I’ve been calling for a swift and surprising 1% Fed Funds rate hike for months now. China’s just raised rates for the second time this year.
What Beijing understands about psychology, posturing and foresight, we seem to have forgotten here in the People’s Republic of Designer Yoga Apparel. Fed Chairman Ben Bernanke claims that if and when the time comes, he can raise rates in minutes. He should start warming up his button-pushing finger now.
My belief is that an interest rate hike, if accompanied with the right language, would accomplish the following:
♣ Signal the end of the crisis phase and the resumption of normalcy (fake it til you make it)
♣ Take some of the speculative edge out of global commodity prices (like we really need $4 a gallon gasoline now)
♣ Push the sideline-dwellers to act (expansion, hiring, home-buying, ordering) by slowly closing the door on “free money”
♣ Force the banks to earn profits by making actual loans, deny them the risk-free spread morphine drip
♣ Back off all those end-of-an-empire eminences and death-of-the-dollar dilettantes
♣ Help with the prevention of future bubbles that inevitably arise when the cost of capital is zero
According to an article at The Telegraph, hedge fund golden boy David Einhorn is now in agreement with me.
“The crisis that required zero interest rates has passed,” said Mr Einhorn, who co-founded and runs Greenlight Capital, a $6.5bn fund. By not raising rates “it increases the chance that governments will over-borrow and fall into a debt trap…If interest rates ever do go up again, you have another crisis,” Mr Einhorn told The Sunday Telegraph.
And that’s coming from someone who was way ahead of the curve in terms of realizing that the Lehman Emperor had no clothes. I’m not exactly sure if his admonition against zero percent interest rates is a new development or something he’s been saying for a while, but it’s nice to have yet another voice of reason in the chorus.