Charles Evans, Fed President: Why The Economy Is In A 'Trap'

Higher prices, one top Federal Reserve official believes, could lead us out of the economic slump.

The current problem, Chicago Fed President Charles Evans said in a speech Saturday, is that even though interest rates are near rock-bottom, people are tending to save money rather than spend it. The situation, called a "liquidity trap," means the economy resists the Fed's attempts to kick-start it: Even when money is cheap, people don't use it. But Evans proposed a solution.

In addition to a new round of quantitative easing, an asset-purchase strategy that would boost inflation and lower interest rates as more money enters the economy, the Fed could pursue "price-level targeting." Rather than aim for a specific level of inflation, a price-targeting program would, as the name suggests, aim for a specific level of prices and use any inflationary means necessary to get there.

In general, low interest rates have encouraged banks and other companies to borrow cheap money without spending it. U.S. corporations saw profits rise in the second quarter, despite declines in revenue, because many have been hoarding their cash -- a tendency that the New York Times noted won't do much good for the economy, since companies won't, for example, use that money to create jobs.

Promoting inflation via price-level targeting won't be popular, Evans predicted. "Central bankers and the public generally loathe the idea that even a temporarily higher inflation rate could be beneficial or be consistent with price stability over the longer term," he said, adding later that "Most critiques I have heard of this type of policy tool involve the risk of runaway inflation expectations or the loss of hard-earned credibility." Still, he said, despite the risks, the policy is at least worth considering.

Other Federal Reserve officials might not share Evans' views. St. Louis Fed president James Bullard told the Financial Times he was "sympathetic" to price-level targeting but added, "I don't think we're going to go in that direction any time soon."

Bank profits in recent months have also been boosted by the low interest rates, as HuffPost's Shahien Nasiripour reported in August. But again, lending dropped significantly, as confidence has remained low.

The current low rates have hurt savers, whose certificates of deposit and money market accounts are earning very little interest.

Comments

[Cristy Upshaw]

05:00 PM on 11/16/2010

The FED's and Governments/Banks, etc will always find away around obtaining fradulent currencies [legally through their eyes] and in turn make us THE PEOPLE pay for interest on loans through the Federal Reserve which they never had to pay for in order to obtain whatever agenda they have. They will do whatever they can to make it harder for people who are unable to save for whatever reason, the poor, the seniors. Why would they care? In my eyes they don't, they have the upper hand.

[JoeLeland]

01:33 PM on 10/29/2010

THE FEDERAL RESERVE BANK IS A PRIVATE COMPANY.
Article 1, Section 8 of the Constitution states that Congress shall have the power to coin (create) money and regulate the value thereof. Today however, the FED, which is a privately owned company, controls and profits by printing money through the Treasury, and regulating its value.
The FED began with approximately 300 people or banks that became owners (stockholders purchasing stock at $100 per share - the stock is not publicly traded) in the Federal Reserve Banking System. They make up an international banking cartel of wealth beyond comparison (Reference 1, 14). The FED banking system collects billions of dollars (Reference 8, 17) in interest annually and distributes the profits to its shareholders. The Congress illegally gave the FED the right to print money (through the Treasury) at no interest to the FED. The FED creates money from nothing, and loans it back to us through banks, and charges interest on our currency. The FED also buys Government debt with money printed on a printing press and charges U.S. taxpayers interest. Many Congressmen and Presidents say this is fraud (Reference 1,2,3,5,17).
Who actually owns the Federal Reserve Central Banks? The ownership of the 12 Central banks, a very well kept secret, has been revealed:
Rothschild Bank of London Warburg Bank of Hamburg Rothschild Bank of Berlin Lehman Brothers of New York Lazard Brothers of Paris Kuhn Loeb Bank of New York Israel Moses Seif Banks of Italy Goldman Sachs.

[JoeLeland]

05:55 PM on 10/24/2010

End the Fed.
On June 4, 1963, a virtually unknown Presidential decree, Executive Order 11110, was signed with the authority to basically strip the Federal Reserve Bank of its power to loan money to the United States Federal Government at interest. With the stroke of a pen, President Kennedy declared that the privately owned Federal Reserve Bank would soon be out of business. The Christian Law Fellowship has exhaustively researched this matter through the Federal Register and Library of Congress. We can now safely conclude that this Executive Order has never been repealed, amended, or superceded by any subsequent Executive Order. In simple terms, it is still valid. Then came Nov 22 1963.

