WSJ: Raise Rates to Boost the Economy

The chairman of the Federal Reserve is stuck between a rock and a hard place—well, more like a house and a gas tank. How to escape? Mr. Bernanke, raise interest rates now.

In order to the save bank balance sheets that he never cleared of toxic mortgage assets, Ben Bernanke's near-zero interest rate policy and dollar- printing programs were an attempt to create a so-called wealth effect. "Lower mortgage rates will make housing more affordable and allow more homeowners to refinance," Mr. Bernanke wrote in a Washington Post op-ed last November. "Lower corporate bond rates will encourage investment. And higher stock prices will boost consumer wealth and help increase confidence, which can also spur spending."

In other words, the Fed is manipulating the stock market. And it has been on a tear, up 19% since Mr. Bernanke's Jackson Hole speech last August outlining a second round of quantitative easing.

Unfortunately, when you print dollars, you debase the currency—and it shows up in higher oil prices, already rising well before the rebellions in Egypt and Libya. Copper and wheat and food are also seeing increases. For that matter, just about everything is rising except home prices. The Case-Shiller home price index dropped 2.4% in December.

What Mr. Bernanke's dollar printing has given to consumers in a supposed wealth effect, it has taken away in the cost of living.

Worse, the bond market is spooked and long-term interest rates have spiked. The 10-year Treasury has gone to 3.28% from 2.5% since Mr. Bernanke chatted up QE2 last August. When spreads are widening between short-term and long-term rates, it usually means that banks don't want to lend. Lenders see runaway commodity prices and rightly fear that current long-term rates will rise with inflation, putting any loans made today underwater quickly. Banks see near-zero short-term rates and dollar printing stretching out to the horizon, and they no longer believe long-term rates are going lower, so they sit. Businesses too are waiting to hire until the economy is back to normal. Zero interest rates are not normal.

Mr. Bernanke has to change their view. He could persist on his present course and keep trying to juice the stock market to induce wealth, but consumers will still be dragged down by $80 fill-ups at the pump, and the economy will continue sideways.

Or he could admit his folly and break out of the box. How? By raising short-term interest rates. What? Won't that kill the recovery? No.

It's all counterintuitive, but it will work. Ending quantitative easing and raising short-term rates will surely cause the stock market to crater. 1,000 points? 2,000? Who knows? But a selloff will ensue. Does that mean a negative wealth effect? I doubt it. Who really thought they were wealthier at Dow 12,000 versus Dow 10,000?

Some banks will sputter, and maybe even fail, even the big boys. But they've already had two years since the end-of-the-world sell-off in March 2009 to get their acts together, and many can now pay dividends. Hopefully the FDIC is ready to dive in and remove the remaining toxic mortgage assets of any failing banks, along with their managements, and then refloat the institutions. This contingency should be well mapped out by now with the Orwellian-named "Orderly Liquidation Authority" in the Dodd-Frank law.

But along with a likely lower stock market and failing banks will be several positive effects that will finally kick-start the economy. Oil and wheat and commodities will see a 20%-30% drop in price as speculators run for the hills. This will be a de facto tax cut for consumers. Hiring should restart when businesses see normal short-term rates, most likely 2%.

Similarly, the dollar, suddenly backed by rising interest rates, will start to rise. Unlike those foolish enough to believe that a lower dollar is the path to growth, a higher dollar will lower prices across the board, especially at Wal-Mart—shoes, shirts and sugar. Even better, the companies that are leading the economy, such as Apple and EMC, will benefit from lower costs for memory and storage, as will Google and Facebook stocking their data centers. This price cut on productivity tools will be a good thing for the economy and the real wealth effect.

And even better, despite rising costs from higher short-term rates, surviving banks will lose their fear of rising long-term rates and will start lowering banking spreads, signaling their willingness to lend and fund a real recovery.

The municipal and state debt crisis is going to happen no matter where short-term rates end up. Spending cuts and higher tax receipts from an expanding economy are their only salvation. Raising rates may be the only way to get there.

