Why Some Always Want to Raise Fed Rate

Paul KrugmanOver the weekend, Dean Baker wrote, Fed Fails to Raise Rates in Timely Manner, End of the World Is Imminent. For normal people, hearing that the Federal Reserve didn’t raise interest rates last week would be like being told we weren’t invaded by space aliens: it hadn’t occurred to them that such a thing might have happened. But for economists and financial types, the last month was spent speculating whether the Fed would raise interest rates to head off inflation.

The weird thing about it is that it would have made no sense. Analysts have to turn themselves into intellectual contortionists in order to justify raising rates. But that didn’t mean that the Fed was not going to raise rates. There are always those who want the Fed to raise rates because they can make (even more) money from the move. But mostly, the argument is incredibly selfish for a certain class a people. Inflation is way below where even the Fed wants it — much less where I think it should be. But these people argue that we must raise rates because even the prospect of a little inflation is far worse than putting real people out of work.

Also this weekend, Paul Krugman wrote, The Creativity of the Permahawks. In this context, a “hawk” is someone who wants to raise interest rates — thus slowing the economy — because she is afraid of inflation or something. But a “permahawk” is someone who always wants to raise interest rates. And the point that he was making in the article is that the permahawks are very creative: they can always find a justification for why we absolutely have to raise interest rates now now now!

The thing is that all of these people were screaming about inflation back in 2010. And they kept saying it year after year. Well, now they just sound silly. So they can’t reasonably claim that unless the Fed raises interest rates, we are going to turn into Zimbabwe. But they always find some excuse to push for higher interest rates from the Fed. And this is so because they want higher interest rates because it benefits them — not because they are worried about inflation or financial vulnerabilities or anything else that they claim. It’s like Republicans running around claiming we must cut Social Security benefits because they are worried about its long-term finances, when they really just want to cut Social Security benefits because they want to destroy all of the New Deal and Great Society programs.

But Krugman brought up a great comparison. The truth is that the people who always and forever want to raise interest rates are treated seriously by economists and the media. This is the way, is it not? When people are spouting nonsense that will hurt workers, then it is Very Serious. But the same thing coming in support of workers is a very different matter:

Or put it this way: if, say, Jeremy Corbyn or Bernie Sanders were to invent whole new, dubious economic theories to justify the policies they clearly want for other reasons, everyone would be coming down on them hard for being flaky and irresponsible. Yet when the BIS [Bank for International Settlements] — which was, once again, dead wrong on inflation — does the same thing, it’s taken very seriously.

In another article, Krugman provided an analytical reason why it is that the finance types are always screaming for interest rate increases. It’s a bit technical, but it turns out that the lower the interest rate the the Fed sets, the smaller the difference between the the amount of money that banks borrow and lend at. Thus: low Fed rate means lower profits for banks.

None of this would probably matter if we lived in a democracy. But we don’t. Those of us who risk losing our jobs aren’t listened to at all. Those who own banks are listened to a great deal.

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About Frank Moraes

Frank Moraes is a freelance writer and editor online and in print. He is educated as a scientist with a PhD in Atmospheric Physics. He has worked in climate science, remote sensing, throughout the computer industry, and as a college physics instructor. Find out more at About Frank Moraes.

2 thoughts on “Why Some Always Want to Raise Fed Rate

  1. I have noticed that unless it hurts poor people, a proposed policy will not be taken seriously. And this goes back decades-even during the Great Depression when everyone except the Fords were broke, you had writers going “I dunno, helping the poor just means that they will be lazy.”

    Frustrating to no end but what can one do at this point besides restrain yourself from getting a torch and pitchfork to hunt down Martin Shkreli. Who my idiotic roommate defended because she knows nothing about the economics of health care.

    • That’s exactly right. I’m written a lot about this because it bugs me: the people calling for “tough choices” are never the people who are hurt by those choices. The idea of “shared sacrifice” is that the poor get hurt and the rich get even further ahead. It’s amazing.

      Yeah, Shkreli is awful. But then again, he is exactly what our system dictates. But he shows what a crock “meritocracy” is. If he were so smart, he wouldn’t have walked into this PR landmine.

      There’s a reason that CEOs are much more likely to be psychopaths than the population generally. And if that isn’t an indictment of our economic system, I don’t know what is.

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