Skip to comments.For recovery, raise rates
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.
Ping to a Republican-American Editorial.
If you want on or off this ping list, let me know.
I vote with Michaelson.
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.
If you were on FOMC, would you vote to raise the rate?
Only after the Republicans retake the House.
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?
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.
So when has Keynesian economic theory ever worked?
And why is it a credible theory? Why are its “religious zealots” awarded Nobel Economic Prizes?
They don't, until you get to 3 year and longer Treasuries.
Now, now ... mustn’t put our resident cheerleader in a bind.
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.
Sorry, forgot the ‘?’
We have Kenyanesian Economics, which has never been known to work..
The discount rate is 0.75% (up to 1.25%) and the term is overnight to a few weeks.
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.
Never. It isn’t. Politics.
Any other questions?
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.
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?
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.