I've learned to go straight to the point when talking about raising interest rates (or lowering them, but you'd have had to go negative to go any lower than they were). My first question will always be how this will affect the day-to-day lives of the half of Americans in the throes of financial insecurity. This is an especially salient question when the rate adjustments are as small as the one announced last week.
Ideally, raising interest rates is good for savers, not just lenders. The savers represent more people, and they represent ordinary people; most working people don't lend out money institutionally, but they have savings accounts (although that's increasingly a luxury we hope to see made available on a wider scale by postal banking).
This was the motivation for Ralph Nader's aggressive (and, some say, sexist--others not) letter to Fed Chair Janet Yellen. In demanding the Fed raise rates from zero, Nader was speaking for those who rely on interest income to pay their bills. But the Fed's incremental increase, from 0.25% to 0.50%, with a projected 1% increase next year, is unlikely to help middle class savers all that much. Moreover, millions of people don't have savings accounts at all.
Yellen's response to Nader emphasized macroeconomic factors like inflation and unemployment, and she argued that a robust rate hike would ultimately put more people out of work or otherwise economically worsened. I can't speak to how well the Fed predicts unemployment effects (feel free to share if you have it), but I'm told they have a poor history of predicting growth and inflation. I have some experience with arguments about inflation, and know that the same set of assumptions operating at the Federal Reserve are those that are claiming Jeremy Corbyn will induce an era of money-in-wheelbarrows, or that giving money directly to people will do the same. To that I keep responding that the argument doesn't make sense in a world where half the population lacks basic financial security, where people are not spending or investing or building new sources of value, and community banks dying off at an unprecedented rate.
I laughed, then slowly nodded, when I read Michael Roberts' analysis of Yellen's interest rate apologetics, and why the hike came when it did:
When interest rates are zero, then the Fed has no control over interest rates in general. With positive rates, it can exert some control. It even says that if things go wrong, it can cut rates when they are positive which it cannot do when they are zero. This is a weird argument. It’s like saying it is best if I cut my wrists now so they can start healing earlier, rather than holding off as I am going to have to do it some time.
Finally, there is a (vain) belief that the US economy is reaching full capacity and is ready to invest and grow steadily for the foreseeable future.
Roberts also points out that the Fed's attempt to control interest rates, combined with the audacious critiques of regulation coming from Lawrence Summers and others, is
another argument for public ownership and control of banking. That’s something that does not seem to be on the agenda of any major leftist group.
In fact, the Green Party embraces public banking, and Bernie Sanders is a fan, if quiet about it during his candidacy. But OMG! We've come full circle to public banking again. When you accept the inevitability of private banking, and particularly of big private banks, you adopt a worldview, consciously or unconsciously, that erroneously assumes both that money is finite and that some people can't handle having too much of it. However those bear out empirically (as if anyone would really know), they are "financial fictions," like legal fictions, created to justify other applications and arguments. Those fictions play well with what, in reference to Larry Summers, Roberts calls "a dismal picture of the capitalist future over the next couple of decades," where "the major capitalist economies will . . . just stumble along trying to boost the economy with credit bubbles, then suffer financial busts and drop back again."
Why do we keep punishing ourselves?
(image credit: Vectortoons.com)
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