If low too long, a bane, not boon

It has been interesting to read recent columns by James McCusker and other articles in The Herald relating to interest rates and how they relate to the economy. In Friday’s Herald, the lead story in the Business Section stated some economists think that lowering the interest rates will spur the economy.

Why bother? There comes a point when lowering prices will not significantly increase demand. The Fed has already lowered interest rates beyond what they should be and have not helped stimulate the economy. Banks are already awash in cash. The problem is finding enough qualified borrowers to lend money to. In a poor economy, there are many businesses with uncertain futures that are showing losses in their income statements making them unlikely candidates for loans. Lowering rates further will not only be detrimental to savers who have saved all their lives to have interest income augment other retirement investments and Social Security payments, but profit the banks and the federal government, which are already over-borrowed. Little wonder the government wants to keep rates low.

As a matter of fact, in my opinion, low interest rates over a long period of time have been a major factor in the economic woes we have witnessed over the past five years. Low interest rates from 2001- 2005 encouraged borrowers to buy homes and durable goods that they could not afford. The banks anxious to employ excess reserves were over aggressive in booking loans fueled by competition and poor underwriting practices encouraged by Fannie Mae and Freddie Mac. In other words, the Fed left the punch bowl out too long. This was a formula for disaster.

Naturally, when the economy cooled and interest rates rose, loan defaults were consequential. We have not seen the end of this yet. Many home owners are still walking away from their mortgages because they owe far more on their homes than the market value and see no near term improvement in home values in the market place.

Bob Miller

Everett