Low Interest Rates Should Favor Meritorious Money Use


The globally coordinated interest rate cut today shows the desperation of central bankers in trying to calm market psychology. The rhetoric about inflationary prospects moderating is delusional. While commodity prices are coming down in the short term they will likely reverse in the mid-term, as fundamentals point higher. Furthermore, government bailouts and backstops will lead to higher inflation as will entitlement programs and the alleged need for large military expenditures.

The global rate cut reveals that Ponzi style finance capitalism is a deeply flawed version of market capitalism. A properly designed capitalism would not become unhinged at the prospect of a loss of economic growth. The problems we are experiencing with the leveraged growth model of capitalism suggest that we should move toward an aggregated dividend model instead. If nothing else, the moral hazard embedded in current remedies spells the eventual death of the system. It is not possible to extensively reward irresponsibility without undercutting the legitimacy of the regime.

The fundamental problem with all “across the board” rate adjustments — up or down — is that money management is made to be indifferent to the moral dimensions of different types of debt utilization. It is one thing to use debt to build essential infrastructure or advance technology. It is quite another thing to lower rates and make debt more attractive so as to refuel the engines of speculation. The move of central bankers to lower rates across the board aids the speculator as much as the manufacturer.

It is past time for central banking institutions to require banks to differentiate their rates and loan policies based upon actual use of money by bank borrowers. Activities that replenish the good of society should get lower rates than activities that prey upon the individual or aggregate weaknesses. In conjunction with this policy change, central banks should charge borrowing banks high premiums for loans made for speculative or highly consumptive purposes. In this way banks would be provided an incentive to loan out money for the enduring good of society.

As proven by the explosive growth of hedge funds over the last twenty years, investment banks lack morality and must be subjected to appropriate regulation. These banks borrow from central banks (really from taxpayers), then re-lend the money to elite level speculative players that hazard the public good. This is the same type of dereliction of duty in central bank management that we witnessed when the FED created undifferentiated easy money after 9-11. Instead of the low cost money being used specifically to build a better future, the money flowed into speculative enterprises and wasteful applications. Now we suffer the humiliation of having to bail out irresponsible borrowers — large and small — because a failure to stabilize them allegedly undercuts the viability of the quasi-Ponzi model, which in turn weakens confidence and the functionality of the general economy. Surely, there is a lesson in this that we can learn!