Low interest rates are disguising a poor economy
by David Atkins
Dave Dayen has a superb explanation today of how Congress is getting set to shaft students again on student loans. They’re basically trying to tie the student loan rate to the ten year T-bill rate, which is a problem because T-bill rates are at historic lows right now. That means that already onerous loans today will be even worse in the years ahead.
And that’s just one small facet of the broken economy. We are now into the sixth year of an economic depression caused by unpunished Wall Street greed and recklessness. The stock market and the incomes of the wealthy have returned to pre-crash levels. But the rest of the economy is still suffering tremendously. The unemployment rate remains abominably high, and that says nothing of the underemployment rate.
Take me, for instance. My business is in marketing research. It’s particularly susceptible to demand-side problems in the economy. If regular people are hurting, they can’t afford to buy products. If they can’t afford to buy products, companies get reticent about bringing new products to market and advertising them. Budgets decline, companies decide to cut costs by either eliminating market research or in-housing it away from independent researchers, thereby risking objectivity and professionalism. My industry has taken a huge hit since the crash, and it hasn’t returned.
I’m still counted in the ranks of the employed, but business is still well off pre-crash levels. Many of my competitors and colleagues have been forced out of our profession and into lower-paying jobs in other fields. None of that has changed in the intervening six years. In fact, it has gotten worse.
And that is despite pedal-to-the-metal loose monetary policy. I suspect that Krugman and Dayen would prefer to keep interest rates as low as possible for as long as possible. It’s basic Keynesianism. But it’s also highly problematic, as it drives anyone with savings into assets like stocks and housing because it’s impossible to get a decent rate of return on regular savings. That in turn is driving base housing prices higher, and is further bloating the stock market. Higher interest rates hurt homeowners and borrowers, but help renters and savers. Regardless of inflation, low interest rates and loose money are not all to the good. And we’ve been in a super-low-interest-rate environment for many years now.
Nor is it clear that when rates do eventually go up, it won’t have seriously adverse consequences. There is a mini-bubble in housing right now which will likely pop as soon as rates go up any further, and the consequences of higher interest rates on student and business loans are clear.
The Fed can’t keep it going forever, and if they do there are entire classes of people–mostly young savers and renters unable to afford a house not because of high interest rates but because they can’t afford the base price–who are being hurt in the meantime.
Don’t get me wrong: low rates are still the right thing to do because the economy is fundamentally broken. But they’re also artificially inflating housing and stock markets that are disguising just how terrible and broken the economy still is.
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