The Federal Reserve should let the recent rise in long-term interest rates spread to short-term rates, says John Berlau, director of the Competitive Enterprise Institute’s Center for Investors and Entrepreneurs.
“The zero (short-term) interest rate is ironically proving detrimental to economic growth and long-term prospects for the economy, because it’s raising the fear of inflation,” he told Newsmax.TV’s Kathleen Walter.
“Banks are borrowing at the federal funds rate of zero and then investing it either in commodities like gold or oil . . . or in currencies perceived to be more stable like the Canadian dollar.”
Video — John Berlau: Fed Should Let Interest Rate Rise
In essence, the Federal Reserve is rationing capital, Berlau says.
“The Fed is buying Fannie Mae’s loans, tilting the market toward housing or zero interest rates, putting in the scare of inflation.”
The solution is for the Fed to let rates rise, he says.
“Don’t try to fight it and let markets set rational prices.”
Higher rates would benefit savers, Berlau points out.
Higher rates would also benefit the economy, because the Fed’s current meddling will bring on fears of inflation, he says.
“Rising interest rates wouldn’t doom economic growth," he said. "They may help promote economic growth when interest rates are set rationally. Keeping the federal funds rate at zero could have a further detrimental effect.”
Berlau is opposed to the idea of tightening restrictions on short selling.
“We need more short selling,” he said. “The short sellers turned out to be right about the subprime crisis, and they knew secrets about this.”
Hedge fund manager William Ackman made big money betting against mortgage-backed securities, Berlau notes.
“I wish my 401(k) had shorted these things too, and I bet a lot of Americans wish that.”
Rules for mutual funds should be liberalized to allow them to engage in more shorting, he says.
“That’s both so they can profit when their managers are smart enough to see these negative trends in the market, and also you need shorts to counter the longs so there isn’t as much of a bubble built up.”
Regulators also should avoid curbing high frequency trading, Berlau says.
“With the right incentives that can be part of the solution,” he says.
“You want the market to be able to send signals, whether short or long, to things that happen, because signals are like a form of information. If you put restrictions on high frequency trading, you might end up (hurting) the trading of mutual funds, college endowments — things that affect everyday Americans.”
Berlau is bullish on commodities.
“The Obama administration is closing off drilling,” he explains. “That means oil, where it is drilled, there’s high demand for that.”
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