Higher Rates Would Boost Growth, Paper Argues


By Patrick   Follow   Tue, 20 Nov 2012, 9:38pm   671 views   12 comments
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http://blogs.wsj.com/economics/2012/11/19/higher-rates-would-boost-growth-paper-argues/?mod=patrick.net

Fed’s super easy policy of recent years has at best delivered modest growth. Despite historic Fed action, unemployment, while off its peak, remains very high. Central bankers have long argued that as moribund as the current environment may be, a less easy path would have almost certainly resulted in even greater woe. They believe higher rates would depress whatever growth the economy managed to generate. That would leave a significant amount of slack in the economy, in turn generating inflationary pressures well under the 2% price rise level officials want to see.

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  1. Kevin


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    1   3:07am Wed 21 Nov 2012   Share   Quote   Permalink   Like   Dislike  

    I'm skeptical that changing interest rates* can have much of an impact on the economy in any direction. You can make money as cheap as you want, and people won't borrow it because they're not confident in their long term ability to repay. You can make money as expensive as you want, and people won't borrow it because they're not confident in their long term ability to repay.

    Interest rates are reactionary.

    * The notable exception may be a massive swing in rates. This would just create chaos though.

  2. CaptainShuddup


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    2   6:28am Wed 21 Nov 2012   Share   Quote   Permalink   Like   Dislike  

    Kevin says

    You can make money as expensive as you want, and people won't borrow it because they're not confident in their long term ability to repay.

    That's where you are wrong. Higher interest rates rewards risk and hard work. There's a greater motive for me borrow money at a higher interest rate, to build a business. Knowing that as my business grows, the dollar gets stronger, and My bank will reward me for money I put in the bank.
    Higher interest rates eats into the amount Investors can speculate on housing. Lower house prices are more attractive regardless the interest rates. Also saving up that 20% down payment gets a little easier when the bank is paying interest for keeping money in a savings.

    Low interest rates, is purely a Wallstreet bankers game, they are the only ones that wins. Sure I get 3.50%-4.0% mortgage, but my dollars goes a lot less farther and there's no chance for me to make my money work in a safe interest baring account. The only option is to play the Casino that is Wallstreet.

  3. CaptainShuddup


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    3   7:04am Wed 21 Nov 2012   Share   Quote   Permalink   Like (1)   Dislike  

    John Bailo says

    I mean if no one has money to spend, why would someone borrow and build a new plant, or develop a new technology for consumers who can't find a job?

    On the contrary, people(those that can be in the class you speak of) have never bigger cash reserves. Would be investors have either been on the side lines because they realize it would be futile to invest in a culture, where winners and losers are picked by the Government and backed with grants, tax cuts and rebates. It would be an unfair advantage.

    Then there's those that has figured out what's going on, and realize that it is much easier to earn money the Lesko way, find a Government channel giving money away.

    As long as the entitlement tree is bearing fruit in a perpetual harvesting season, why sow any seeds?

  4. YesYNot


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    4   7:38am Wed 21 Nov 2012   Share   Quote   Permalink   Like   Dislike  

    I don't think that cause and effect are all that clear. During times of high growth in economic activity there are generally higher rates, because people want to borrow and invest in new manufacturing and infrastructure. That doesn't mean that the fed can cause growth by increasing rates by limiting access to capital.

    If the fed tried to increase rates, and gov't made it harder to get house loans a few years ago, it would not have caused an economic boom. It would have made banks go insolvent. Lots of housing would have gone into default and people would have been stuck in their houses without the ability to move. It would have been more of a messy panic than we have had.

  5. uomo_senza_nome


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    5   9:06am Wed 21 Nov 2012   Share   Quote   Permalink   Like   Dislike  

    Kevin says

    I'm skeptical that changing interest rates* can have much of an impact on the economy in any direction

    So Lowering interest rates by Greenspan after the 2000 tech bubble burst had NOTHING to do with the housing bubble?

