Are Low Interest Rates Good Or Bad?

The Obama Administration really wants low interest rates, and so does the Bernanke-run Fed. We've had many years of low interest rates, and for the past couple of years they've been about as close to zero as it is possible to get. But are low interest rates really good for us?

The answer to that, as with most things in economics, is a bit complicated. But let's look at the pros and cons of low (and high) interest rates.

Low interest rates are basically good for one class of people: borrowers. Those who are in debt like low interest rates because that means they have to pay less interest on their debt. Individuals and corporations with credit card debt, car loans, and the like are pretty happy with low interest rates... as is the Federal Government. Our government is deeply in debt, and these low interest rates mean they can manage to rack up more debt without immediately paying the piper.

Low interest rates, though good for borrowers, aren't so good for lenders. Think about it... if you were a lender with a pile of money available for loans, would you want to lend it out at ruinously low rates? Add into the equation the fact that interest rates are almost certainly poised to rise in the near-term: would you lend your money now, at low rates, or would you prefer to hold off lending until the rates rise? The answer should be obvious.


Low interest rates also punish those who save money instead of going into debt. There is little reward for putting money into a bank account to earn interest, because interest rates are so low. If you have $250,000 in the bank, you'll be doing good to earn $7,500 in interest each year. As a comparison, I remember 10% interest on savings accounts... that same $250k would have earned $25,000 in yearly interest. As someone who has savings, which would you rather see?

So, our current low interest rates encourage consumers to go into debt, discourages savings, and reduces the ability of lenders to remain economically viable. Savers who want to earn a decent return on their money are forced into higher-risk scenarios, and that's not a good thing.

So, what are the pros and cons of HIGHER interest rates?

As interest rates rise, those who are in debt pay more and more in interest. If the interest rates double, for example, the Federal government is in for some REALLY tough budget problems. Anybody incurring new debt or having existing debt with variable rates will experience this pain.

On the flip side, interest earned by those who save, such as retirees, will do them a lot of good. Higher interest rates encourage saving and discourage debt. Also, lenders will be more willing to lend money, and will earn more money from their lending practices.

Higher interest rates could also help the housing industry.

There is nothing inherently good about low interest rates, though when they get TOO high they tend to stifle a lot of economic activity. There is a healthy range for interest rates, but by artificially holding rates at zero, the Federal Reserve is not letting a healthy balance be struck. Many financial analysts believe that the Fed policy is actually laying the groundwork for a future crash that could be just as big as the 2008 crash.

If there's one lesson we should have learned from the now-defunct Soviet Union, it's that central economic planning doesn't work. Sure, we CAN hold interest rates at artifically low levels, but that doesn't exist in a vacuum, and there WILL be real-world repercussions.

Instead of holding interest rates at zero, we need to let the market find a reasonable and healthy balance between the needs of borrowers and the needs of lenders and savers. The rates need to rise in a natural reaction to our current situation, and it won't be long before the Fed is forced to raise them.