When an economy needs a little boost, the lowering of interest rates spurs consumer big ticket buying and encourages businesses to expand by lowering the cost of anything that is financed. However, with short term interest rates already near zero, this tool is no longer in the Federal Reserve’s toolbox. So Bernanke’s move is to lower long term rates in the hope that that will encourage companies to expand and consumers to increase their purchases of automobiles and homes. That’s the Bernanke Twist.
Tell me, with short term rates near zero and long term rates at 1.94%, the lowest in more than a half century, how much more likely is it you will buy a car if long rates go from 1.9 percent to perhaps 1.7 percent? How much more likely is it the owner of the tire store in your neighborhood will open another outlet now that he can borrow for a few pennies less? None.
Corporations are not lacking money. Consumers are not holding back because of interest rates. The Fed is pushing on a string — again. It is not the cost of money or the lack of money in the system that is holding back a recovery. It’s executive government policy that’s crippling the economy. The tire shop owner may be ready and anxious to open another store, but first he must know how much it will cost to take on the new employees. He also needs to know what the latest regulations are and how much it will cost to comply with them. But none of this is knowable given the complexities of Obamacare and the vagueness written into many of the new laws. So we sit.
What this country needs is not a good 5 cent cigar or lower interest rates. What this country needs is a presidential election year. Let’s hope the voters don’t make the same mistake twice.