[JoeLeland]

06:03 PM on 10/24/2010

Grayson to Bernanke > " Which foreign Central Banks received the $ 500,000,000,000? "
Bernanke " I don't know"
http://www­­.youtube.­c­om/watch­?v­=n0NYBT­kE1­yQ

[blueken]

09:46 AM on 10/20/2010

I have been saving for retirement of 23 years. I'm now at a stage in my planning that I have moved most funds to low risk investments. They don't pay squat. I would actually benifit by hire interest rates. I would be a lot more likely to spend today, if I could see my investments growing. The interest rate is so low, that my income hardly covers the service fees for the fund. Talk about a dis-incentive to save.

[Better Better]

04:03 AM on 10/20/2010

Until Washington produces substantive plans to cut spending, no company is going to invest, consumers won't spend. There is no confidence in Washington getting America's finances on a sustainable track. We'll be stuck at 10% unemployment or higher until such time as credible fiscal plan is produced. As long as the price of gold goes up, Washington has failed. Why would a foreign firm invest in the US when the USD drops and profits being repatriated to home countries are worth less and less? Until a fiscal plan is produced, foreign investment into the US will dive. The Brits have a plan and confidence in their future. The US is lost in an ocean of denial.

[blueken]

09:43 AM on 10/20/2010

Companies are far more interested in customers who are ready, willing and able to purchase products, than deficits and taxes. It is the consumers of this country that are aprehensive of the future. For twenty years the wealth of this nation has flowed to the elite 2% of the population. To show their gratitude the wealthy have shipped jobs over seas. Most people in this country are not confident enough in their future employment to risk makeing large purchases like new cars, new homes and large renovations of existing homes. This is a huge drag on the consumer economy.

[LunaPark]

01:18 AM on 10/20/2010

Wow, the Fed is willing to destroy our currency chasing Keynes's failed theories. Tough crap if you tried to save for retirement, or you are a senior on a fixed income, or you are poor trying to make ends meet.

[Cristy Upshaw]

04:38 PM on 11/16/2010

And when did they truly care?

[spikedawg71]

04:52 PM on 11/16/2010

They want us destroyed, in 200 years we outdid what they accomplished in many many centuries. The aristocracy and the Vatican feels entitled to everything, money, power etc. AND they have the juice to accomplish that. They don't believe in competition, now there is the US and China and them...soon, just them, like before, because China would probably want to be paid back on what we borrowed, and you know we'll walk out on the bill, as always

[Dosadi]

09:00 PM on 10/19/2010

Derivatives:
Basically, derivatives are financial instruments whose value depends upon or is derived from the price of something else. A derivative has no underlying value of its own. It is essentially a side bet. Originally, derivatives were mostly used to hedge risk and to offset the possibility of taking losses. But today it has gone way, way beyond that. Today the world financial system has become a gigantic casino where insanely large bets are made on anything and everything that you can possibly imagine.
The derivatives market is almost entirely unregulated and in recent years it has ballooned to such enormous proportions that it is almost hard to believe. Today, the worldwide derivatives market is approximately 20 times the size of the entire global economy.
Because derivatives are so unregulated, nobody knows for certain exactly what the total value of all the derivatives worldwide is, but low estimates put it around 600 trillion dollars and high estimates put it at around 1.5 quadrillion dollars.

Counting at one dollar per second, it would take 32 million years to count to one quadrillion.

To put that in perspective, the gross domestic product of the United States is only about 14 trillion dollars.
The total market cap of all major global stock markets is only about 30 trillion dollars.
When you are talking about 1.5 quadrillion dollars, you are talking about an amount of money that is almost inconceivable.

[Dosadi]

08:57 PM on 10/19/2010

Why is it a trap?

