Wall Street Journal Article: Fed Splits over how long to keep cash spigot open
In my opinion, the Federal Reserve bank should not 'keep the cash spigot open'. Mr Stein, the president of the Federal Reserve Bank in Boston has stated that low rate policies help the U.S economy, however some institutions and individual investors may take on too much debt, or too many risky assets, resulting in the toppling of banks and other financial institutions. I have to agree with Mr. Stein. Low interest rates will give risky borrowers, access to capital. The quest for higher returns will draw investors to certain types of assets, and push up prices. Issuers of junk bonds will become popular. Poor quality companies with too much capital, may lead to it building things with borrowed money. They may be incapable of repaying the loans, thus leading to the company having to declare bankruptcy and layoff workers. Borrowing money does not boost the economy, instead it expands debt, leading to more volatility, which can lead to a crash. Other downsides to low interest rates are that moderate income investors may not be savvy enough to invest in anything other than a bank CD, and will therefore be hurt by low interest rates. Insurance companies and banks may counter the low interest rates with large fees, thus contributing to inflation. Affluent investors can be fooled by a fake market boom, which can lead to them thinking it would be safe to make money They may start selling uncovered puts which will later result in losses. Investors need yield, and are therefore seeking it in places they should avoid. There seems to be no risk as long as credit is easy. Low yield forces people that should be retiring into remaining on the job. This in turn deprives college graduates and other younger unemployed people of jobs, which leads to lower wages. This my deter people from buying homes including first-time home buyers, who are extremely vital to the housing market. In my opinion,...
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