Let me say that Larry Summers certainly holds to the Democratic Party mantra of job creation through monetary policy. However, he really could care less about jobs, in my opinion, when push comes to shove. Larry Summers cares about banks. And low interest rates insures that banks remain functioning, as they skate on thin ice, like Will Rogers once said about the state of banks in the Great Depression.
You cannot have a .25 basis rate hike without putting the banks on thin ice these days. That is the Summers’ message. And China just cut their funds rate .25 percent and our stock market in the United States rejoiced for a while. Talk about thin ice.
Back in 2013, Summers talked about how the natural interest rate sans a bubble economy is negative. Yes, negative. Remember, this is not some chump off the street. Larry Summers was the second choice behind Janet Yellen for Fed chairman.
The relentless decline of the 10 year treasury bond interest rate, stopped only by the Dot Com bubble and housing bubble, is decidedly down over the past 20 years.
So, raising rates in the midst of little bubble activity seems to Summers to be ludicrous. You could say housing is in another bubble. But it is a bubble for the wealthy. It does not appear that Main Street is participating in many bubbles right now except in auto sales. In fact, it is more likely that main street is a victim of bubbles that exist, at least in food, housing and until recently, oil and building commodities.
Keeping Main Street weak, through technological gains and job elimination and China slowing, could theoretically push interest rates down to negative territory and certainly, the Fed fears Main Street becoming strong without a reliance upon the credit their member banks offer. Wage inflation is a no no, although bankers really like asset inflation.
When Volcker raised interest rates to over 20 percent to stop inflation back in the ’70s, the act only destroyed the S&Ls. If someone tried to stop overheating nowadays by that method, you would destroy the TBTF banks, ie. the financial system itself.
The economy simply cannot be permitted to overheat in any significant way, the key being tamping down any wage inflation which can be done whether there are bubbles or no bubbles. I think that this bully of a financial system has been Alan Greenspan’s plan all along. He has created this monster, with diminishing or stagnate main street consumer demand, which Summers is trying to make sense of, with potentially dreadful consequences.
So, Summers is basically saying or implying that the economy on Main Street cannot be permitted to engage in bubbles anymore, unless negative interest rates are available as a means of stimulus after the resulting crash. Â
Bloomberg agrees with Summers. There are not very many options left in a downturn.
The Fed wants to raise rates now, and lower them later while still being positive. But it is looking like that could hurt the banking systems and obviously undo the stock markets around the world.
Keeping Main Street bubble-free ensures some bank stability but profits are low. Or if you want Main Street to engage in bubbles, and Summers says they are necessary to growth, you have to allow negative interest rates in times of bust. Of course, at the point at which the negative interest rate is at minus 100 percent, you will just give your money to the banks and never see it again.
