outoffocus (24.48)

Raise Interest Rates?

October 07, 2008 – Comments (7)

I know I'm going to get some negative comments or probably no recs for this post but...oh well. 

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?

Corporate profits over the last 10 years have been based solely on the expansion of debt over the past 10 years. That debt is now flushing itself out of the system. What happens when that debt is all flushed out?

Currently alot of banks are facing a liquidity crisis.  They need cash.  So what is the logical answer to encourage the cash to come to your bank instead of gold and other assets?

Currently savers have no real incentive to save.  Banks are paying next to nothing in interest and the stock market is a joke.  Not the mention inflation is eating up the buying power of current savings. So what should banks do in order to encourage people to pay down their debts and save?

The free market has already started implementing this idea. Banks that are paying competitive rates on their savings accounts are seeing an uptick in new accounts.  So if the free market is having successful results, why not the federal reserve?

Now I know the immediate effect of raising interest rates would be quite dire. We would have a serious recession or maybe even a depression.  But honestly, aren't we already headed in that direction. But that recession and/or depression would also cause people to pay down debt and save. It would flush out the irresponsible companies and allow the responsible companies to take their place. It would create real wealth in this country instead of false wealth based on printing money. 

Once again, I know this is not a popular idea.  But considering the events over the past 8 years, I'm not so sure that the popular ideas are in the best interest of this country.  Currently everyone only cares about short term gratification instead of long term tangible benefits.  I believe that raising interest rates will be extremely painful in the short term, but will in the long term will return prosperity back to this country.