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Sunday, March 20, 2011

(Don't) Raise Rates to Boost the Economy

David Frum tweets:

If there were a prize for the most foolish op-ed of the week, we wouldn't have to wait till next Friday to award it.


Raise Rates to Boost the Economy, by Andy Kessler, Commentary, WSJ: The chairman of the Federal Reserve is stuck between a rock and a hard place—well, more like a house and a gas tank. How to escape? Mr. Bernanke, raise interest rates now. ...
It's all counterintuitive, but it will work. Ending quantitative easing and raising short-term rates will surely cause the stock market to crater. 1,000 points? 2,000? Who knows? But a selloff will ensue. Does that mean a negative wealth effect? I doubt it. Who really thought they were wealthier at Dow 12,000 versus Dow 10,000?
Some banks will sputter, and maybe even fail, even the big boys. ... Hopefully the FDIC is ready to dive in and remove the remaining toxic mortgage assets of any failing banks, along with their managements, and then refloat the institutions. ...
But along with a likely lower stock market and failing banks will be several positive effects that will finally kick-start the economy. Oil and wheat and commodities will see a 20%-30% drop in price as speculators run for the hills. This will be a de facto tax cut for consumers. Hiring should restart when businesses see normal short-term rates, most likely 2%. ...

The key to recovery begins with a Fed induced stock market crash, followed by failing banks -- perhaps even systemically important ones? This may win more than "the most foolish op-ed of the week".

    Posted by on Sunday, March 20, 2011 at 09:15 PM in Economics, Monetary Policy | Permalink  Comments (23)


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