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.
(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.
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