Should interest rates be raised during a recession?

Should interest rates be raised during a recession?

Conventional economic theory states that during a recession interest rates should be lowered to spur lending. In practice, there is an argument to be made that this actually perpetuates the recession and leads to asset bubbles, debt supercycles and an increase in wealth inequality.

1. Clear bad debts faster giving room for the economy to grow again.

2. Allow the market to clear so that prices reach levels that wise investors will buy assets.

This rewards those that save for a rainy day, leading more to do so in your economy, leading to a more robust, slow and steady expansion, rather than one built on over leverage.

3. Give reasons for banks and savers to take risk.

Investing in an established business at 1% looks much more attractive than a new one at 3%, but investing in a new one at 10% gives a reward to that risk. This prevents zombie companies/monopolies from crowding out the economy.

4. Prevent continued bailing out of the banking system.

This prevents the central bank policy from reaching the 0 lower bound, a trap that is all but impossible to escape from. A point where asset values have reached bubble prices and widened the gap between rich and poor. The solution to this problem is almost always extremely painful and destabilizing to society. It’s much better to take a little pain frequently, than to all that pain all at once.

Jim Grant gives many other arguments from his book/talks regarding “The Forgotten Depression of 1921”: