The Cost of Cheap Money
The Federal Reserve Board announced yesterday that it would keep its overnight interest rate where it has been for nine months — at 1 percent, its lowest level since 1958. Factor in inflation, and Alan Greenspan is essentially lending money at a loss. This cannot go on indefinitely, and it should not go on much longer. In this election year, Mr. Greenspan and the other Fed officials are under tremendous pressure to stay put on rates in the absence of a tightening labor market or other signs of inflation, but such a stance would be a mistake. There are other costs associated with exceptionally cheap money that the Fed must recognize, and address by gradually raising rates.
There is no question that the Fed's loose monetary policy helped jolt the economy back to life last year. It increased corporate profits and prompted consumers to refinance their mortgages and to spend their way into plenty of other debt. That mission accomplished, the argument for keeping rates at crisis-driven shock-therapy lows is that businesses are still not hiring, and that there is no sign of inflation on the horizon. Those are the classic cues the Fed awaits before raising rates.
The sharp spike in the productivity growth rate in recent years explains why mass hirings and signs of inflation are scarce even with a rebounding economy. But the Fed cannot afford complacency.
Mr. Greenspan should heed the lessons of the stock market bubble of the late 1990's. In the new economy, remember, we were assured that the old speed limits needn't apply. What investors were not warned about enough was the extent to which the virtuous cycle of cheap money, low inflation and strong growth was feeding a speculative financial market bubble, which eventually popped at huge cost to those investors.
Now there are other hints that too much of a good thing can be dangerous. In some parts of the nation, housing values suggest that another bubble is forming. Many homeowners, and consumers in general, are borrowing recklessly, betting that rising housing prices and easy credit are here to stay. With 30-year loans available at 5.5 percent, mortgage debt soared to $6.8 trillion last year, from $4.9 trillion in 2000. The nation may be in for a rude shock when the real estate market levels off, and when millions discover that the adjustable rates of their mortgages and other loans can be adjusted upward.
The Fed should gradually wean the country off such extraordinarily easy money before it is forced to do so abruptly, and painfully. It cannot wait until after the election, nor until it sees inflation pick up. Rates are so low that the Fed has plenty of room to move before being accused of adopting a restrictive monetary policy. It needs to get started.
nytimes.com
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I am happy to see stuff like this cause no one believes rates can stay this low
Mish
Mish |