Because all currency is the product of a loan, the moment that first bill goes into circulation, more money is owed to the Federal Reserve banking system than is actually in existence, and the population is trapped; sold into debt-slavery by their own government, as happened to us all in 1913.
The system perpetuates only so long as an ever-larger group of new borrowers can be found to create new money to pay the interest on the old money. That is what makes it a pyramid.
That is why the government and media always talk about the "growth" of the economy. "Growth" may sound like a good thing to the unenlightened, but in a debt-based economy, "growth" means "deeper in debt". And because it is a pyramid, if the economy does not grow, that is, if more new debt cannot be created to service the interest on the old debt, the pyramid collapses, which is what is happening now.

[guveqzero]

02:41 PM on 10/19/2010

Savers are hoarders, they do nothing for the domestic economy, but take wealth and hand it to banks that invest it overseas or in import businesses. Spenders are just drainers, they transfer wealth overseas by buying imports. To change this picture, trade and business tax law needs to be changed. But, Congress is brain dead.

[CroatianCritter]

12:42 AM on 10/19/2010

Why do we keep asking the Fed to deal with our problems when they don't really care about the public? This is a group of elites that run the economy for the sake of themselves. Why do you think they created the Federal Reserve System. Money is only created in this country through debt. It is a great system as the people in charge of it (The corporate banks) pretty much own everything until debt is paid off with thousands of dollars of interest money attached. A society that saves money does not work for the elites. They need us borrowing. If we save and pay cash, prices will drop and they can't make their thousands of dollars of blood money through interest that they count on. If we want to solve this economic recession, it is time to let the idea of a central bank disappear into history. It is not needed. We will be in for a short term painful readjustment but in the long run, this country will be much better off. My grandfather always said that credit cards would be the downfall of this nation. He turned out to be correct (May he RIP!)

[diddleydee]

12:33 AM on 10/19/2010

TARP and QE2 are both a waste. We need to barter toilet paper.

[rikster]

06:20 PM on 10/19/2010

it might come to that...

[liberalbug]

09:22 PM on 10/18/2010

Hmm, why are people saving despite cheap money? Well first, only corporations "can afford" to take advantage of all this cheap money. Good luck getting the rest of us to run up our credit cards these days. To put it in simple terms, I will start spending money again when I (a) have job security (thank goodness I still have a job); (b) can get a decent raise--last one was in 2007; (c) my insurance premiums don't continue to increase at double digit rates year after year (thank goodness I still have insurance); (d) interest rates on my savings account are more than 2.5% and I can get a five year CD for 5%; and (e) my neighbors, who are all also hanging on by the seats of their pants get all of the above. Fear is in the economy for good reason and it doesn't take some fancy economist to know that people will not start spending again until that fear is gone.

[castlerider]

10:07 AM on 10/19/2010

Banks have made it too difficult to get loans for too many people.
Whether that's a good idea or not, we're going through a heavy inertia moment adjusting to the loss of flow of capital. This truly prompts fear in many directions because of the destructive effects of so many entities losing revenues they've gotten used to.
Leadership has failed to counter these effects because it's apparently so hard to get the big picture on it and apply support where it's most needed.
I expect it will take at least 5 or 6 more years before we see a better solid foundation for the economy and fear being fully replaced with confidence.

[holyghostie]

09:02 PM on 10/18/2010

The game is rigged. For years they said smart people should save their money....

But than the government said we know the "bad" people were risky with their money and gambled it away, BUT we are going to make them whole again....and in the process lower interest rates so low, that we penalize the SMART SAVER TWICE.

[Intolerantcentrist]

08:43 PM on 10/18/2010

That’s fine Fed President Evans, but can you truthfully explain to the Country how and why the FED designed our financial / banking systems to crash at such an unthinkable scale?

Without question, the FED designed our deregulated financial / banking systems to the degree that the entire system collapsed. I’m guessing this is the reason that we have not received a truthful explanation; and the truth necessarily affords the FED no possibility of claiming plausible deniability.

[econ1]

04:30 PM on 10/18/2010

Inflation clearly helps debtors and the US government is on its way to being one gigantic debtor. So one can expect further efforts to debase the dollar. People in retirement or preparing for it will have to save even more to have the income to live if interest rates are driven down, so you might expect savings to continue to rise (as they have in Japan) and spending by people over 50 to contract.