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?