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article imageOp-Ed: The case for raising US interest rates before a fatal crash

By Paul Wallis     Jan 14, 2013 in Business
Sydney - As Fed chairman Bernanke asks the kids to stop fighting and get the go-kart back on the road before yet another wave of Congressional constipation in March, one thing is becoming obvious. Monetarism doesn’t work. Stagnation is its best result.
Sydney Morning Herald
…But lawmakers must still navigate the debt limit as well as thrash out a deal over drastic automatic spending cuts that were postponed until March 1.
"We're not out of the woods because we are approaching a number of other fiscal critical watersheds coming up," Mr Bernanke warned.
This is “management by catastrophe”. A US default would be a massive hit to the entire financial sector. The cascade would destroy banks and could even crash retail and online businesses like the 1929 disaster. People could wake up to find their bank is broke. That almost happened in 2008. Forget credit cards, you’re looking at a cash economy. Imagine a world without VISA and MasterCard. Who’d be buying what, with what? 442 US banks have failed since 2008. Wanna try for a few thousand more?
The fact is that the monetarist idea of running the world by interest rates has failed dismally. Low rates should generate business investment and confidence. The result has been the exact opposite. New business initiatives aren’t creating jobs. Layoffs are still happening as the world’s financial geniuses try to cut their own inflated, self-inflicted costs.
The same mentality affects government. Who wrote the IOUs? Congress. Who accepted any old price for anything, as long as it looked good as a rider on a bill and pleased donors? Congress. The result has been that costs of government have blown out endlessly, and both sides are responsible. A mindset that can’t foresee consequences is now supposed to clean up its own mess, when it doesn’t even understand it?
Low interest rates have become a very bad habit. These low rates are literally money for jam. No effort required, just borrow at 0.25% and lend at 4.5% and you’re a financial wunderkind. No, as a matter of fact you’re a moron, because you can’t even figure out a way of getting more than 4.5%, but what the hell- You’re happy.
Ironically, the opposite was the case in the high interest rate 80s. The only way to pay off high rates was to come up with good business options. If you’re paying 15%, apparently, you’re more inspired to get off your butt than if you’re paying 0.25%.
The financial culture isn’t up to that speed any more. The hedge funds and private equity guys are sharp, but only sharp compared to total non-performers. The banks are financially ultra-cautious, when not making ridiculous loans to countries that can’t pay them back and pretending the endlessly failing derivatives are “clever”.
This is a culture that doesn’t receive messages, however blunt. Meanwhile Bernanke, who must have taken a course of smell-reducing meds to tolerate the stench of stupidity in the sector he’s supposed to be running, has tried to allow for more quantitative easing- printing more money to stimulate the crashed couch potato which was once called the US economy by buying bonds.
The approach also would allow the Fed more easily to pull back on its stimulus if financial stability were threatened by forces such as market bubbles or if inflation picked up after years of being tame. Conversely, if the outlook deteriorated, the central bank could prolong its bond buying.
In other words, if inflation = economic growth, the stimulus is put on hold. This is a bit like not giving coffee to someone on crystal meth. Sadly, the broad brush approach is much too theoretical.
No benchmarks have been set for what constitutes healthy growth.
Where’s the new business?
Where’s the venture capital?
Where are the entrepreneurs?
Where are the ideas?
Where are the jobs?
Where are the startups?
These are the signs of working businesses trying to expand. They’re the drivers of business and catalysts of commerce. They’re also practically endangered species now. Risk aversion has become business aversion. A generation of business people too scared to fail will do nothing. A generation of economists brought up on 1970s buzzwords will stick to painting by numbers rather than buy a Van Gogh or even go looking for one.
Road to where?
Road to where?
Congress can play chicken as much as it wants. The cows are dying. The farm is falling to bits. The global pecking order is changing. The barnyard isn’t even vaguely like what it was when these policies could at least pretend to work. Either the vaudeville act reinvents itself, or the show is over.
You can be in only so many crashes before one of them does the job and kills you. You might get away with one or two, but the odds become steeper against you every time. One day you don’t walk away from it. That day is getting closer.
Raise the rates. Make these bastards work for a living. Kill off the inefficient and uncompetitive freeloaders. Survival isn’t a passive occupation.
This opinion article was written by an independent writer. The opinions and views expressed herein are those of the author and are not necessarily intended to reflect those of
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