This insight was originally published on July 8, 2010 for subscribers. RISK MANAGER SUBSCRIBERS have access to SELECT MACRO content in real-time.
Conclusion: Washington’s Economic Officialdom doesn’t understand that a ZERO percent “risk free” rate of return not only scares capital out of this country, but that it is also a tax on the fixed incomes of baby boomers with hard earned savings accounts.
It’s no secret that we are not fans of Ben Bernanke and his Princeton crony Paul Krugman. We don’t believe in disrespecting the cost of (or access to) capital. When you socialize an economic system, you encourage bad behavior by undisciplined allocators of capital. Bad players then perpetuate existing problems.
Thankfully, there seems to be a reasonable voice at the US Federal Reserve who doesn’t wake up looking to pander to a Nobel Prize winner that has seen nothing but his 2008 theories fail. When you watch Krugman speak, you tell me if the man looks right stressed. If I were him, I would be too.
Kansas City Fed head, Thomas Hoenig, speaking with Kathleen Hays on Bloomberg Radio's "The Hays Advantage," yesterday at 11:30AM EST said he didn't think a one percent interest rate would be harmful to the economy. "I am not saying raise rates to very high levels. I am saying get it off zero," Hoenig said. (Source: Bloomberg)
Below, Darius Dale did a solid job paraphrasing the highlights from an outstanding Hays interview:
You have to be careful with resisting the inertia of “extended and exceptional”. Just because the EU sovereign debt crisis scared investors and inflation fears subsided doesn’t mean that we should hold rates low indefinitely.
How do you incentive savings and subsequently loans when you’re giving people zero % returns on saving?
You can’t solve every problem with monetary policy. It is an allocative instrument and we need to use it carefully.
I’m not saying take rates up substantially. I’m advocating a policy towards a slow normalization of rates (i.e. what we’re seeing in Australia, etc.)
There is a time factor; the more we delay, the more difficult it will be to make a move, as uncertainties and issues build up. Slowing growth, housing, and the Bush tax cuts expiration will all be factored into the debate as we progress through the year.
There will always be risks and the more you delay in acting, the more the risks begin to pile up.
To have lived through three bubbles (housing, tech, 1970’s), not calling out the negative implications of negative real interest rates would be a derelict to my responsibility as a official of the FOMC.
It’s expensive to hire people in the U.S. That and uncertainty about the future – including burgeoning fiscal deficits – means we are going to have to wait until the confidence comes back for job creation to accelerate.
When I was elected Federal Reserve president of K.C., I was given a single reichsmark by my elderly German neighbor. He said to me, “When I was a boy, this could buy a small house. By the time I got older, it couldn’t even buy a loaf of bread. Don’t let that happen here.”
The German hyper-inflation was caused by trying to fix every single economic and political problem with monetary policy.
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