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Raise Interest Rates Part II

Recs

33

August 10, 2010 – Comments (30)

 A couple years ago when Benny B. was slicing interest rates like lunchmeat, I wrote a controversial post titled Raise Interest Rates. It certainly wasn't a popular idea then and with the threat of double dip, its not popular now. In the previous blog I stated my argument as such:

What if the fed raised interest rates?  I know its a strange idea.  Its definitely not a popular idea.  But if you look at the circumstances, the basic circumstances, it makes sense.  We have a downturn caused by too much easy credit.  A shift from a nation of savers to a nation of debters.  So wouldn't the logical answer be to get rid of the easy credit and return us to a nation of savers?

I think that statement is just as relevant now as it was then.  

Russiangambit posted a good article yesterday explaining why QE didn't work the first time and why it won't work the second time.

Now Yahoo Tech Ticker has an article essentially echoing my sentiment on interest rates.

Memo to Bernanke: Forget 'QE2', the Fed Should RAISE Rates to Help the Economy

Personally I dont think the Fed is keeping rates this low and providing QE because he "cares" about the economy. I think he's doing it to keep the big banks from failing as the assets on their books continue to rot. But thats just the cynic in me.

As I stated before, due to the unpopularity of this idea, I don't expect alot of recs.  If nothing else, I hope to provide food for thought.

30 Comments – Post Your Own

#1) On August 10, 2010 at 2:11 PM, goalie37 (90.72) wrote:

I don't know about everybody else, but I agree.  Raising rates, as you say, would encourage saving and discourage borrowing.  It would also strengthen the dollar, which I see as a key to recovery.

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#2) On August 10, 2010 at 2:13 PM, QualityPicks (22.91) wrote:

Well, you get a Rec from me :) I believe low rates for sooo long are really bad. I personally think they should not be controlled by the Fed, and let the markets decide what the rate should be.

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#3) On August 10, 2010 at 2:29 PM, binve (< 20) wrote:

outoffocus, you get an amen and a rec from me :)

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#4) On August 10, 2010 at 2:30 PM, Valyooo (99.48) wrote:

I definitely agree with you, I was just reading that article on yahoo

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#5) On August 10, 2010 at 2:38 PM, davejh23 (< 20) wrote:

"Personally I dont think the Fed is keeping rates this low and providing QE because he "cares" about the economy. I think he's doing it to keep the big banks from failing as the assets on their books continue to rot. But thats just the cynic in me."

I wouldn't call this cynicism...it's a verifiable fact.  In general, I think we would be well-served if the Fed just always did the opposite of what they thought was best.

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#6) On August 10, 2010 at 2:51 PM, awallejr (75.87) wrote:

People seem to forget that it was Bernanke's raising of interest rates prior to the crash that really pricked the housing bubble.  While Jim Cramer loves to keep showing his "they know nothing" table pounding clip, if you actually listened to it he had faith in Bear Stearns as a company when it was trading at 100 that day, and wanted the Fed to lower rates to help continue the bubble.

The bubble is burst.  We are now trying to recover from it.  Raising rates on a weak economy with housing prices still declining with foreclosure overhang supply simply makes no sense at this time.  While all the pundits back in 2009 kept interpreting "extended period of time" to mean months, I kept saying it means years, because it is going to take years to work our way through this mess.

The savings rate already is increasing and the paying down of debt continues.  Raising rates might make cash flush people happy, but it won't help clearing out that foreclosure inventory which has to be done.

Just because we disagree, that doesn't mean I won't rec your post.

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#7) On August 10, 2010 at 2:54 PM, truthisntstupid (93.32) wrote:

I've hated low rates ever since this race to the bottom with interest rates started.  I first remember interest rates starting to creep slowly downward in the early eighties when it really hurt a lot of older people.  For most of my adult life until then, passbook savings accounts paid 5.25% interest and CD's paid higher than that.

Then this craziness started.  Lower...and lower...and LOWER...

Senior citizens that had saved all their lives and thought they had done everything right watched in horror as their retirement evaporated before their very eyes.  Back then most people's savings vehicle were bank IRA's. They had saved.  Many had lived frugally and worked hard to ensure they could have a good life in their golden years.  Politicians didn't care.  All anybody cared about was the new mantra of lowering interest rates to "stimulate the economy."

Lower interest rates, they said, meant lower cost of capital.  More small businesses would start up, creating more jobs.  Existing small businesses would thrive,expand, and hire more people.

It was bullshit.  Many of the "new jobs"  being created were being filled by people who never should have had to go back to work! 

Many people's retirement was virtually stolen out from under them in one of the most massive transfers of wealth ever seen.  They called it "trickle down economics." 

Nothing trickled down.  It trickled up.

End this nonsense. 

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#8) On August 10, 2010 at 3:03 PM, davejh23 (< 20) wrote:

"The bubble is burst.  We are now trying to recover from it.  Raising rates on a weak economy with housing prices still declining with foreclosure overhang supply simply makes no sense at this time.  While all the pundits back in 2009 kept interpreting "extended period of time" to mean months, I kept saying it means years, because it is going to take years to work our way through this mess."

