Don,
I guess I could see that perspective, but then again when we have interest rates at 6%, and banks are charging 2-3% more than that to actual recipients of consumer loans, the real rate is 7-9% above the recognized rate of inflation. If the economy is growing at 6-8% with only 1-2 percent inflation, surely that is better than what we saw during the '80s where interest rates were double or triple the nation's economic growth.
I was thinking this afternoon about the question of what role I believe the Fed should play and came up with analogy (which obviously has its limitations as all analogies eventually do). Since many folks have analogized the Fed as the entity that takes away the punch bowl just as the party is getting started, I thought I would expand on that:
Let's imagine the economy as a club/bar in the business of entertaining its customers and providing them an enjoyable experience, with a bartender serving up alcohol, determining prices for drinks and determining when a customer is cut off and not served anymore.
Customers have the option of paying cash or establishing a tab of course. So if interest rates are synonymous of the actual price for each drink, raising drink prices impacts the amount of money each must pay for enjoying themselves. Establishing a tab is analogous to extending credit to a customer with the belief that he will be able to pay it off in the future, if not that very evening in cash.
The Federal Reserve is like an economic bartender, doling out drinks at a reasonable price, providing credit for those with sufficent resources, and cutting off those who have had a bit too much that they endanger themselves or others. If a certain group of customers are abusing their priviledges or getting out of hand, you don't punish all the customers by raising the price of drinks all around. You limit the amount that those abusive customes can extend on credit, or cut them off completely until they sober up. Raising interest rates is tantamount to raising the price of drinks, and impacts everyone, the credit abusers as well as those who are conscientious about their savings.
Again, I recognize has limited application, but it just makes sense to me and struck me as applicable to the "punch bowl" analogy that I often heard in my economics classes.
Regards,
Ron |