    Housing bubble was driven by inorganic credit growth (beyond that can be meaningfully serviced). You can't have inorganic credit growth without setting the price of money too low.

    If demand can be created by debt, isn't that demand unsustainable?

  6. Zakrajshek


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    6   9:27am Wed 21 Nov 2012   Share   Quote   Permalink   Like (1)   Dislike  

    Any gain to the economy from low rates is probably completely offset by a loss to the economy from savers receiving less interest. I've seen it written that $400 billion per year has been lost by savers and transfered to borrowers in this low interest scheme.

  7. tatupu70


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    7   9:31am Wed 21 Nov 2012   Share   Quote   Permalink   Like (1)   Dislike  

    Zakrajshek says

    Any gain to the economy from low rates is probably completely offset by a loss to the economy from savers receiving less interest. I've seen it written that $400 billion per year has been lost by savers and transfered to borrowers in this low interest scheme.

    Why do people think this is a "scheme"? The Federal Reserve does not set the rate on Treasuries. Or LIBOR. (granted they can have some influence, but it's highly overrated, IMO)

    Rates are low because the 1% and Chinese have so many dollars that there is nowhere else for them to park them. When the top 1% have all the money, this is what happens. If you want higher rates, fix the wealth disparity problem.

  8. P N Dr Lo R


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    8   9:35am Wed 21 Nov 2012   Share   Quote   Permalink   Like (2)   Dislike  

    One group who would benefit from higher rates is retirees! They can't get even a modest risk free rate of return on deposits anymore--they don't need more risk. A $100K CD at a modest 5% would produce $5,000 interest in a year, or a little over $400 a month--they would most likely spend every cent of it. When I was in Chase the other day I looked at the interest rate posting that they had been paying on a minimum $10K, it had been changed from 1.25% to 1.01%.

  9. CaptainShuddup


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    9   9:36am Wed 21 Nov 2012   Share   Quote   Permalink   Like   Dislike  

    YesYNot says

    It would have made banks go insolvent. Lots of housing would have gone into default and people would have been stuck in their houses without the ability to move. It would have been more of a messy panic than we have had.

    How do you quantify that? It seems to me, historically speaking.
    We as a nation have rebounded a lot quicker, with a solid footing, with market forces at work, than we've had in the last 5 or 6 years with 100% government forces picking the winners and losers. As of now, all we need is just one breaking Wallstreet story to be right back where we were in 2007-2008. Every single bit of it, and don't kid your self.
    The dust bunnies were just kicked under the couch, they are still there in all of their nastiness splendor.

  10. upisdown


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    10   9:45am Wed 21 Nov 2012   Share   Quote   Permalink   Like   Dislike (1)  

    P N Dr Lo R says

    One group who would benefit from higher rates is retirees! They can't get even a modest risk free rate of return on deposits anymore--they don't need more risk. A $100K CD at a modest 5% would produce $5,000 interest in a year, or a little over $400 a month--they would most likely spend every cent of it. When I was in Chase the other day I looked at the interest rate posting that they had been paying on a minimum $10K, it had been changed from 1.25% to 1.01%.

    Are you proposing giving money to the entitled boomers just to park their money in a bank and collect the interest payments?

    Hasn't that generation done enough to screw this country and put us into the position that we are now?

  11. ELC


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    11   8:54am Thu 22 Nov 2012   Share   Quote   Permalink   Like (2)   Dislike  

    YesYNot says

    That doesn't mean that the fed can cause growth by increasing rates by limiting access to capital.

    EVERYTHING they're doing has to do with preventing the banks from failing. EVERYTHING.

  12. P N Dr Lo R


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    12   9:41am Thu 22 Nov 2012   Share   Quote   Permalink   Like (1)   Dislike  

    upisdown says

    Are you proposing giving money to the entitled boomers just to park their money in a bank and collect the interest payments?

    Yes. They're not being "given" money, they're earning interest and every dollar would go right back into the economy. BTW, I'm older than the boomers.

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