Do you recover from the burst by trying to reinflate the bubble?  I'd say that the clear answer is: "No!".  While measures to keep long-term rates low might help clear housing inventory, there are other downward pressures on housing prices besides rates.  Rates are FAR below historical averages.  Why extend the pain by artifically supporting housing?  Eventually, rates will go up and housing will resume the collapse.  You're right in the fact that it will take "years" to work through this, and no matter what the Fed does now, home prices will be lower 10 years from now than they are now.

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#9) On August 10, 2010 at 3:06 PM, Valyooo (99.48) wrote:

Truthisntstupid-

How can you say anybody shouldn't have to work in the first place?

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#10) On August 10, 2010 at 3:13 PM, mhy729 (30.09) wrote:

Valyoo, I believe he was referring to retirees that are forced to return to the workforce due to diminshed savings.

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#11) On August 10, 2010 at 3:17 PM, davejh23 (< 20) wrote:

If you really want to support housing, why not nationalize the mortgage market?  As it is, the GSE's are an enormous mess that are already being supported by taxpayers.  The gov't could at least make money on mortgages instead of forking over billions to the GSE's every quarter.  To protect against default risk, make all mortgages recourse loans...the IRS garnishes your wages for life if you walk away.

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#12) On August 10, 2010 at 3:26 PM, truthisntstupid (93.32) wrote:

I was referring to senior citizens who had worked hard and saved all their life to ensure a comfortable retirement.  And I maintain they had it stolen from them in a most insidious, come-from-behind manner.  Many elderly citizens had to go back to work. 

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#13) On August 10, 2010 at 4:19 PM, awallejr (75.87) wrote:

Do you recover from the burst by trying to reinflate the bubble?

You recover by eventually absorbing the excess that had to be shed after the bubble burst.  All those lost jobs, for example, will take years to be absorbed back in and I suspect more through attrition than any major overall job growth.  As to where home prices will be ten years from now only time will tell.  But let's be  clear, people will always need a home.  Roof over your head, clothes on your back, food on your table.

 

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#14) On August 10, 2010 at 6:31 PM, whereaminow (< 20) wrote:

All those lost jobs, for example, will take years to be absorbed back in

Why?

David in Qatar

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#15) On August 10, 2010 at 7:40 PM, awallejr (75.87) wrote:

Why what?  Why will it take years or why will they be eventually absorbed back in?

If the former: simply because I don't see any catalyst that will create about 8 million jobs in the near future.  Love to hear it if you can.

If you mean the latter: because I do see attrition becoming a bigger catalyst as the boomers retire. I read an article from a local newsletter basically doing a small bio on a local kid who scored perfect scores on his SATs and is choosing a career with the parks department.  What caught my eye was the comment by one of the heads of the NYC Parks Dept saying they need more young blood since they are looking at a 40% decrease in their workforce with all the upcoming retirements.

And with the boomers retiring you will see job growth in the areas that will ultimately cater to them.  And once the bulk of the boomers pass on, I guess you will see another bubble in those areas that did cater to them. 

 

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#16) On August 10, 2010 at 7:45 PM, whereaminow (< 20) wrote:

If the former: simply because I don't see any catalyst that will create about 8 million jobs in the near future.  Love to hear it if you can.

Yes, the former. I was just curious for the rationale for that comment.  Just picking brains today :)

David in Qatar

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#17) On August 10, 2010 at 8:09 PM, russiangambit (29.49) wrote:

I completely agree. The cost of capital shouldn't be at 0, it should be at normal levels 3-5-7%. Otherwise, it discourages savings, discourages productiv investment and  encourages speculation, malinvestment and mispricing of risk. The productive capital leaves to to the locations where they can earn more, a giant carry trade  and it is not good for the host economy. It is a pretty effective tool for a destroying an economy it seems. Like a drug, eventually it kills  the host.

With low interest rates FED is trying to prevent people from saving and force them to spend and speculate, not understanding that it is a deleveraging cycle and by preventing people from saving they are only prolonging the deleveraging, Duh.  

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#18) On August 10, 2010 at 8:23 PM, awallejr (75.87) wrote:

And yet the savings rate is actually rising.

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#19) On August 10, 2010 at 8:51 PM, outoffocus (23.56) wrote:

awallejr 

And yet the savings rate is actually rising.

Since you mentioned this twice I felt it necessary to comment. The savings rate isnt made up entirely of cash sitting on the sidelines.  The act of paying down debt is counted as part of the savings rate. I've mentioned numerous times before that in this era of extremely low interest rates, keeping cash on the sidelines while having debt outstanding is a losing proposition because you are paying more interest than you earn.  Therefore a better use of funds would to be pay down debt. 

Could it be possible that people are figuring that out, thus increasing the savings rate by paying down debt?

