Interest Rates

The Fed’s decision last week not to raise interest rates has produced a predictable burst of apoplexy in the banking industry.

So what?

Banks would be more profitable if rates were higher. These low rates have squeezed their net interest margins and banker are prone to bleat very loudly if their bonus opportunities are damaged slightly.

So what?

I was asked over the weekend whether this prolonged period of low interest rates was politically rather than economically driven. I am not quite sure what my questioner had in mind about the political motivation. It was probably some deep Obama plot to deprive retirees of their interest income. I tried to present the basic argument explaining low rates and their persistence. I don’t think I made much impression.

It seems that the bankers and their friends in the right wing media have managed to bludgeon their message into the public’s minds. Plenty of people who normally ignore economics are suddenly experts on Wicksell. Or so it seems.

I keep trying to suggest that monetary policy remains stuck in a more extreme state, and a largely ineffective one at that, due to our extraordinarily counter-productive fiscal policy. If my retiree questioner want interest rates to shift upward to provide a more comfortable income for him and his wife, then he needs to call for a shift in fiscal policy. Perhaps we ned a higher rate of inflation too.

When I ask him about this, he looks at me as if I am mad. The government, he is certain, needs to balance its books. Then we need zero interest rates I respond.

And the conversation ends abruptly.

The bankers really have won the public relations game.

I just file this away in my plutocracy drawer. The long war continues. Those of defending democracy have a long road ahead of us.