Paul Krugman: "natural rate of interest is BELOW current levels"Submitted by HuskerSkier on Sat, 04/21/2012 - 22:46
This made my day! I busted out laughing when I read this. Thank you amberwaves for this post (which is a great and informative post)
The naive (or deliberately misleading) version of Fed policy is the claim that Ben Bernanke is “giving money” to the banks. What it actually does, of course, is buy stuff, usually short-term government debt but nowadays sometimes other stuff. It’s not a gift.
To claim that it’s effectively a gift you have to claim that the prices the Fed is paying are artificially high, or equivalently that interest rates are being pushed artificially low. And you do in fact see assertions to that effect all the time. But if you think about it for even a minute, that claim is truly bizarre. [at this point I am giggling a little bit, so it's not like what is to come should be that surprising]
I mean, what is the un-artificial, or if you prefer, “natural” rate of interest? As it turns out, there is actually a standard definition of the natural rate of interest, coming from Wicksell, and it’s basically defined on a PPE basis (that’s for proof of the pudding is in the eating). Roughly, the natural rate of interest is the rate that would lead to stable inflation at more or less full employment. [ok this makes sense, maybe I let my guard down a little..]
And we have low inflation with high unemployment, strongly suggesting that the natural rate of interest is below current levels, and that the key problem is the zero lower bound which keeps us from getting there.[HAHA, there it is!!! the problem is we don't let the fed have negative interest rates!!! If only they could loan out 100 and request back 99 the economy would be saved!!!] Under these circumstances, expansionary Fed policy isn’t some kind of giveway to the banks, it’s just an effort to give the economy what it needs.
...and, I'm speechless.