Are Low Interest Rates Hurting the Economy?

 

The former Chairwoman of the Federal Deposit Insurance Corporation, Sheila Bair, has recently stated that “Low interest rates are hurting, not helping, the economy”.  According to Ms. Bair, historically low interest rates have helped the housing market recover but are hindering business lending, which holds the key to the overall recovery.  “Very low interest rates on your (the banks) balance sheet … is not good for business lending”, says Bair.  She would like the Fed to start increasing rates in a gradual and methodical manner so that the market can adjust.
Even the WSJ’s conventional economics columnist, David Wessel, admits that “big companies continue to build an enormous cash hoard as if they are preparing for catastrophe”.  He says that “Ben Bernanke sees the exit, he just doesn’t know how to get there”.
Current policies for fixing the economy are clearly not working and may be doing grave damage.  There are lots of policy measures which might help, and certainly won’t hurt, such as broad-based tax reform, loosening regulation of small business, aggressively pursuing new trade agreements, visa reform, targeted job training, etc..  Concentrating on implementing such measures is what our national leaders should be doing!

2 thoughts on “Are Low Interest Rates Hurting the Economy?

  1. You quote Wessel (in apparent agreement) as saying “…big companies continue to build an enormous cash hoard…,” but you have said many, many times that we need to stimulate business investment through broad-based tax reform.

    How do you rectify this clear contradiction? If companies are currently building enormous hoards of cash, why would lowering tax rates (which are already at generational lows– see link below) cause them to invest more in employees?

    http://www.ritholtz.com/blog/2012/08/historical-tax-rates-poster-on-sale-for-10/

    Clearly business had no problem investing in more employees over the last 75 years when every tax rate (corporate, personal, and capital gains) were all significantly higher. But today, while sitting on “hoards of cash” they won’t invest unless tax rates go to *even lower* record lows? Do you think that argument is serious? Or even makes sense?

    Or perhaps you’ve just confirmed all the links to all the data I’ve provided you over the past year? The ones that show that the problem today is clearly on the demand side and thus there is no theory/evidence/reason to believe that tax rate cuts/reforms will stimulate the economy?

    Why yes, I believe you have!

    Now that you have actually (but unwittingly) made the argument against your own views, will you finally believe it? Or even acknowledge it?

  2. As pointed out by the economist, John Taylor, and others, there is a strong inverse relationship between business investment and unemployment. Some big companies are sitting on hoards of cash because they lack confidence that our national leaders are serious about addressing our severe fiscal problems. What they need is to see political movement in a responsible direction before they will invest in new growth. How about (smaller) companies without hoards of cash? They will have to borrow in order to expand and grow and this is where the problem lies. Interest rates are so low that banks are reluctant to lend to these smaller, less established, companies.
    This is why low interest rates are not helping the economy grow and why they should be phased out carefully and deliberately, but starting immediately.

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