Investment manager John Michaelson has an interesting op-ed in today’s WSJ. He argues that super-low interest rates, which the Fed re-committed to yesterday, may be hindering, not helping, economic growth.
There are plenty of reasons to not like low interest rates. For one thing, they help cause asset bubbles. For another, they hurt people and organizations—like seniors and non-profits—that depend on funding from fixed-income investments. For a third, they penalize people who are trying to do the financially responsible thing and save.
But Michaelson comes at this from an entirely different angle: he says that low interest rates are part of the reason companies are sitting on cash instead of investing. He says they’re part of the reason we’re not seeing more job creation.
Here’s the core of his argument:
Banks are able to make adequate returns by borrowing at near-zero rates and investing almost risk free and without effort in longer-term government debt, federal government-guaranteed debt, or in relatively riskless investment-grade debt—all at 3% to 4%. They have little incentive to go out and make loans to job-creating businesses that might have a higher yield but entail significant risk and effort… Paying higher rates to attract deposits will force banks to look for lending opportunities beyond government type credits.
In other words, there’s not a whole lot of reason for banks to drum up business.
And from the corporation side, there’s not a whole lot of reason to knock down banks’ doors. With demand for products and services still fairly slack, companies aren’t chomping at the bit to build more factories and hire more workers. The low interest rates that are supposed to entice them to do those things aren’t, Michaelson writes, because, as any CFO can tell you, whether credit is slightly cheaper or slightly more expensive just doesn’t matter enough to tip the decision.
Steve got at this in a post back in June. And Liaquat Ahamed and I talked about it a year and a half ago. Monetary policy is a pretty blunt instrument, and it can only do so much. If the economy is sluggish, people won’t want to spend money. If interest rates drop by a huge amount, that might get attention, but keeping them at 0% month after month after month shouldn’t be seen as a solution. It might even be the opposite.