An Interest Rate Problem of Interest
by Eric Lofgren
Much talk has circulated over what has dubbed the ‘new neutral’ in which interest rates are projected to be low for a long time. With their ability to pin down the short-end of the yield curve, central bankers across the developed world have sought to stimulate their sluggish economies with cheap credit. The European Central Bank (ECB) implemented a negative 1/10 interest rate on deposits at their facility in hopes of spurring banks to lend. However, as Atif Mian and Amir Sufi related in their new book House of Debt, the problem is a demand issue. They provide compelling evidence that households ran up debt and are currently repairing their balance sheets after housing prices collapsed, unwilling to take on new debt. While at the depths of the recession there was a credit crunch on the supply side, today’s lenders cannot find the “right” kind of demand. This leaves central bankers in a bind. There are compelling reasons to keep interest rates low...
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