Yesterday Comptroller of the Currency Thomas Curry said that he is concerned that auto loans are showing signs of the frenzy seen in housing loans before the 2008 financial crisis. He is right to be worried about auto loans but he misses the reason why. The surge in auto sales and loans to finance them is not, as the Comptroller says, an issue that needs more regulatory attention. It is instead an easily foreseeable outgrowth of the Federal Reserve’s failed policy of near zero interest rates.
Recent headlines indicate that the Federal Reserve is likely to postpone any increase in interest rates until 2016 because of new signs of continued weakness in the US economy. Only in the realm of government policy is the failure of the current strategy of easy money a reason to continue easy money policy. The Fed has lowered rates since June 2006 and been near zero since November 2008 with the predictable result of massive distortions in the US economy and a failure to achieve even close to historically normal post-recession growth. To continue with this policy is unfair to the American people who need growth in the economy to lift their wages and standards of living.
At the peak of the housing froth in 2006 the Fed cut interest rates even though signs of a dangerous overheating of housing were everywhere. An more normal interest rate environment before the crisis would have meant more expensive mortgages. Some borrowers would not have purchased homes and would have avoided foreclosure and bankruptcy during and after the crisis.
Since the 2008 crisis, the Fed has pursued near zero rate policy ostensibly to help the economy recover and reduce unemployment. The result has been a failure as the economy has grown at anemic levels and work force participation rate has sunk. Those workers exiting the workforce have caused the government’s official unemployment rate to decline but that number is hardly relevant when the US has so many people not even looking for work anymore. Over the last couple of years, every time the Fed gets close to raising rates, it backs away due to the slowest growth in a post-recession recovery since the Second World War.
At this point we need the Fed to try something different. A return to a normal interest rate posture cannot be any worse than where near zero interest rate policy has put the country. All of the candidates at the Democratic debate Tuesday denounced the terrible state of the US economy after seven years of Fed monetary policy and Obama administration fiscal policy. In fairness to the Fed, the administration’s fiscal policy has been no help as the President has raised taxes several times despite his own admission that such tax increases are detrimental to the US recovery. The administration has also acknowledged that the “stimulus” in 2009 failed to find the promised “shovel-ready” projects.
More normal rates would reduce the distortions that the Fed’s policy is creating. Strong auto sales continue to be fueled by low rates which certainly pleases the auto workers unions that support the President. However, easy money encourages consumers to allocate capital to auto purchases that might be better spent elsewhere or saved (if savings rates were not so low due to Fed policy). The same easy money policy is keeping the stock market at historically high levels although the most recent possibility of a rise in rates and economic weakness in China has caused stocks to pull back some. Why would an administration that claims to want to address inequality in America continue to pursue a policy that enriches those Americans who own stock over those who rely on wages for a living?
There is some method to the Obama administration’s seeming madness in not promoting economic growth in the wake of the terrible recession that cost millions of Americans their jobs and devastated their savings. While Republicans in Congress have recently been able to slow the President’s spending, the current administration has racked up deficits that make the Bush administration’s deficits look like child’s play. The Obama administration has benefited mightily from the Fed’s near zero policy as it can borrow money at low cost to fund the tremendous debt it has incurred. Last week’s auction produced a zero coupon Treasury three month bond for only the second time and one month bills routinely price at a zero coupon. I’m sure that the administration is loath to see the Fed raise rates to anywhere near normal because it would reveal the real borrowing cost of America’s more than $18 trillion debt. It is sad that the American people are the ones who have to pay the price in reduced economic prosperity.