Tuesday, February 7, 2012

"Charles Schwab channels his inner Walter Bagehot and says interest rates need to increase "

From Trust Your Instincts:
I almost missed this, but in a Wall Street Journal column, Charles Schwab came out and said that the time has come for the Fed to stop pursuing zero interest rate policies and let rates increase.

Mr. Schwab provides his reasons for why Walter Bagehot was correct with his 1870s observation that savers require a minimum of 2%.

We're now in the 37th month of central government manipulation of the free-market system through the Federal Reserve's near-zero interest rate policy. Is it working?
Business and consumer loan demand remains modest in part because there's no hurry to borrow at today's super-low rates when the Fed says rates will stay low for years to come. Why take the risk of borrowing today when low-cost money will be there tomorrow?
Federal Reserve Chairman Ben Bernanke told lawmakers last week that fiscal policy should first "do no harm." The same can be said of monetary policy. The Fed's prolonged, "emergency" near-zero interest rate policy is now harming our economy....
Average American savers and investors in or near retirement are being forced by the Fed's zero-rate policy to take greater investment risks. To get even modest interest or earnings on their savings, they move out of safer assets such as money markets, short-term bonds or CDs and into riskier assets such as stocks. Either that or they tie up their assets in longer-term bonds that will backfire on them if inflation returns. 
They're also dramatically scaling back their consumer spending and living more modestly, thus taking money out of the economy that would otherwise support growth...

See also Dec. 2008's "Mom, Ben Bernanke Likes Bankers Better than He Likes You":
Savers are getting screwed as banks reliquify their balance sheets.
The ostensible reason short rates are now officially at 0.2% is to encourage banks to lend.
It's not going to happen. The banks are not taking on individual's or commercial's risk. Auto loans for a FICO score of less than 720 aren't being written.
So what are they doing? Carry-trade (say it like "Toga party")....