Loosening monetary policy

I came across this cartoon in the New Yorker which in a way could be used to show quantitative easing as well as lower interest rates. Rather than Ben Bernanke’s helicopter drop how about opening the money pipe. Is that Ben Bernanke showing people around with Tim Geithner (US Treasury Secretary) adjusting the flow? New caption – “These two guys have been doing this for well over a year now”

As we know an expansionary monetary policy involves lowering the rate of interest set by a country’s central bank. This should influence the rate of growth of aggregate demand, the money supply and ultimately price inflation. However growth and inflation still eludes the US economy.

2 thoughts on “Loosening monetary policy

  1. XX

    “This should influence the rate of growth of aggregate demand, the money supply and ultimately price inflation. However growth and inflation still eludes the US economy.”

    Am I wrong to speculate that the reason for this inconsistency is consolidation?

    Consolidation in 2 places:
    1. On the supply end, where on the Fed member banks and other select institutions get the mega cash from the Fed – either in the form of Trillions in 0 percent or near-zero-percent loans or the buying of all the “under-performing” (fraudulent toxic) assets weighing on the behemoths’ balance sheets.
    2. On the distribution end, where a few banks & corporations dominate the commercial capital lending environment and also the retail banking environment.

    If there were far more lenders out there and the commercial banking industry were more competitive, wouldn’t this allow all that free and easy money the Fed pumps into its owners’ hands to trickle down a bit more easily – i.e. at lower interest rates – to businesses and consumers?

    Reply
    1. Mark Post author

      Agree with you. Here in NZ although our base rate (Official Cash Rate set by the Central Bank) is 2.5% and has been that level for sometime, trading banks still charge significantly higher rates. I see in the US that the Fed has come out and said that it is going to keep the Fed rate at near zero till 2014. This is a very bold statement – I presume they know their economy well enough to make such a big call. However, you are right – if we are to grow there needs to more competitive rates for consumers and business. Also people need to consume or have the confidence to do so. People have got their fingers burnt and are very conservative with regard to consumption.

      Reply

Leave a Reply

Your email address will not be published. Required fields are marked *