Thursday, August 28, 2008

Save the savers

These are tough times, and in tough times, the government is here to help. This is why the finance industry is getting help, people late on their mortgages can seek assistance, the Big Three in Detroit are asking for 25-40 billion dollars, airlines are clamoring for supports. What about those that planned ahead?

You have heard this argument already a thousand times: why should those that were foreseeing troubled times bail out the irresponsible ones? It is clear that Schumpeterian creative destruction is beneficial here and that the role of the government is not to encourage moral hazard. What about the current monetary policy of low interest rates, though? Retirees and those who planned ahead saved and are getting very low returns now, in fact in most cases below inflation. The popular press claims low interest rates are good for the economy, but this is not the case for everyone.

Time to increase interest rates to fight inflation (remember the Taylor principle: for every increase in inflation of one point, increase interest rates by one and a half points) and put some money back in the pockets of those bailing the others out.

1 comment:

Anonymous said...

You could have added that higher interest rates will stop the freefall of the dollar, and reduce gas prices (in the US). You pointed out earlier that a majority of the gas price hikes in the US were due to the fall of the US dollar...