Monday, August 30, 2010

How Is The Fed Going To Grow The Pie?

Most people have never heard the words monetary policy, and that is unfortunate. Monetary policy is hardly something that is taught in schools at the lower levels. As a result, monetary policy is something that is reserved for people like Ben S. Bernanke and others charged with the responsibility to conduct our nation's monetary policy.

For the last week or so I have been thinking about monetary policy and whether it might make sense to raise interest rates. The Fed has kept interest rates low for the banks that borrow by keeping the discount rate at next to zero. This then has kept Fed Funds low and has provided banks with low cost reserves so that they can be in compliance with reserve requirements set by the Fed. This is all very good for the banks as they can borrow at a very low cost and lend to consumers at a very high cost and make a nice spread on their money.

But, what about consumers that are savers? Savings account pay next to nothing and as a result, it is calculated that savers lose out on about $350 billion a year in lost income from savings. Perhaps if the credit card companies had lowered their interest rates in the face of the recession, as the Fed has lowered theirs, the consumer may have been more able to bring the economy out of the recession.

The major problem, the decline in housing, has affected so many facets of our domestic economy that raising interest rates seems like the last thing the Fed should do. But, the game is appearing for me more like the banks are the casino and more money is going to the house and less and less money is getting back into the hands of the consumers. The problem as I see it is that the banks are now doing fine, but the consumer with the capital markets down and savings earning next to zero, and the banks not lending, but holding onto their money, then where is growth and consumption going to come from? And, how is the Fed going to grow the pie?

Stay tuned.


LceeL said...

Ah Fred, I'm glad you brought this up. Frankly, as long as the Fed is controlling monetary policy, perhaps the federal Government should step in and establish Federal Usury laws. The inconsistent structure of Usury across the country is part of the issue with the credit card industry - and the supreme Court didn't help when "The Supreme Court had ruled in 1978 that a national bank could impose any credit rate allowed by the state in which it is located." So credit card companies (banks) started locating in South Dakota, where Usury Laws don't exist. Because they could. It's time for the federal government (read: Senators and Representatives) to STOP listening to the lobbyists filling their pockets with money for their re-election campaigns and start listening to the needs of the people that elected them. PASS USURY LAWS. Good laws. That work and are effective. Give the little guy a chance.

Robert said...

Higher interest rates would create more balance in the economy, but part of the reason why they are so low is because (I think) the Fed, and government leaders are trying to keep unemployment from getting too high. Higher interest rates from the Fed are perceived to be a brake on the economy which is moving slow as it is.

For a greener economy, in terms of consumption and environmental preservation, we may need to learn how to live with a slower economy. Distribute the jobs better. Encourage more folks to work part time, but have a system where people can survive without having to make so much money. Try and create more reasonable housing and health care costs, for instance.

I think "pay as you go" buying for consumers is better than relying too much on credit card debt. Yes, the greedy bankers are charging a lot for credit card debt in spite of real low Fed rates. Still, low credit card rates might not be a good way toward recovery.

Home loan rates are quite low, for instance. Seems like high credit card rates are limited to just credit cards.

If we could survive higher Fed rates, without tossing folks into the street, there would be more incentive to save. There would be more balance.

With more balance, there could be more real and sustainable growth based on new technology and so forth, rather than just bubbles based on low interest rates.