Logical Stimulation

Greenlight Capital president David Einhorn in conversation with Erik Schatzker (Bloomberg TV), on a meeting between Einhorn and (retired Federal Reserve chairman) Ben Bernanke in March this year:

Einhorn: … my feeling has been that by having rates at zero for a very, very long time the harm that we’re doing to savers outweighs the benefits that might be seen elsewhere in the economy. So I got to ask him about this.

Schatzker: Okay, and what did he say?

Einhorn: Well first of all he says, you’re wrong. That was good. And then he said the reason is if you raise interest rates for savers, somebody has to pay that interest. So you don’t create any value in the economy because for every saver there has to be a borrower. And what I came back to him was I said, but wait a minute. You said for a long time we haven’t had enough fiscal stimulus, and who’s on the other side of the low interest trade? It’s the government. And so if the government — if we raise the rates, the government would have to pay more money to savers. You’d have the bigger deficits. You’d create the stimulus, the fiscal stimulus that you’ve been complaining that Congress wouldn’t give to you, right? And savers would benefit from the higher rates and because savings is spent at a very high rate in terms of interest — interest income on savings is spent at a high percentage, you’d get a real flow through into the economy.

High-level questions of economic theory aside, the sheer counter-intuitive ingenuity of this argument is dazzling, and disconcerting in terms of mainstream macroeconomic thinking. Raising interest rates — supposedly the definitive act of ‘fiscal austerity’ — is exposed as a mechanism of automatic stimulus. Sadly, Einhorn seems not to have received any response from Bernanke explaining where his model goes wrong.

(Partial transcript and full video available at the ZH link.)

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