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There's no interest in low interest rates; it's all about jobs

December 14, 2012 12:10 am

EARLIER THIS week, Federal Reserve Chairman Ben Bernanke announced that short-term interest rates (between the Fed and banks) will remain near zero until the unemployment rate drops to 6.5 percent.

Under the "new norm" and with the likelihood that there will be more job layoffs as Obamacare takes effect, interest rates may remain low for a long time.

But is the Federal Reserve's policy on interest rates helping the economy or hurting it?

The Fed's prime rate is now so low that if it were a limbo pole an ant couldn't get under it.

In theory, low interest rates are supposed to help a struggling economy. They allow companies to borrow cheaply so they can make improvements to their infrastructure, create more inventory and hire more workers.

These low rates are also supposed to boost consumer spending by keeping mortgage rates and finance charges low. That should encourage the general public to run right out and buy big-ticket items such as homes and cars.

Well, after four years of historically low prime interest rates, none of that has happened. Home sales are still at 20-year lows despite mortgage rates under 4 percent.

As for cars, well, go to your local bank sometime and check out the rates on a car loan. While the prime rate is less than 1 percent, banks will sock you for as much as 8 percent for an auto loan.

Consumers could have gotten those rates when the economy was in high gear and the prime was 5 percent. Only dealer incentives, which are not directly tied to the Fed rate, offer low-rate financing.

Meanwhile, all those companies that are supposed to be scooping up that cheap money aren't. Instead of borrowing, the big corporations like Apple and Microsoft are hoarding billions of dollars in cash and sitting on money, keeping it out of circulation.

Small mom-and-pop companies, on the other hand, are either afraid to borrow because of the sour economy or they don't qualify for loans.

According to the bankers I know, commercial customers aren't beating down their doors trying to get cheap money. Instead, business owners are sitting and waiting until the economy improves before they dig themselves a financial hole.

No, low interest rates haven't spurred the economy along. In fact, they may have hurt it because there is another side to this low-prime coin.

Several months ago, I allowed a certificate of deposit to roll over and when I checked my rate I found I was getting .25 percent. That's right. The same bank that was charging 7 or 8 percent for a car loan wanted to give me a quarter of 1 percent interest on my money.

Those of my generation were taught that if they saved their money, they could get good returns when they got to retirement age. If you could somehow save $100,000 you ought to be able to earn $8,000 a year (at 8 percent) on that money.

Now, at .25 per cent (you get less than that for regular savings), you would earn $250 on that $100,000.

This makes the Fed's low-interest rate policy a double-edged sword. Businesses aren't borrowing the cheap money, so it is not helping spur job growth as intended.

Meanwhile, those with savings are getting virtually no return on their money and these are the people who would be spending if the money they had put in the bank was earning decent interest.

The argument, of course, is that these Americans over 50 already have their homes and their furniture and they won't buy.

That's a lot of bull. Do you know how many parents and grandparents are being asked to help their children and grandchildren today? It is occurring in almost every family.

If those with savings were earning more interest, they would be spending more and further greasing the economic wheel. They would be eating out more, buying newer cars and providing more help for their struggling children.

Low interest rates aren't helping the economy. Those who aren't working don't qualify for mortgage loans, and houses sit empty despite 3.5 percent rates.

Jobs spur home sales far more than low interest rates. When I bought my first home, my mortgage rate was 9.75 percent. Yes, the home price was 10 percent of what it would be now, but I was making 10 percent of what I'm making now, so the playing fields were even.

I bought (and paid for) that house at 9.75 percent interest because I had a job and was confident that I was going to keep it. And the bank let me borrow the money because I had a job.

Jobs and confidence are much more important to a struggling economy than low interest rates.

Present Fed policy has proven that.

Donnie Johnston:

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