Fed's Duke: Small businesses wouldn't have survived without lower interest rates from QE2

Elizabeth Duke, a member of the Board of Governors said in a speech yesterday that the Federal Reserve's policy of reducing long term interest rates has saved the world from disaster.  She does not explain how it encourages asset bubbles and inflation. 

What she doesn't get is that we are at the endgame of our 40 year lowering interest rate cycle. 

If you think of how lowering interest rates always causes financial assets to increase in nominal value.  Your home is a financial asset and as such has been buoyed up because of lowering interest rates. 

It's all well and good, but it does the opposite when the rates go up.  Housing, stock markets, bond markets all go down in tandem.  Right now we are at negative real interest rates which are unhealthy, unsustainable and causes malinvestment. Via IMN
"Those [QE2] purchases put downward pressure on longer-term interest rates generally and helped normalize the spread between mortgage rates and long-term Treasury rates, which had widened during the financial crisis," she said. "Reducing longer-term rates influences the economy in much the same way as lowering the expected path of short-term rates."

"For instance, the decline in longer-term rates lowers the cost and increases the availability of capital and credit, which in turn encourages business expansion," she said.

"In the most recent episode, another important result of lower rates has been a reduction in debt service burdens from existing debt," Duke said. "Households in particular have significantly reduced mortgage payments through refinancing. And numerous small business owners have told me that they could not have survived the downturn without low rates."
Again, the data don't support her conclusion.  Even during the crisis, business investment has been down, way down.  At the same time she admits that she is helping debtholders and mortgageholders.  That doesn't renters or people looking to buy houses. 


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