Monday, February 6, 2012

It’s Time To Quit Low Interest Rates

An op-ed in the Wall Street Journal of 6 February by Charles Schwab points out that in the 37th month of central government manipulation of the free-market system, the Federal Reserve’s near-zero interest rate policy is still not accomplishing its goal of stimulating the economy.

“The Fed policy has resulted in a huge infusion of capital into the system, creating a massive rise in liquidity but negligible movement of that money. It is sitting there, in banks all across America, unused. The multiplier effect that normally comes with a boost in liquidity remains at rock bottom. Sufficient capital is in the system to spur growth—it simply isn't being put to work fast enough.

“Average American savers and investors in or near retirement are being forced by the Fed's zero-rate policy to take greater investment risks. To get even modest interest or earnings on their savings, they move out of safer assets such as money markets, short-term bonds or CDs and into riskier assets such as stocks. Either that or they tie up their assets in longer-term bonds that will backfire on them if inflation returns. They're also dramatically scaling back their consumer spending and living more modestly, thus taking money out of the economy that would otherwise support growth.

“In short, the Fed's actions, rather than helping, are having the perverse effect of destroying the confidence of businesses and individuals to invest and the willingness of banks to loan to anyone but those whose credit is so strong they don't need loans.”

It seems the money is there for the asking; but with consumer confidence at such a low ebb, nobody is willing to risk anything on borrowing. It seems to me that if America were to elect a President, such as Mitt Romney—an obviously skillful and insightful businessman—the confidence in American business and entrepreneurship would explode in a burst of borrowing and investing.

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