Wednesday, March 7, 2012
"It's punishing savers"
I keep hearing people talk about how low rates are punishing savers. Okay.
If savings are a leakage to demand and we have a shortage of demand don't you want to penalize behavior that results in leakages? That makes sense.
The problem is, there is no direct channel between punishing savers and creating demand. People may very well decide to accept paltry--or even mildly negative returns--if risk aversion is great enough.
In addition, low rates are helping borrowers. That's something that they always forget to mention...double entry accounting. For every saver there is a borrower.
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6 comments:
Mike,
I'm definitely hearing an increasing amount of this complaint in the media... Ben Stein had a Fox hit on Yahoo! the other day where Ben pointed this out, many others lately.
Seems like many "want it both ways" on this issue where supposedly monetary policy is effective by lowering interest rates, but then now that MP is proving to be ineffective at the zero bound, they are complaining that savers are being harmed... Looks like they cant see that you cant have it both ways.
Resp,
Right, they complained when interest rates were rising in 2005 and 2006. Now they're complaining because they're low.
The biggest hurdle in understanding this and related complaints about economic policy outcomes is that the guy on the street is unaware that in a closed economy every action is connected to itself thru a feedback loop (often negative feedback). The relationships are mostly counter-intuitive.
So we should be teaching the paradox of thrift and other related ideas in school as a matter of economic survival.
If the FED did rise rates right now markets would crash literally. After all the effort of the FED to reflate prices (sometimes failing miserably, ie. real estate) all this people would cry when their beloved stock market goes again down and their capital and investments get eroded.
Actually I don't care if they rise rates, but if they did the very weak economy would have even less margin as the already low margin to expand credit gets even smaller. This wouldn't be a problem if the government ran a big enough deficit with that extra money going to the pockets of the majority, but no, they also will be crying about how this is a burden on their children and how big is the public debt!
Doomed if you do, doomed if you don't, and dumb people in between.
Yes, but Mike you've got to remember that borrowers are impure spendthrift layabouts with no moral core.
They are unable to resist the temptations of a modern consumer society. Therefore they have sinned and deserve to be punished.
The propaganda against debtors in this crisis is right out of a Dickens novel.
Is it any wonder we've turned entire countries (ie Greece) into debtors' prisons?
the banks aren't necessarily passing on the low interest rate to everyone else though, at least not in the UK where it's difficult for individuals and businesses to get loans. It's the gap in the 'theory'.
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