Don’t Lower Rates Again!

I read today that Bernake is expected to lower rates to historically low levels, perhaps as soon as next week.  This time though, rates might drop below 1%, to perhaps 0.75%.

Seriously, does anyone in Washington have a history book?  Or maybe even an economics book?  The Japanese did the same thing trying to encourage lending.  They actually lowered rates to ZERO and they stayed in an economic downturn for over ten years!

Bernake’s logic: Lower interest rates will encourage borrowing.  He’s exactly right there.

But lower interest rates will NOT encourage LENDING!  It actually gives lenders no incentive to lend money.  What we really need is much higher interest rates!

Think about it for a second. Right now, lenders have no confidence that they will be paid back.  Normally, if you are a risky borrower, you get charged a higher interest rate.  This way, the lender is compensated for the risk they are taking.  Instead, the Government is intervening in the system and trying to encourage lending by lowering rates.  This will encourage borrowers, but it does nothing to encourage lenders.

We need to let the market set interest rates, not the Federal Reserve.  The more intervention, the worse the problem is going to get.

Sure, the higher rates might be a crimp on our credit based economy, but in the short term, it will encourage lending.  In the long term, it will increase the reliance on savings and paying cash and discourage the use of credit for funding everyday expenses and paying the bills.

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