 

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#20) On August 10, 2010 at 10:54 PM, ChrisGraley (29.81) wrote:

I'm just gonna rec.

I'd like to argue the naysayers, but I'm too tired tonight. 

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#21) On August 10, 2010 at 11:17 PM, Starfirenv (< 20) wrote:

Good stuff all. +1 rec pump for you.

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#22) On August 10, 2010 at 11:31 PM, awallejr (75.87) wrote:

outoffocus  I said this in comment #6 "The savings rate already is increasing and the paying down of debt continues."

I only mentioned the first part in comment #18 in response to russiangambit's comment that people won't save in a low interest rate environment.

While it might be a better use of funds paying debt off first (well "bad" debt) before saving from a net gain point of view, people don't always follow that advice.  Keeping and adding to cash on hand to cover short term emergencies for example, while paying down CC debt over the months works for many, and in fact that is what we are seeing.

So the savings rate has been increasing, and the paying down of debt has been increasing (either voluntary or through bankruptcy), all during a low interest rate environment.

I wish people would stop blaming this financial crisis on interest rates.  It had more to do with zero credit standards when just giving money to anyone with a pulse was the norm. Standards are way stricter now and yet we are at the lowest interest rates you ever will see.

If you want 6% then just buy T and don't watch it every day.

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#23) On August 10, 2010 at 11:48 PM, NOTvuffett (< 20) wrote:

Even when we were on a gold standard, there were natural boom and bust cycles in the economy.  The attempt to artificially control the economy in the long term via the money supply seems doomed to failure, look at what a spectacular job the Fed has done so far.  How can all of this "cheap" money and deficit spending not result in significant inflation in years to come?  Maybe not crazy hyper-inflation like Weimar Republic or Zimbabwe, but significant.

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#24) On August 11, 2010 at 7:41 AM, outoffocus (23.56) wrote:

awallejr

Yes people are paying down debt and saving in spite of the low interest rates.  But thats simply because Central Bank rate manipulation can only defy fundamentals for so long (see Japan).  That doesn't change the fact that the Fed wants to keep us a nation of debtors by keeping interest rates low under the guise of "stimulating the economy". The whole point is the Fed wants our economy to grow by encouraging an already overly indebted consumer to take on more debt rather and speculate in the market rather than encouraging saving and productive investment. 

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#25) On August 11, 2010 at 2:55 PM, awallejr (75.87) wrote:

OR the FED wants to keep debt expense low while institutions and people delever and rebuild their balance sheets. 

You now saying this "Yes people are paying down debt and saving in spite of the low interest rates." contradicts your and russiangambit's premise that low interest rates preclude the same from happening.

Don't equate low interest rates to "easy credit."  They are not the same. 

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#26) On August 11, 2010 at 3:01 PM, whereaminow (< 20) wrote:

awallejr 

Hi, I'm back for more brain picking if you don't mind. 

If the former: simply because I don't see any catalyst that will create about 8 million jobs in the near future.  Love to hear it if you can.

A simple question: how is a job created?

David in Qatar

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#27) On August 11, 2010 at 3:53 PM, outoffocus (23.56) wrote:

awallejr

OR the FED wants to keep debt expense low while institutions and people delever and rebuild their balance sheets. 

You now saying this "Yes people are paying down debt and saving in spite of the low interest rates." contradicts your and russiangambit's premise that low interest rates preclude the same from happening.

Don't equate low interest rates to "easy credit."  They are not the same.

 

I understand you feel real strongly about the Fed keeping interest rates low, which is fine. However this seems to become less of a sharing of ideas and more of a quest to see who is "right".

For one, I am not contradicting myself. Two, some of what you stated above, I've already addressd. So I'm going to leave the debate there.  You believe interest rates should stay low. Thats fine. We can just agree to disagree.  Theres no point trying argue who's right because in the grand scheme of things, no one really knows, not even economists.  If the Fed raises interest rates, as with all economic decisions, it will benefit some and hurt others.  It simply depends which side of that decision you are on.

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#28) On August 11, 2010 at 9:55 PM, awallejr (75.87) wrote:

Hi, I'm back for more brain picking if you don't mind.

No you're not.

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#29) On August 14, 2010 at 12:19 AM, ChrisGraley (29.81) wrote:

I'm back and still tired, but I'll add that the Fed won't raise rates because the banks are still broke. The banks won't lend money because they can borrow money for free and invest in the market. The government will print even more money to get people to buy stuff and nobody will buy stuff because 1 in 5 (yes that's the true number) don't have jobs.

Sounds to me a lot like stagflation.

You can argue that we might print money that actually creates jobs, but I don't think this administration knows how to do it. Even if they stumbled into creating jobs, the money created at this point will force us into hyper-inflation.

 

 

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#30) On August 16, 2010 at 12:18 PM, miteycasey (30.30) wrote:

This is why trickle down economoics doesn't work....greed. Instead of spending and stimulating the economy people getting the money are looking out for their own asses and buying treasuries. 

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