 

 

Comments

[Yannick]

Andy,

Please do us a favor and stop writing for publications like WSJ that hide your content behind a paywall. Whatever it is they pay your for your column, I'm sure you could easily get back by going direct to your readers.

[OwnedByTwoCats]

Raising interest rates slows the economy. Unemployment is at 9% and underemployment at 16%; raising interest rates will make that worse. More people without jobs means more people who would love to be customers but are out of money, so sales would remain stagnent or go lower.

Crude oil is expensive, yes. But that's because production is constrained and instability in the Middle East is raising fears that production will be constrained even further, demand has been rising from places like China and India, and short term demand for refined oil products is inelastic.

[Aaron Klein]

Yannick, open Google and search for the headline of Andy's column. You'll be able to pick up the whole piece pretty quickly, if you don't find the WSJ worth $103 a year...

[wholesale cellular accessories]

The economy has now experiencing wild crises. And the world is facing on it's crucial stage. There are big competitors which are just taking for granted on this issue and just focusing on the matter how they will be able to make their business profitable.

[rift platinum]

thanks for the useful info. I appreciate it.

[Testking JN0-101]

The wealth is going through crisis in nature. And the world is facing a crucial phase. There are large competitors that are only obvious things, and focus only on the question how they can make the business profitable.

[Bra]

I really like the work that has gone into making the post. I will be sure to tell my blog buddies about your content keep up the good work. Thanks

[Buy zithromax]

Thanks a lot for enjoying this beauty blog with me. I am appreciating it very much! Looking forward to another great blog. Good luck to the author! all the best!

[Dog Symptoms Shaking]

This is one of the highly attractive, informatics, well-written and highly crisp blog that has been explained in fabulous manner to help out reader and visitors. All information found here is genuine and realistic.

[הדפסה על חולצה אבי גרף]

To save the bank balance sheets and never cleared of toxic mortgage assets were Ben Bernanke near zero interest rate policy and programs of dollars in printing are an attempt to create a wealth effect.

[Bollinger Bands Strategy Forex]

Thank you. I just found this blog and what a great resource! It is a good blog and their posts are effective. This is very nice post! I will bookmark this blog.

[Cheap snapback hats]

In other words, the Fed is manipulating the stock market. And it has been on a tear, u

[green white card]

This is a good post. I'm definitely going to look into it.Really very useful tips are provided here.thank you so much.Keep up the good works.

[mulberry alexa bags]

I follow you VIA GFC and I love your blog!

[body waxing supplies]

I hope you have a nice day! Very good article, well written and very thought out. I am looking forward to reading more of your posts in the future

[Dog Symptoms]

Nice Post and well written, we all can hope that the wealth effect is still going forward and working the way it should. keep posting the info

[Football Predictions]

Good article! Thank you so much for sharing this post. Your views truly open my mind.

[cheap coupon codes]

A comprehensively detailed and attention grabbing review that you wrote in this article. I am really convinced the way you look. The way you describe the whole thing is simple and understandable.

[Obd2 Scan Tool]

Your article is very smooth, very lively written, using the grammar very well, giving us a lot of fun .. Keep it up! lyj

[Plagiarism Software]

Wow, I love your site, big thank you to these ideas, and note in the first place that I fully agree with you! Let me emphasize, yes your article was excellent. I definitely enjoyed every little bit of it,

[Munchkin Kittens]

I will post a link to this page on my blog. I am sure my visitors will find that very useful. I think the error is due to a virus and disabling the firewall in that case will not be an intelligent thing to do.

[Scottish Fold Kittens]

Thanks for nice post. The post is pretty interesting. hanks for the information for me. I proud of you.Thanks a lot.

[Gulf Air Reviews]

This blog is very helpfull for a person .your blog is so impressive for anyone to see it . I am impressed to see this blog.

[Causes Of Obesity]

I am sure my visitors will locate that extrmely use SEO.This shot is very impressive. That frame is really unique

[Singapore Airlines Check In]

you are a great person in this blogs and internet markeeting . I proud of you.Thanks a lot. I hope this will also beneficial for others .