Letter to Ben Bernanke of the Federal Reserve

Chairman Bernanke:

As part of the Federal Reserve's sweeping response to the credit crisis of 2008, and the worldwide recession that it spawned, you, as Chairman of the Federal Reserve, were highly proactive in your efforts to lower the discount rate. The discount rate (to refresh the mind of a student of economics such as myself) is the rate that banks charge to borrow from the Fed. Discount rates have been at historically low levels since the crisis. As a result of the Fed's decision to lower these rates, banks were supposed to extend more generous credit to borrowers.

As the economy has begun to show signs of growth and stability, it is essential, first and foremost, that the Fed began to normalize its stance in regards to member banks. Raising the discount rate is an ideal first step to send such a signal -- because the discount rate only directly affects the emergency fund borrowing of member banks, consumers will not initially feel the 'pinch' of a slightly higher rate. However, raising the discount rate communicates to the world that the Fed believes that the American and the world economy has transitioned to a more normalized state of affairs. Economists and investors alike have been wondering when the discount rate will increase: it is already expected and better to do it now, rather than postpone it any longer.

Secondly, reducing the discount rate at this juncture is important because of worries in the financial markets about long-term inflation. Inflation is always a concern for investors. Financial markets will grow skittish if there are few signs that the Fed is attempting to exercise fiscal restraint and responsibility. America has been financially profligate for too long, and the Fed has always been looked upon as a steadying influence. The Fed must not condone 'irrational' market exuberance once again, as it did under your predecessor Alan Greenspan's now much-criticized stewardship.

Thirdly, one of the initial criticisms of your 'loose' money policy during the crisis was that by encouraging consumers to borrow and spend, it was merely exacerbating the behaviors that gave rise to the credit crisis as a whole, namely the tendency for American consumers to spend money they do not possess. While a near-zero interest rate for both consumers and banks may have been salutary during the depths of recession and despair, in the long-term it is necessary to encourage consumers to save as well as spend. American consumers have one of the lowest rates of saving, and the highest rates of spending, of all the major industrialized powers. This is despite the tremendous prosperity American has enjoyed as a nation for many years. Americans need to reassess the balance between what they borrow and what they spend, to avoid America giving birth to a new generation of debtors.