I shall now drop MORE money from helicopters--over Wall Street. AP Charles Schwab has written an eloquent plea in the Wall Street Journal calling for the end of the Fed's zero-interest rate policy.

We second that plea.

The Fed's zero-interest-rate policy, now going into its third year, is hosing people who are responsible and live within their means and rewarding people and companies who don't (or didn't) -- or who don't need the help.

Anyone who has saved money is being screwed by this policy. Anyone who borrows money is being rewarded.

For example, the Fed's zero-interest-rate policy is still giving a gigantic subsidy to banks by allowing them to borrow money from the government for nothing and then lend it back to the government at a ~3% interest rate. The spread on this trade continues to produce massive Wall Street profits, and, with them, enormous bonuses--without any of the risk that is normally supposed to accompany such profitability. Once again, this policy rewards those who helped cause the crisis in the first place, at the expense of those who didn't. (If you don't understand how great it is to be a banker right now, read "How To Make The World's Easiest $1 Billion").

Why does the Fed have a "zero-interest rate" policy? To stimulate borrowing. If money is free, the theory goes, people and companies will borrow a boatload of it--and they'll use it to buy stuff, make investments, and create jobs.

In a garden-variety cyclical recession, this policy works.

But this time it's not working.

Why not?

Because this isn't a garden-variety recession. This is a recession caused by too much debt. (A balance-sheet recession, as the economists say).

You can't borrow your way out of a debt problem. You have to get out of it by doing what American consumers are now doing despite the Fed's attempts to stimulate more borrowing: by spending less, saving more, and paying down (or restructuring) your debts.

American consumers are cutting back because they, if not the government, have realized that they have too much debt--and they're taking steps to reduce it. They're starting to save again--5%+ of disposable income and climbing--instead of spending every penny they earned.

With consumers tightening their belts and the country awash in excess capacity, companies aren't borrowing money to make new investments. They're simply borrowing money to replace older, higher-priced debt--and, in the process, earning more profits for their shareholders (as a result of the artificially low interest rates). This is another gift from taxpayers to borrowers, and it comes at the expense of companies and people with money in the bank.

How much is the Fed's zero-interest rate policy costing savers? As Charles Schwab notes, there is more than $7.5 trillion sitting in FDIC-insured savings accounts alone (this doesn't include the trillions more money-market accounts and other short-term savings vehicles). At a normal 3% rate of interest, this money would be earning savers $225 billion a year.

Under the current zero-interest-rate policy, meanwhile, it's earning them nothing.

Not once since the start of this recession has the Fed acknowledged the real problem with the economy--that we borrowed way too much money and bought stuff we couldn't afford. It's time for the Fed to acknowledge that. It's also time for the Fed to reward behavior that will eventually get us out of the malaise: Debt reduction, savings, and a return to financial discipline. Lastly, it's time for the Fed to stop rewarding banks to doing nothing more than borrowing money for free from the government and lending it back to the government--and instead force them to earn their money the old-fashioned way, by making smart private-sector loans.

How can the Fed do this?

By simply raising short-term interest rates to a normal level, say 2%-3%. Not suddenly, not overnight--over the period of, say, a year. And not to a restrictive level. Just back to normal. Just back to where rates would be if the Fed weren't doing everything in its power to get the country to borrow its way out of a debt problem.

See Also: How To Make The World's Easiest $1 Billion