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Note to Dean Baker: raising interest rates is not progressive

January 29, 2011

Liberal economist Dean Baker criticizes the Fed today for not having raised interest rates to counter the housing bubble.

(If the Fed was unable to stem the bubble through publicity or regulation),  … the Fed could have raised interest rates. Greenspan has always been dismissive of the idea that higher interest rates could have popped the bubble, noting that long-term rates stayed low in 2005 and 2006 even as short-term rates rose by several percentage points. This is again a silly cop out.

Suppose that Greenspan started a round of rate increases with the explicit target of popping the housing bubble. For example, suppose he announced the first half point rise in the federal funds rate and said that he would continue to raise interest rates until the real value of the Case-Shiller 20 City index fell below its 2000 level. This likely would have gotten the attention of financial markets and had some impact on house prices.

This is a widely shared view and we’ve therefore become immune to what it’s really saying.  So, allow me to translate:  We as society should have paid wealth holders a higher risk-free interest rate in order to have kept them from speculating on real estate loans.

Doesn’t  sound too progressive, does it?   Let’s provide wealth with a safe return so they don’t go around seeking unsafe returns.

Baker closes with this bit of populist rage:

It is not too late — we could still fire Bernanke and take away Alan Greenspan’s pension.

Come on.  This is nothing but faux populism.

Raising interest rates is never progressive – it’s always a transfer from society to wealth.  Bernanke and Greenspan are eminently worthy of criticism from the left, but certainly not for their failure to drive interest rates higher.

From → Dynamics, Suppression

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