Minneapolis Fed’s chief Kocherlakota is thinking that in the next nine months the Federal Reserve system should increase rates, bucking a trend that is now years old of keeping interest rates low in order to facilitate bank lending.

Money quote:

Kocherlakota, who does not vote on Fed policy this year, is on the hawkish end of the policy spectrum at the U.S. central bank, more focused on the threat of high inflation than on the dangers of high unemployment.

 

I cannot emphaize enough how much I disagree with Dr. Kocherlakota. Any sustained recovery in the jobs sector will be dependent upon business borrowers having money (ie hard cash) available. The easiest way to do this is allow banks to to borrow from the window the Fed offers, and in turn lend it out. Now this is dramatically hard in real practice, but it doesnt mean that it does not work.

If interest rates return to even 2007 levels  the investors in safe deposits such as money market accounts and CD’s will see a higher return on their investment. The downside of course now being that the banks have to pay out more in interest for the same cash they could easily get for cheaper.

the only manner in which Dr. Kocherlakota’s idea would seemingly work in real life is if those high dividends from depository products were spent in a stimulus-like fashion. This is clearly not the case. Pensioner’s whose CD funds banks normally take in to increase capital ratio’s are more likely to sit on the money, or dole out piecemeal to relatives or on food at Denny’s. This does not create a sustained ability to raise purchases in areas like retail or housing, (buying things to put in a new house for example).

Spurring business’ to grow and higher more workers is a much more lucrative, and in the end practical, way to solve sustained economic impasses.

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