Friday, September 3, 2010

Raise Interest Rates!

Here's some lateral thinking for you: Since late 2008, the central banks of the world have been pumping hundreds of billions of dollars into the world's banking and financial institutions in order to stimulate economic activity and head off a recession / depression. This is the right thing to do in a fiat money system when faced with this economic situation. (I'm not going to discuss my views on fiat money, but a fiat money system is what we have so that's what we've got to work with.)

However the worldwide money situation is bizarre right now, upside-down. The stimulus money, which is now some trillions of dollars, has not been stimulating like it ought to. Why? Because banks are not lending the money but are hoarding it. The banks of the world are sitting on well over a trillion dollars and are not lending it out. Why? Because interest rates are extremely low, near zero, and have been low for a long time. The banks are waiting for interest rates to go up which will raise the effective value of the cash they are hoarding and they will start lending again.

I propose that the Federal Reserve should raise interest rates and that this will stimulate lending and thus stimulate the economy. This sounds bizarre but given the upside-down state that the world's money systems are in, I think it would work.

What do you think?

2 comments:

Mark said...

I think they're not lending because they're desperately afraid of another liquidity crisis. Raising rates would only facilitate great debt issuance, the opposite of what we need. (It would also increase the government's borrowing costs, again, the opposite of what we need).

The right answer is; cut taxes. With lower taxes there is more economic activity, which is what we really want. It is real growth rather than the artificial kind you get from manipulating the money supply.

Anonymous said...

A counterpoint, without suggestion or solution.

It isn't just the banks that are hoarding. Companies are hoarding trillions and refusing to hire. Individuals unsure of next week's paycheck are hoarding as much as possible. Everyone is hoarding.

Jacking interest rates might stimulate bank lending, but there might not be enough loan demand to matter.