By Brad Brooks at Bloomberg
Now that U.S. stock markets have experienced their first 10 percent correction since 2011, investors are again looking to the Federal Reserve to bail them out. Although the Fed hasn’t raised interest rates in almost 10 years, sympathetic pundits say it’s still too soon to raise them now. The economist Larry Summers, runner-up for the top spot at the Fed a few years ago, says raising rates would risk “tipping some parts of the financial system into crisis.”
How did our financial system weaken to the point where a quarter of a percent increase in rates is more than it can handle?
The process started a dozen years ago, when Alan Greenspan — then chairman of the Fed — decided to lower rates to 1 percent after the country had emerged from the mild recession that followed the popping of the tech bubble. Then, when the Fed began to tighten policy, it did so with agonizing slowness — raising rates just a quarter of a percent at a time, so as not to upset the financial markets.
This set the table for the subprime housing debt mess in a way that neither Greenspan nor his successor, Ben Bernanke, could foresee. Everyone assumed real estate was too diverse an asset class to ever be in a bubble. Despite credible warnings about the potential problems starting in 2005, the Fed and Treasury were still blindsided in 2008 by the enormous losses at Bear Stearns, Lehman and AIG. Suddenly, the emergency 0 percent overnight lending rate was required and, almost seven years later, it’s still deemed necessary. Meanwhile, three rounds of quantitative easing have added roughly $3.5 trillion in purchases to the Fed’s balance sheet.
What we have to show for this is a more concentrated financial system, in which the top five banks control nearly half
Originally appeared at: http://davidstockmanscontracorner.com/why-the-fed-should-raise-rates-now/