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OpEdNews Op Eds    H4'ed 7/29/12

Incentivizing Economic Growth

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Message Seymour Patterson

The Federal Reserve Bank (Fed) has pursued an almost obsessive basement level interest rate policy in recent years (2008 to the present) as a calculated strategy to keep the fragile economic recovery for aborting. The rationale for this strategy, beyond its theoretical underpinnings, is the idea that quantitative easing (easy money) provides the motivation for business firms to investment. However, bankers are unwilling to be seduced by the lure of low interest rates.  They are too clever to bite the bait. Yet, the country is awash with money and the nation's banks collectively are curiously in possession of approximately $1.6 trillion in cash (excess reserves) and have been diligently intransigent in their reluctance to transfer this money to the business and household sectors of the economy. The problem the Fed faces is its goal, economic growth, which is divergent from the typical business firm's goal, which is to maximize profits for stockholders (owners).  Ironically, in the grand scheme of things, these two goals--the Fed's pro-growth goal and the business pro-profit goals--are interrelated for low interest rates through different channels can lead to investment, profits, and economic growth.

The problem with low interest rates, apart from liquidity trap--a situation where the short-term nominal interest   is so low (zero) that increasing the money supply has no effect on output and prices --is that they have inherently perverse properties. In normal times, banks want to make loans. Low interest rates underestimate the risks of loans in this environment. Like the Libor (London Interbank Offered Rate) interest rate issue, Barclays and other banks manipulated interest rates and kept them low. These low rates suggested that the institutions were in better shape than they really were: in other words, the low rates understated the true risk profile of banks. This is, of course, illegal and Barclay was fined $453 million for falsifying Libor rates. It seems Tim Geithner, the U.S. Treasury Secretary, knew about this when he led the NY Fed. In 2008, Geithner e-mailed Mr. Mervyn King, the Bank of England governor about this problem. However, he did not follow through with his concerns. In other words, he did nothing to stop it.

As far back as 2005, a number of banks around the world submitted falsified data to Libor to keep their borrowing rates from each other low. Libor is a crucial rate in finance used to set the rates on students' loans, credit cards, and corporate debt. The artificially low interest rates enabled banks to hide their true financial problems. This practice led to the subprime mortgage debacle for subprime mortgage lenders used Libor index to link adjustable rate mortgages since they were very rosy. Many big banks that submitted interest rates to Libor, also received TARP (Troubled Asset Relief Program) bailout money: Bank of America, JP Morgan Chase, and HSBC. In a way, for what they did Barclays got $8.5 billion from TARP, and Citigroup got $45 billion they are getting off easy. Remember Barclays' fine for submitting false documents was $453 million by the U.S. and British regulators. On the other hand , Barclays got a whopping $8.5 billion in TARP bailout money from taxpayers. Gee, what a deal. Bank commits a crime and gets fined $453 million but gets $85 billion bailout money for a financial crisis it participated in making. You defraud your local bank you go to jail; you get behind in your mortgage payments, the bank forecloses on you. But if you are too big to fail bank, you get billions in TARP bailout money.

The chutzpah of banks, not just TARP and Libor, to take your money (deposits), give you virtually nothing for the privilege of safeguarding it (with FDIC guarantees), and then they turn around and make loans at much higher rates of interest. They might take your money and make you pay a fee if your balance falls below a predetermined level, ratchet up the interest on credit for late payment, and foreclose on your mortgage. More remarkable is the fact that banks have a source of funds, i.e. the Fed. They have access to the discount window where they can borrow money for 0.25 percent interest from Fed and use this money to buy Treasury bills that yield 3 percent interest.  For doing nothing, banks make a 2.75 percent spread per swap. For example, on say $1 trillion, they stand to make $25 billion. How to explain this aberration? It is the result of the clash between the profit goals of business and the economic goal of the Fed.

For a very vocal group embedded in half of the country's electorate are voters for whom the expression "stimulus" is a very abhorrently dirty word and its advocates are seen as spawns of Marx.  In this alternate reality, Ann Rand is extant, tax cuts reign supreme, and austerity speaks to economic recovery. Never mind the historical failure of austerity measures promoted by the IMF, which forced belt-tightening structural adjustment programs (SAPs) on floundering African countries; add the glaring failure of austerity in Greece, Spain, and the U.K. Yet, despite this, stubborn, diehard, proponents of austerity won't go away. They--ECB, WB, IMF--wield the enormous power of the purse with which they can force desperately overleveraged countries to genuflect to their demands in order to receive bailout moneys. Here at home, Sheriff John Rutherford was told by the Mayor of Jacksonville Florida to find more budget cuts. The additional cuts mean 95 positions are on the cutting block, including cuts to the Community Transition Center in downtown Jacksonville.  The 300-bed Center serves as an alternate holding facility for criminals near the end of their sentence. He also wishes to save officers employed and programs like the Community Service Officers (support in crime prevention, investigation, and responses where full police powers are unnecessary and assists police officers in upholding law and order) and the Matrix House drug rehab facility funded within JSO. The Sheriff of Jacksonville is trying to restore money lost to budget cuts so as not to furlough some of his police officers. He believes that reducing the number of police officers on the streets will increase crimes.

Allow me indulge a brief philosophical rant. It seems to me ideologues appear incapable of accepting facts that conflict with their predetermined views of the world, so given that mindset, ideology trumps evidence, even when such evidence presented on a platter is irrefutable. You don't have to go far to appreciate the import of this observation: global warming (climate change) is a hoax, no matter evidence to the contrary; Obama is a Kenyan, who cares what his long-form certificate of live birth indicates; the economy is worse, i.e. not getting better even when the data shows the economy added jobs steadily; tax increases are bad in spite of the fact that higher marginal tax rates in the neighborhood of 90 percent have been consistent with high economic performance in the 1950s, 1960s, and 1970s.  Or consider the ideological positions staked out by democrats and republicans. Democrats want to extend the Bush tax cuts except for the top 1 percent of taxpayers; republicans want to extend these cuts for everyone. However, the Obama payroll tax cuts, mind you, will not be extended for workers, even by congressmen who signed the Norquist no-tax-hike pledge. Thus, the payroll tax goes up. Why? The payroll tax cuts are viewed as part of the stimulus, while the Bush tax cuts are not. This is clear from the Senate bill S.3413 Hatch-McConnell "Tax Hike Prevention Act of 2012." A selected entry from the Senate bill is quoted here. Note the litany of tax cuts that will be extended and not extended, in particular the payroll tax cut. "S. 3413 would extend the 2001 and 2003 tax relief that is set to expire on January 1, 2013 for one year through December 31, 2013, including a straight extension of the expiring individual tax rates, family tax relief, death tax relief, and a patch to stop the Alternative Minimum Tax (AMT) from hitting millions of American middle-class families in 2012 and 2013. The AMT patch in the amendment is effective for tax year 2012 and 2013, since the patch has already expired at the end of 2011 . . . There is no extension of the payroll tax cut in the amendment." Well, it is hard to fathom how such ideological contradictions inhabit the same space simultaneously.

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Seymour Patterson received a Ph.D. in economics from the University of Oklahoma in 1980. He has taught courses and done research in international economics and economic development. He has been the recipient of two Fulbright awards--the first in (more...)
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