jeudi 2 avril 2015
Larry Summers and Ben Bernanke are having the most important blog fight ever
Posted on 21:52 by nice news
Why the heck are interest rates so low?
That's the question former Treasury Secretary Larry Summers and former Federal Reserve Chair Ben Bernanke have been debating in what might be the world's most important, but also most respectful, blog fight. Are rates low because not enough people want to invest or because too many people want to save? The answer tells us why the economy seems stuck and what we can do to un-stuck it.
Now, part of it is that the Federal Reserve has cut short-term rates to zero and bought enough long-term bonds to push their rates down, too. But that's not the real story. After all, it's not like the Fed can keep rates lower than they "should" be without fueling inflation—which there isn't any now. So rates are so low not because that's where the Fed wants them to be, but rather because that's where the economy needs them to be. If it weren't for the fact that rates can't go—well, at least not that far—below zero, they'd probably have fallen even further on their own, and the recovery would have been better. Everything the Fed has done has just been trying to make up for this, to get rates closer to where they would be if they could be negative.
Okay, but why does the economy still need such low rates? Good question. Summers worries it's a new old problem called "secular stagnation." That's the idea that, absent a bubble, the economy will be stuck in a never-ending slump, because inflation-adjusted interest rates can't go low enough to get people to borrow and invest. Economist Alvin Hansen first proposed this in 1938, when it looked like slower population growth would mean slower investment growth—why build new houses or offices if there aren't new people for them?—and make the Depression go on for, well, close enough to forever.
Now the baby boom thankfully proved him wrong, but what if, Summers wonders, their retirement
That's the question former Treasury Secretary Larry Summers and former Federal Reserve Chair Ben Bernanke have been debating in what might be the world's most important, but also most respectful, blog fight. Are rates low because not enough people want to invest or because too many people want to save? The answer tells us why the economy seems stuck and what we can do to un-stuck it.
Now, part of it is that the Federal Reserve has cut short-term rates to zero and bought enough long-term bonds to push their rates down, too. But that's not the real story. After all, it's not like the Fed can keep rates lower than they "should" be without fueling inflation—which there isn't any now. So rates are so low not because that's where the Fed wants them to be, but rather because that's where the economy needs them to be. If it weren't for the fact that rates can't go—well, at least not that far—below zero, they'd probably have fallen even further on their own, and the recovery would have been better. Everything the Fed has done has just been trying to make up for this, to get rates closer to where they would be if they could be negative.
Okay, but why does the economy still need such low rates? Good question. Summers worries it's a new old problem called "secular stagnation." That's the idea that, absent a bubble, the economy will be stuck in a never-ending slump, because inflation-adjusted interest rates can't go low enough to get people to borrow and invest. Economist Alvin Hansen first proposed this in 1938, when it looked like slower population growth would mean slower investment growth—why build new houses or offices if there aren't new people for them?—and make the Depression go on for, well, close enough to forever.
Now the baby boom thankfully proved him wrong, but what if, Summers wonders, their retirement
Larry Summers and Ben Bernanke are having the most important blog fight ever
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