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To: April Lexington
Take more from the productive class in the form of higher interest costs and give that money to bond holders (grannies) who live better.

The "grannies" you speak of are people who saved for their whole lives, who lived in a fiscally responsible way for their whole lives, and put savings away while it earned usually 4% or more interest. Have you noticed? While that was happening the US had the best economy in the world.

So what is "granny" doing now? Cutting back on funding grandkids educations and vacations etc., giving less to cultural things, spending less money locally. Why? To subsidize an invasion of foreigners, the take-over of our bodies (you'd be amazed how many seniors who don't like the new intrusive health-care "reforms"), take-over-kids lives education programs and helping people who got mortgages they couldn't afford.

And what about the younger two or three generations? How are they going to save if they can't find steady work, can't pay off their debts, and savings don't get a boost from interest? Who're the feds going to rob next? There's no one left.

STARVE THE RICH, FEED THE POOR, TIL THERE AIN'T NO RICH NO MORE"

Ten Years After

(You really should study your 1960s and '70s rock and roll)

33 posted on 08/16/2010 5:30:51 AM PDT by grania ("Won't get fooled again")
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To: WOSG
eliminate any interest mortgage deduction

I don't know about that one. A lot of people paying their mortgages and just getting by need that income tax refund to pay their property taxes.

34 posted on 08/16/2010 5:35:41 AM PDT by grania ("Won't get fooled again")
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To: ding_dong_daddy_from_dumas

If they want another 500,000 foreclosures, raise the rates.


35 posted on 08/16/2010 6:24:37 AM PDT by stephenjohnbanker (.Go troops! " Vote out RINOS. They screw you EVERY time" Jim Robinson)
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To: DB; Pelham

” The thing is, there are millions of variable rate mortgages out there with people barely making the payments.

If rates start to rise, there will be another wave of foreclosures and bank failures as a result.

The morons in government have built a catch 22 situation were all paths out have very bad consequences. “

WINNER!!


36 posted on 08/16/2010 6:26:57 AM PDT by stephenjohnbanker (.Go troops! " Vote out RINOS. They screw you EVERY time" Jim Robinson)
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To: Graybeard58
Sorry, they like the Ben Burn-yank-me method of economic recovery most; By throwing money out of helicopters over our cities first. If he has to, he will....

Oh, wait!

37 posted on 08/16/2010 6:34:44 AM PDT by PSYCHO-FREEP ( Give me Liberty, or give me an M-24A2!)
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To: Toddsterpatriot

Ah yes, we all recall the Peanut Farmer and those wonderful lines at gas stations and mtg rates OF 12%+, INFLATION IN THE TEENS ETC ETC ...Long Live Jimmah Cawta !


38 posted on 08/16/2010 6:47:09 AM PDT by litehaus (A memory tooooo longt A)
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To: Toddsterpatriot

Isn’t it about the only and most urgent thing to do ?


39 posted on 08/16/2010 7:02:06 AM PDT by Rummenigge (there are people willing to blow out the light because it casts a shadow)
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To: Graybeard58

Thanks for the ping Graybeard. “Remember in November” as seems now is the battle cry, and yes Michaelson makes sense, but then too....he’s not trying to destroy the country.


40 posted on 08/16/2010 8:43:49 AM PDT by rockinqsranch (Dems, Libs, Socialists, Call 'em what you will. They ALL have fairies livin' in their trees.)
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To: Brilliant

“It the Fed raises rates, we will instantly be in an inflationary spiral as businesses try to spend the trillion dollars in cash reserves they have on their books right now.”

You have it somewhat backwards. Raising real interest rates makes holding cash balances more attractive because you get a return on your savings. People spend cash reserves as fast as they can in response to inflation, for example during the late 70s, when the real interest rate offered on savings was often less than the inflation rate.

Some might argue that the current real rate of interest is positive even while it is nominally zero, due to deflation.


41 posted on 08/16/2010 9:04:15 AM PDT by Pelham (Islam, the mortal enemy of the free world)
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To: Robert A. Cook, PE

That would depend on what you mean by Keynesian economics. Animal spirits, consumer confidence, are ideas used by almost everyone now. And it was a recent Republican administration that went far beyond Keynes’ modest prescription by claiming that “deficits don’t matter”.


42 posted on 08/16/2010 9:55:24 AM PDT by Pelham (Islam, the mortal enemy of the free world)
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To: Pelham

We don’t have inflation though. There is no penalty to holding cash now. Increase the interest rate and there will be.


43 posted on 08/16/2010 11:28:02 AM PDT by Brilliant
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To: Pelham

We don’t have inflation though. There is no penalty to holding cash now. Increase the interest rate and there will be.


44 posted on 08/16/2010 11:30:01 AM PDT by Brilliant
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To: Brilliant

A higher interest rate is an incentive to hold cash. You earn more on your savings the higher the real interest rate is.

A low rate, especially a zero interest rate policy like we now have, is a disincentive for holding cash balances because you earn little or nothing on your savings. There is no penalty incurred for spending your money because you are earning nothing on it.

This is a very elementary economic concept. Raising rates does not cause inflation, it is in fact the first tool that the Fed uses to combat inflation. You have the process backwards.


45 posted on 08/16/2010 9:59:02 PM PDT by Pelham (Islam, the mortal enemy of the free world)
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To: Pelham

They don’t pay interest on cash. I will grant you that my logic is counter to conventional wisdom but I am saying conventional wisdom is wrong in this instance. We had a story a few weeks ago that businesses are sitting on more than a trillion dollars in cash. Why? Because there is no penalty in doing so. You can’t invest it in stocks and bonds and generate any kind of meaningful positive return anyway right now so why not hold cash? If you push up the interest rate just a little though, then there is a penalty for holding casha nd it would quickly either be spent or invested.


46 posted on 08/18/2010 10:36:00 AM PDT by Brilliant
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