The environment of exceedingly low interest rates is great for banks, according to Richard Fisher, President of the Federal Reserve Bank of Dallas, but is doing little to help the overall economy get back on track. “Despite their theoretical promise, reductions in interest rates to Lilliputian levels have not done much thus far to spark loan demand,” he told the Association for Financial Professionals in San Antonio Monday. Liquidity seems to exist in other markets, notable commodities, he said. But it worries him that the money markets aren’t coming back strong enough and short-term lending to small business remains restricted to a point of macroeconomic pain. “It concerns me that liquidity is omnipresent on bank and corporate balance sheets, and yet it is not being used to hire American workers,” he said. Fisher claims that banks already hold over $1 trillion in excess reserves. Holdings of government securities as a percentage of total assets on bank balance sheets are growing, he said, and loans as a percentage of assets are declining. The recent Fed cash pump, referred to as QE2, will also keep rates low and weaken the dollar, Fisher said. And the inflow may not stop at the current allotment to purchase $600 billion in Treasuries between now and the end of the second quarter of next year, which is on top of the amount projected to replace the paydown in mortgage backed-securities. “I could not state with conviction that purchasing another several hundred billion dollars of Treasuries — on top of the amount we were already committed to buy in order to compensate for the run-off in our $1.25 trillion portfolio of mortgage-backed securities — would lead to job creation and final-demand-spurring behavior,” he said. “But I could envision such action would lead to a declining dollar, encourage further speculation, provoke commodity hoarding, accelerate the transfer of wealth from the deliberate saver and the unfortunate, and possibly place at risk the stature and independence of the Fed.” Federal Reserve chairman Ben Bernanke recently defended QE2 in an editorial in The Washington Post:
“This approach eased financial conditions in the past and, so far, looks to be effective again. … Easier financial conditions will promote economic growth … lower mortgage rates will make housing more affordable and allow homeowners to refinance. Lower corporate bond rates will encourage investment. And higher stock prices will boost consumer wealth and help increase confidence, which can also spur spending.”
Fisher said he is already seeing foreign money go to other lands, funds that would normally be diverted into the American economy and that if more careful steps aren’t taken, the nations can experience “super ordinary” levels of inflation. Write to Jacob Gaffney.
