SOLUTION TO UNEMPLOYMENT? RAISE INTEREST RATES, NOT GOV'T

So what's the solution to this recession? Not the technical recession, which according to most economists has ended, due to the small expansion of the GDP and the slowdown in job loss. Ok, I buy the argument that 12 months ago, the question was "great depression"? and today it's "is recovery quick enough"? However, despite the recognition that technically the economy is very slowly making a turn-around, too many people are out of work for that so-called turnaround to make an appreciable difference, especially if you're out of work.


Employers are simply not hiring and small business, who by the way are our biggest employers, are simply not getting the capital they need to expand even in instances when they can demonstrate that they are a great risk. The problem is not that banks don't have capital to lend small businesses, even though 133 banks have went out of business this year alone. The problem is more so the capital itself.. that is the greenback... the dollar. It seems that banks are simply not that turned on by the dollar to take wholesale and categorical lending risks on small businesses. The dollar is in fact attractive to buyers of the American currency, since it's so cheap and can be purchased even cheaper as the US continues it's money printing spree. The dollar is not so sexy for lenders that fear marginal back-end profits due to a poor U.S. currency exchange rate.


The Federal Target Rate, that is the interest rate the Federal Reserve charges banks to borrow its dollar is at almost 0%. 0.25% the be exact. The reason the Feds lowered the bank lending rate was to somehow stimulate the economy. The thought was that if lending were cheap then banks will borrow more and lend more. Makes sence but it hasn't quite played out that way. Yes, lending is cheap but the lending has primarily been pretty active with mortgages. Despite the cries about how it's so hard to get a loan, in today's economy, you can obtain a gov't backed mortgage with a 550 credit score and very little down payment or equity. Even though mortgage debt makes up about 12% of our American consumer debt, the focus on stimulating the economy through home purchases and refinancing hasn't been as fruitful in jumpstarting the economy as the Federal Reserve had intended. We still have a pretty bad unemployment problem, despite the official declaration of the end of the recession.


So what is the solution? It's not very popular but RAISE INTEREST RATES! Raise the Federal Target rate and make it more expensive to borrow American money. I believe that this will in fact adversely affect the mortgage refinance market much more than it will the home purchase market since refinancers are motivated by the lowest possible rate and home buyers really just want a nice home they can afford. Remember, the bank-to-bank lending rate is almost 0% and it's done very little to date for unemployment.


What industry is desperate for capital and will likely pay a higher premium to access that capital? Of course, small businesses. Small business will pay more money to borrow money because frankly, they need it most. Why create more deficite spending for small business initiatives when the problem can be solved in the free market. If the Feds raise the lending rate, it also affects the exchange rate so you get more bang when you buy into the buck. The IMF (International Monetary Fund) does a similar practice with impoverished nations. The IMF has been criticized for adding to a countries misery, by extending poor nations astronomically high interest rate loans. However, the method to the madness is to attract capital into that impoverished country through an influx of currency investors seeking big gains from a high exchange. The influx of capital encourages lending and lending circulates cash.

The reality is that banks would much rather rent you a higher priced dollar than a cheaper one because they make so much more money on the exchange. The problem is finding that consumer that is willing to pay the much higher price to borrow that money and small businesses seem to be a pretty good fit.