Open letter to Ben Bernanke

Photo by Shawn Thew/EPA file

Please tell me, Ben, that your efforts to flood the loan market with liquidity and keep interest rates artificially low are only in response to pre-election political pressure, and that you will change course after the November elections.

Although I am very pessimistic about actions that you, Henry Paulson, Congressmembers, and Bush have already taken, I do have some reason for hope. I find it to be rather intriguing that there was a coordinated cut in interest rates by a plurality of central banks. Is this because you are cognizant of the fact that a unilateral cut would beget an outflow of capital, thus contributing towards more illiquidity (in real terms) in the loan market? If interest rates should be as low as you want them, then the unhampered market would set low rates without your interference.

Ben, you have to be aware of the fact that a negative rate of return in real terms has negative consequences. Where do you suppose real rates have been for the last 8 years? I know some prices are now falling, but we can't measure the effects of inflation by looking at changes in prices. Prices are still too high, and you are preventing them from falling.

It is savers who supply credit. The fact of the matter is we do not have a credit crunch, but a savings crunch. Why? Because we blew everything during the inflationary orgy of the last several years. Does this paucity of savings warrant low or high interest rates (in both nominal and real terms)? You have to know the answer to this one, Ben. So what is preventing you from doing the right thing by one-upping, say, Egypt?

If we want to raise capital, I propose taking interest rates up to, say, 15%. What do you think about that one, Ben? Sure, my proposal would be painful for some, but we are already losing jobs and the economy is going to keep shrinking, as there will be a steady erosion of capital until we do the right thing and raise interest rates. What is preventing you from doing such a thing? Is it the biggest sub-prime borrower of all, the United States government?

Having $10.5 trillion in debt and high interest rates would certainly make things uncomfortable for bureaucrats and politicians in Washington. But the present course is only going to buy them some time. How much time, we don't know. What are they going to do when the economy has shrunk down to nothing? There will be no economy and no government when that happens. People have this crazy idea that there can't be an economy without a government. No. There can't be a government without an economy.

You do say that you are a student of the Great Depression. Perhaps you noticed that Young, Meyer, Black, and Eccles all kept us in a depression by doing the same thing with interest rates that you are doing. And have you noticed that periods of economic expansion were all precipitated by double-digit prime rates? Conversely, economic downturns have been precipitated by artificially low rates (especially negative real rates).

There is no way to prevent the liquidiation of malinvestment, Ben. There is nothing orderly about a controlled liquidation, by running more interference with the market process. It is time to do the right thing, Ben: raise interest rates!