ENOUGH WITH THE LOW INTEREST RATES ! / THE WALL STREET JOURNAL OP EDITORIAL ( A MUST READ )

OPINION

OCTOBER 2, 2010.

Enough With the Low Interest Rates!

Fed policy punishes savers without making credit more readily available.

By CHARLES R. SCHWAB

The Federal Reserve's experiment with near-zero interest rates, which began following the credit crisis of 2008, has now become counterproductive.


As a temporary fix it served its purpose. It was an emergency antibiotic appropriate for the illness. But continuing with the experiment is disfiguring the economy and fueling doubt. Healthy economies find their own equilibrium based on market forces of supply and demand. When people don't think market forces are driving the economy and believe instead that it is being driven by excessive government intervention, they don't take the risks an economy requires.


It's time to stop the experiment and return to monetary normalcy.


The negative impact of current policy is clear. The near-zero interest rate experiment is weighing on consumer and investor confidence, and the Fed signals its lack of confidence with each "extended period" proclamation. It is providing banks with low-interest financing that can be used to create modest returns through a carry-trade in U.S. Treasurys but is adding nothing to the velocity of money, which is what actually generates economic growth.


The Fed's super-loose policy has driven down the security and spending power of savers, particularly those in retirement who played by the rules during their working years and now depend on the earnings from their savings for a decent quality of life. As a result, savers and investors are being forced to take more risk with their money as they hunt for higher yields.


The extreme monetary policy is also having no positive impact on the availability of consumer or business credit, job growth or consumer and business spending.


Consumer spending accounts for two-thirds of the U.S. economy. Despite record low rates, consumer borrowing continues to retrench. As of August, we'd seen our fourth straight month of contraction to $9.1 billion. Revolving credit-card debt shrank to $7.4 billion, continuing a 20-month stretch of declines.


Small businesses that create jobs are unable to borrow in any meaningful amounts except via 100% collateralized loans. Banks continue to hold large capital bases, mostly because they have no definitive signal yet from the federal government or regulators about what their capital requirements will be. So they take the most conservative path available—they sit on their money. Today there is more than $7.5 trillion of deposits in FDIC-insured commercial banks and savings institutions, earning—and doing—essentially nothing.


It is time to let the inherent power of economic forces engage. The Fed can help by removing the "extended period of time" language at its next meeting. Elimination of this language would remove some of the glue that has lenders stuck.


The Fed should then move quickly to help rates float and find a more natural level. Lenders would be less afraid of getting slammed by a sudden shift in government monetary policy, knowing instead that their pricing of credit is based on market conditions, which have historical precedent and some measure of long-term predictability.


What bank today wants to offer and then hold 30-year fixed loans at these artificial and temporary rates? Right now most of that lending ends up with Fannie Mae and Freddie Mac—a government-subsidized pool of loans bearing no relation to a natural market for credit. Savers, who today see no end in sight to the Fed's zero-interest policy, would be more careful to avoid the temptation of chasing riskier longer-term yields, knowing that rates could move up at any time.


Our economy is ready to heal. It just lacks broad-based confidence among consumers and business people. It would be a giant boost to confidence if the Fed stood aside and returned to its traditional role as defender of monetary stability.




Mr. Schwab is founder and chairman of The Charles Schwab Corporation.


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