In “normal times” a Fed rate hike would be seen as counter-cyclical, and a drag on the economy.
But sure as heck aren’t normal times, in part evidenced by the disparity between GDP growth and job creation (of which there remains virtually none, with very little on the horizon).
A point we’ve highlighted over and over and over again is the lack of credit availability to small businesses, which are historically the source of job growth.
Another point we’ve highlighted over and over and over again is the fact that banks are mainly just lending money to the government. Commercial and industrial loans — the essence of small business banking — has gone on an epic cliff dive. As shown in the chart.
The answer to the puzzle: raise interest rates. Make it un-profitable to borrow short and lend long against the government.
At least that’s the argument put forth by Martin Hutchinson at Asia Times Online:
The solution is a simple one, and it is not even all that painful. Short-term interest rates must be increased forthwith to the 5% to 6% level, at which they are above the current and impending rate of inflation. At the same time, fiscal discipline must be restored, both directly in public spending and through closing down the housing finance behemoths Fannie Mae, Freddie Mac and the Federal Housing Authority. Huge amounts of current public spending are either wasteful or outright harmful – the gigantic subsidies to “green” fuel technologies, based on a global warming theory that now seems to have been almost entirely a scam, are examples of the latter since they divert valuable private sector resources and people from more useful, wealth-generating activities.
The short-term pain from a renewed housing downturn will be finite; with those moderate interest rates, the equilibrium price level for housing is only some 10% to 15% below current levels, and financing will be readily available on “jumbo” mortgage terms, which will quickly reduce towards “conforming” levels as government-guaranteed paper ceases to be available. While the foreclosures will be worse than on the current track, the housing pain will be bearable and the wasteful diversion of resources into housing reduced.
However, the real benefit of removing monetary and fiscal stimulus will come in the banks’ attitude to their local small businesses. They will no longer be able to make money from investing in Treasuries because short-term rates will be as high as long-term rates. Mortgages and mortgage bonds, as well as being only modestly profitable, will now carry a degree of risk. Local small businesses, where the lending officer is aware of the businessman’s competence and integrity through the community network, will become the most attractive way to make relatively secure lending returns at an attractive level.