Consumption Junkies

Ron Araujo and I car pooled to work at one time and were in the same graduate program in economics. I think that Ron and I laughed together as much as I have with any co-workers (and if you ask my series of exasperated supervisors, that would be a remarkable amount of laughter).

NPR broadcast an inteview with Ron yesterday. As CFO of Mission Federal Credit Union, he was explaining how the Fed's rate move would translate into personal loans. He is still quick and I can swear that I heard an edge of laughter in his voice, even as he talked about something serious. Ron does a fabulous job of making it all sound simple and obvious - something I wish our profs had done. It's easy for me to imagine that in a few years, Ron could be one of those talking head guys on CNBC. Once again, I was made inordinately proud of my friendship with someone who has done well. (Pretending, once again, that this somehow has something to do with me.)

His interview made me think, though. The price of money has dropped. Loans are cheaper. But the flip side of this is that the reward for saving is lower. And I had a blinding flash of the obvious.

It is true that lowering interest rates can help to stimulate the economy by stimulating spending. But we're in a fairly precarious spot because our savings rate runs close to zero. Stimulating borrowing and discouraging savings is unlikely to help that. Might it be that we're taking short term measures that just make our underlying problems bigger?

[A British ATM is in the news for dispensing twice as much money as it should. Next time I talk to Ron, I need to ask him: why couldn't we "stimulate" the economy that way? Random ATM withdrawals enhancement program (RAWEP) sounds like it would be a hit with a polity that has made gambling a multi-billion dollar industry.]