Tags: Jeremy Siegel | Send | interest | Rate | Zero

Jeremy Siegel: Send Interest Rate to Zero

Monday, 11 Jul 2011 08:59 AM

Economist Jeremy Siegel says dropping interest rates from one-quarter percent would make a big positive difference.

"I’ve actually been saying that rates on reserves should be reduced to zero if we want to get banks to lend them out more," Wharton School finance professor Siegel told Index Universe.

"And (Federal Reserve Chairman Ben Bernanke) even mentioned that right in his press conference as something that could be done."

However, the arguments Bernanke used to do QE2 "were based on deflation, not just the slowness of the economy," says Siegel.

jeremysiegel200AP.jpg
Jeremy Siegel
(Associated Press)
"Deflation has stopped, and turned around. So, his main lever to get unanimity on the FOMC is gone."

Overall, deflation seems unlikely, Siegel says. "That puts a floor underneath the whole price structure, because even though we look at core inflation or deflation outside of food and energy, they do seep into core prices," he observes.

"We do have net job creation; unemployment is not rising, wages are pretty stagnant, but they’re not going down. So I don’t see any deflationary pressure, but then I don’t see any inflationary pressures either."

Still, banks are still highly risk averse, Siegel notes.

"There’s not $1.5 trillion of bad assets, let’s be realistic," he says. "The major write-downs have been taken ... they want to keep a lot of reserves."

Siegel also believes we’re also on the verge of some tremendous breakthroughs in energy technology. “Five years from now, I’m not sure the internal combustion engine will be the operative mode for automobiles,” he says.

Former Reagan administration security advisor Robert McFarlane says the U.S. could break OPEC's monopoly by mandating that cars run on fuels other than gasoline as does Brazil.

“The Obama administration recently floated a proposal to raise the Corporate Average Fuel Efficiency (CAFE) standard to 56.2 miles per gallon by 2025,” McFarlane writes in The Wall Street Journal.

“A higher CAFE standard may help our balance of payments a little, but we will remain hostage to the OPEC cartel's control over the availability and price of oil throughout the world.”

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Economist Jeremy Siegel says dropping interest rates from one-quarter percent would make a big positive difference. I ve actually been saying that rates on reserves should be reduced to zero if we want to get banks to lend them out more, Wharton School finance professor...
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