The Optimal Interest Rates and the Current Interest Rate System

Abstract

The paper discusses the current target interest rate, which is closed to zero with the new experiment of quantitative easing since 2009 and has reduced the rate of return and the income and has made the real savings rate negative. This target rate has not reduced unemployment and has not improved growth (it is not optimal), but has increased the debt of individuals and the low taxes on businesses have magnified the budget deficits and the national debt. People were borrowing the present value of their uncertain future wealth and their high debt and low income raise the risk and this high risk premium heighten the interest rate on loans, especially on credit cards. The current monetary system needs to be changed and an interest rate floor on deposits (savings) and an interest rate ceiling on individuals" loans (borrowings) is necessary to improve social welfare, fairness, and justice in our society and not to support only disintermediation (financial markets). The middle class cannot work only to pay taxes and interest on its debt (redistribution of their wealth to government and banks) or worse to be in chronic unemployment. Many home owners defaulted on their loans payments and their homes are foreclosed. They will end up without property (real assets). The unconcern towards the middle class will affect negatively the entire socio-economic structure of the nation and after losing its productive power, it will start declining, as history has shown to us with so many empires that do not exist anymore. We hope the leaders (the democratic governments) to improve public policies, to regulate the financial market and institutions, and to satisfy their policy ultimate objective, which is citizens" perfection and the nation"s highest point of prosperity.