Dean Baker plumbs the depths of the Federal Reserve raising rates in this article published today. Baker rightly places Fed funds rates squarely where it belongs: in the macro-economic arena. He asks why there are still calls (even within the Federal Open Market Committee or “FOMC”) to raise interest rates when we are observing economic indicators such as increases in those employed part-time yet unable to find full time work and those who have become so discouraged they are no longer actively seeking a job. This is called the “Labor Force Participation Rate” and it is measured by the number of people who are registered with state employment offices.
He asks my title question when he questions those on the FOMC who call for interest rate “normalization”. Baker observes that there was a lengthy period in US history when interest rates were in the 6-8% range. The Fed Funds rate is currently .25%; far below that range. However, these are hardly “normal” times we are living in. Manufacturing, for instance is just a fraction of what it was 30 years ago. Shipping costs for importing dry goods from overseas are a fraction of what they were prior to the invention of the shipping container; making the search for the lowest wage possible globally a practical business model. We have also experienced skyrocketing productivity since the advent of the personal computer and widespread robotics. We are just 8 years past the Great Recession and, while the “too big to fail” banks have fully recovered, the middle class has not.
The biggest reason, we are continuing to experience such a tepid economic recovery is that the USA continues to be dominated by Wall Street banks. Wall St. banks do not do the heavy lifting when it comes to lending to small businesses; community banks do that. Yet, even with almost free money from the Federal Reserve, we see very weak lending to the sector of the economy that grows most of the jobs we need. Dodd-Frank has been very hard on community banks and has closed hundreds of them since the Great Recession. Wall St. banks nationwide have been quick to pick up the spoils.
Here in Arizona, three banks: Wells Fargo, Bank of America, and JP Morgan Chase enjoy 70% of the $100B Arizona customers have deposited. Yet, according to this article from the Arizona Daily Star of June 7, a US Congressman had to get involved at the behest of the Arizona Chamber of Commerce and the Tucson Hispanic Chamber to find source capital for the $5,000 to $50,000 loans that small businesses are seeking. Since it seems that risk is so averse to the banks that dominate states, the USA will never see the robust growth we can achieve with one exception: North Dakota; the only state to have a thriving Public Bank; the Bank of North Dakota. North Dakota has some 68 distinct financial institutions and 50 of them are so community based that they are subchapter S corporations. It’s time the Wall St. banks fulfill their obligation to the communities in which they operate or make way for public banks.