– August 11, 2010

“The prevailing view among economists, policy makers and Federal Reserve Board governors is that a zero or near-zero short-term interest rate stimulates the economy—the lower the rate, the better. It is time to re-examine this conventional wisdom. In fact, lowering interest rates too much may not stimulate recovery, but actually slow it. Yes, there are benefits from zero rates, but not nearly enough to outweigh their pernicious consequences.

In the first place, the Fed’s policy of zero or near-zero interest rates means negligible returns on savings. Consumers thus have less to spend and those nearing retirement need to save more. The owners or managers of pension plans, foundations, trusts and the like must also make higher contributions to make up for lower investment earnings in order to meet their obligations. In the case of public pension plans, these higher contributions contribute to local and state fiscal crises.

Meanwhile, banks are able to make adequate returns by borrowing at near-zero rates and investing almost risk free and without effort in longer-term government debt, federal government-guaranteed debt, or in relatively riskless investment-grade debt—all at 3% to 4%. They have little incentive to go out and make loans to job-creating businesses that might have a higher yield but entail significant risk and effort.” Read more.

 “The High Costs of Very Low Interest Rates”
John C. Michaelson
The Wall Street Journal, August 11, 2010.
Image by Michelle Meiklejohn / FreeDigitalPhotos.net.

Tom Duncan

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