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7 Reasons Why Banks Should Increase Interest Rates

By: Steve Johnson

2/19/2009 - 615 Comments

Contrary to popular government opinion, banks and the Federal Reserve should be increasing interest rates to quicken the economic recovery.

I think the best thing that the banks could do to shorten the recession is to increase interest rates.  A sound economy is built on savings and the way to increase savings is to increase interest rates.  If and when the bond market collapses, banks will be forces to increase interest rates and it may be sooner rather than later.

Here are 7 reasons why banks should increase interest rates. Higher interest rates will;

1. Increase savings, which will reduce bankruptcies and foreclosures

Many bankruptcies and foreclosures could be avoided if individuals and businesses had an adequate savings account to buffer them during times like this. 

2. Increase value of the dollar, which will reduce inflation that is just around the corner

The massive amount of money ($5 trillion) that has been added in the last year is making its way through the market and when its gets to the people, it will create a massive wave of inflation.   Higher interest rates would help to reduce spending, which will reduce inflating prices as more people bid for items that are in short supply.

3. Increase bank deposits so banks can lend money to small businesses whom can in turn create new jobs

Banks need money, but not printed money that will lead to inflation.  They need real money that has been saved by the productivity of workers.  The increase in bank deposits will help banks lend money to the wave of small businesses that are going to spring up and will be the biggest creators of new jobs.

4. Increase the rate of failed business models to clear the system

New businesses that have a chance at creating new jobs by building new products at a profit need the old businesses to fail.  Higher interest rates will force businesses that are no longer viable in the market to fold quicker, which will help get them out of the marketplace so that their workers (employees) and capital (bank loans) can be freed up to be used by new and growing businesses.   This is what capitalism is best at doing, but the government is interfering in the process.

5. Increase the motivation of entrepreneurs to go after opportunities

Entrepreneurs are in high demand to rebuild the economy by going after new ideas to produce profitable products and build a business of lasting value and wealth.  Low interest rates cheapen the value of money and therefore reduce the value of hard work to produce long-term wealth.  What good is it to work-hard to gain money when it has little value in putting it to work for you?

6. Increase financial education

The public should be provided a truthful and consistent message about money management.  It’s very important to give the public an accurate understanding of sound money policy vs. the mixed messages they receive today from the politicians telling us to continue spending even when we are flat broke.

7. Restore confidence in the banks

Banks operate on the confidence of their customers.  Confident customers add deposits, take loans and start businesses to generate cash flow. If customers are afraid banks are about to collapse or go bankrupt or become nationalized, they will not do these things.

In Summary

The government has crossed the line and has taken too much control of the financial system, forcing the banks to take on more risk rather than less risk. Increasing the interest rates would give the bank a larger margin and allow them to restore confidence, which would give them more room to deal with bankruptcies and restructuring business loans when a business is in trouble. If allowed to function, banks could provide much more help than they are today.

Here is an interesting article on CNN Money, arguing that the resent increase in savings is killing the economy.  Why saving is killing the economy

“Saving more and cutting debt might sound like a good plan to deal with the recession. But if everyone does that, it'll only make matters worse.”

“That's a lot of spending that's not happening," said Mark Zandi, chief economist for Moody's He said the jump in the savings rate since last summer is "the difference between an economy that is growing and one that is struggling mightily."”

“Until the economic upheaval of the past year, the savings rate was at historic lows, averaging only 0.5% from the start of 2005 through April 2008. The savings rate occasionally even fell below zero, indicating that Americans were dipping into savings to keep spending at a high level. “

This is a bogus argument because an increase in savings is exactly what the banks need to get more capital so they can lend money to new businesses to create new jobs. It will take years and years of savings before people will be able to pay off their consumer debts and have positive cash in the bank.

The primary reason that Americans’ haven’t been saving is because of the governments’ actions to reduce the value of money with lower interest rates and easy credit. The government monetary policy was behind the low savings rate in the first place. They  created the situation of low savings that are now causing massive foreclosures because no one has any savings to pay their mortgage without their jobs. More than anything, the economy needs to increase savings as explained in this article, Why Do We Need Savings?

In the next few years, as the world stops borrowing the US as much money, personal savings will be in desperate need to support the dollar and provide businesses capital to grow.  Without personal savings, the economy will struggle for much longer.  I don’t know how these economists in the article I quoted can call themselves experts.  These experts led us into this mess and they still don’t have a clue.

To encourage savings, which the economy is in desperate need of, banks need to increase the interest rates.  I just hope that Obama, the Fed and Treasure figure this out sooner rather then later.

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