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Raise Interest Rates To Spur Lending?

We know that flies in the face of all conventional economic wisdom.

But for the past year the Federal Reserve has been providing commercial banks with an almost limitless supply of free money in the hope that they’ll make lots of new loans and help boost the economy out of the recession.

Bad Banker(Its rate-setting committee is doing that by charging banks 0% to 0.25% for overnight loans.)

Yet the banks are extending precious little credit to consumers. To small businesses. To anyone.

Could it be that Fed Chairman Ben Bernanke has pushed conventional economic wisdom too far by driving interest rates too low?

The Fed is making money so cheap that banks can turn a profit by simply parking it in Treasuries without making any of the effort, or taking any of the risk, involved in making loans.

If Bernanke made banks pay more for their deposits it might negate that strategy and force them to seek better returns by making more loans.

We know, we know. There are lots of reasons banks are not lending money. It’s risky business in this economy and there are still billions if not trillions of dollars worth of bad loans banks haven’t even begun to deal with.

But before President Obama hauls bank presidents back to the White House for another scolding, maybe he and Bernanke should at least try a modest rate increase.

What do they have to lose? And the millions of savers who have suffered so grievously from the Fed’s cheap-money policy could use the break.

Comments (2)
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2 Existing Comments
  1. CJ said:
    on December 23rd at 05:17 pm

    Point well taken. Driving rates this low to help spur lending and provide a “saftey net” for this sluggish economy will have a back-lash in the near-distant future. What the gov’t should be doing is educating consumers to save, gently push up the rates. This will cuase the econmoy in the short run to flat line, but long term this will be better for teh country. By extending the credit the gov’t is giving to banks they are proloning this cycle; problem is that no one in the Whitehouse wants to take the reposnsibility to drive the market down in the short term only to help the econmy recover in the long term. Keep feeding the fat man more ice-cream rather than putting him on a diet is the logic that our government is taking.

  2. AC said:
    on December 23rd at 07:27 pm

    What the administration is trying to do is to re-inflate the real estate market. Unfortunately for the administration, banks are not about to lend money to people who can’t pay back. All that no interest money is doing is creating bubbles in precious metals and the stock market. Wall Street wins again.