Thinking Citizen Blog — Is Interest Rate Manipulation Just or Wise?
Thinking Citizen Blog — Tuesday is Economics, Finance, and Business Day
Today’s Topic: Is Interest Rate Manipulation Just or Wise?
Interest rates are “the price of time.” What should they be? Who is qualified to say? Who decides? How? What are the lessons of history with respect to interest rate manipulation? Have low interest rates become a destructive addiction? Or are they simply an absolute necessity? Today, excerpts from a book review of Edward Chancellor’s The Price of Time. Experts — please chime in. Correct, elaborate, elucidate.
“A DISTORTION OF PERCEPTION DISGUISED AS A CURE” — an opiate
1.“Interest rates are the most important signal in a market-based economy, “the universal price” affecting all others.”
2. “Interest is best defined as the time value of money, which Mr. Chancellor artfully renders as “the price of time.” It is the price that informs every key financial decision — saving, spending, investing.”
3. “Suppressing the rate of interest is a powerful way to boost an economy otherwise bound for recession, but it is a dangerous one.”
NB: “It is to finance what opiates are to medicine, a distortion of perception disguised as a cure.”
THE LESSON OF 2008 — THE LOWEST RATES IN FIVE MILLENNIA
1. “After 2008, Mr. Chancellor notes, “central bankers pushed interest rates to their lowest level in five millennia.” The move seemed like a success at first, averting deflation and mass unemployment.”
2. “But behind this immediate result lurked structural problems that the bankers had left to fester. Low rates have compounded “our current woes,” Mr. Chancellor says.”
3. “These include “the collapse of productivity growth, unaffordable housing, rising inequality, the loss of market competition” and — as we may all feel right now — “financial fragility.”
A FORM OF CENTRAL PLANNING MORE PERNICIOUS BECAUSE IT IS
SHROUDED IN MYSTERY
1.“The failures of central planning are obvious when the state attempts to direct the entire economy, from railroads to grocery stores. Misguided monetary policy, by contrast, operates invisibly, dispersing perverse incentives and false signals throughout the financial system.”
2. “And the more we blunder, the more the system itself appears to fail, which in turn justifies further interventions,” Mr. Chancellor writes. Even worse, the more central bankers intervene, the more rigged the system seems to become.”
3. “Low interest rates don’t help the poor, who don’t have access to cheap credit. They do help people with formidable assets already, in part by making leverage more attractive. With money so cheap, financiers can boost investment returns with borrowed cash.”
NB: “As Louis Brandeis observed, Wall Street uses “other people’s money.” It prefers to pay as little as possible for the privilege.”
UNETHICAL AND INEFFICIENT — the whales and the plankton
1. “Distributive justice requires that borrowers and lenders receive an equivalence of value,” he writes.
2. “It is unjust that thrifty workers can’t earn a decent return on their savings accounts while sophisticated speculators earn fortunes from capital borrowed for free.”
3. “Low rates shift economic activity from “real world” enterprises to purely financial transactions.”
NB: “The price of securities tends to rise or fall inversely with the price of interest. Those who own the most securities thus benefit the most when interest rates fall. It is no coincidence,” Mr. Chancellor writes, “that the greatest fortunes have been gained during periods of abnormally low interest rates.” As he vividly puts it, “great whales feed off the savings plankton.”
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