There have been several economic theories mentioned in the news lately about the correct plan to stimulate economic growth. The current plan is for the Federal Reserve to begin an aggressive attack on lowering interest rates. There are many tools in the Fed toll belt that could be used, but recently the Fed has been purchasing Treasury bonds with the proceeds of maturing mortgage bonds. The Fed did so to make sure that the money supply wouldn’t start contracting at a time when cash-strapped states are cutting spending to close their budget gaps. Buying bonds in the open market lowers the inventory of existing bonds for sale thus decreasing bond rates.
Is lowering the cost of borrowing money the answer to economic stimulus? In theory, by lowering rates and increasing the ability for consumers to qualify for loans, the Fed would be adding money to the economy, boosting consumers cash flow and increasing consumer spending. The theory seems credible except for the fact that increasing consumer debt is the foundation of the stimulus.
Having originated mortgages for 15 years and witnessing the economic impact of borrowing money first hand, I can honestly say that lowering the cost of debt does not lower the long term effects of debt. It simply moves short-term concerns (cash flow) to long-term concerns (accumulation of debt). The pendulum swings, but unfortunately does not stop swinging. Over the long term it turns a fire cracker into a stick of dynamite. At sometime the debt needs to be paid back. Do we really want to add more debt to a nation with a savings rate of less than 3%?
In the big picture, after the immediate need has passed, did the stimulus really benefit the debtor?
Increasing consumer debt is not the answer to economic stimulus, creating jobs is. Jobs increase cash flow not at the expense of the consumer, but for the benefit of the consumer. Business expansion will do all the hard work for the economy. The Fed also has business stimulus tools in the tool belt that could jump start business loans. How about lowering payroll taxes, unburden business by decreasing health plan taxes, allow easier trade of goods to name a few. The Obama Administration is too focused on the benefits of the few and the expense of the many. Use the tools that stimulate business hiring. Let’s get back to work!