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Low interest rates widen the gap between Main Street and Wall Street

Thought Leader: Sheila Bair
June 22, 2020
Source: Link

By Sheila Bair (original source Yahoo Finance) 

“Is there no end to the absurdity of our debt culture? For most of the past 12 years, we have lived in an era of zero interest rate policy, or “ZIRP.” Designed to stimulate more economic activity by making it cheap to borrow, ZIRP has instead inflated the value of financial assets, encouraged unprecedented levels of public and private sector borrowing, and made the rich even richer – all while delivering tepid growth and stagnant wages in the “real economy.” 

Now President Trump and others are escalating calls for the Fed to utilize negative rates, or “NIRP,” as a way to double down on this spent policy and actually pay borrowers to borrow and penalize savers when they save. But NIRP has been tried in Japan and Europe, and it has been unsuccessful in stimulating their economies, as growth in both regions has lagged even our modest economic gains. Thankfully, the Fed so far has resisted going this route.

When central banks lower rates on safe assets like government securities, they make riskier assets like stocks more attractive in comparison. Stocks are generally valued based on their expected future returns relevant to risk-free assets. So when rates on Treasuries go down, stock values go up.”

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