Federal Deposit Insurance Corp
. Chairman Sheila Bair has joined the chorus of economists voicing concerns over continued use of the Zero Interest Rate Policy
, or ZIRP, for an extended period of time.
"Eventually (rates are) going to start going up and what happens?" Bair told CNBC earlier Tuesday. "A bit of a bond bubble it appears ... and so how do we deal with that? I think there's a lot of liquidity out there, a lot of money looking for return to chase, and so trying to stay ahead of that and look at where it's going and what type of new risk that might present, I think is something we need to be very aware of."
As the members of the Federal Open Market Committee prepare to convene for their next scheduled meeting the first week of next month, most expect officials to keep the target interest rate next to nothing and announce another round of quantitative easing
. Although analysts at Bank of America Merrill Lynch
think this could lead banks to begin a race to a new pricing bottom
in an attempt to gain more market share.
In an interview with Becky Quick
for the corporate news and business channel's Squawk Box morning show, Bair said one lesson of the mortgage crisis has been "that you don't do anyone any favors by making them a loan they can't repay. With home prices down and commercial real estate levels down, the collateral's not there anymore for new lending," to many small businesses, according to Bair.
Still, she said smaller banks seem to be weathering the recession a little better than some larger financial institutions.
"Quarter after quarter, we see the loan balances of the very smalls have gone up slightly and are more level," Bair said. And "you still see some fairly significant percentage decreases quarter-over-quarter for the very largest institutions."
Write to Jason Philyaw