Seeking an Interest Rate Solution: Why the US Federal Reserve should raise short term rates

When the Fed lowered the interest rates for overnight borrowing to near zero, it was said to be a measure to stimulate the seized credit markets. Low interest rates stimulate borrowing. On the demand side that is true. On the supply side, it is clearly not the case.

The financial crisis woke America up from years of binge borrowing and now the credit hangover to deal with. So while low interest rates were appealing for those who wished to refinance their existing debt, there was no interest rate low enough that would tempt them to take on new debt to finance consumption. The deleveraging process limited the chance of success of an interest rate solution.

The country had almost overnight turned from a marginal borrower to a marginal saver.

One of the things that people forget is that low interest rates, while good for the borrower is not good for the saver. (more)