The naming of Ben Bernanke as Time’s Man of the Year prompted a discussion on a local talk show as to whether or not he deserved it.

One caller called in saying no, arguing that he had not really done anything to deserve the recognition.  The caller stated that he had not actually done anything to stimulate the economy.  When asked by the hosts what more he could have done, the caller answered “raise interest rates.”

The hosts could not understand how raising rates would stimulate the economy and the caller did a very poor job of explaining.

Interestingly, the topic of how raising rates is what is needed to stimulate the economy came up on today’s Rush Limbaugh show.  (I know, there are some people that will have a visceral reaction to that name.)

As usual, Rush did a much better job of explaining this.

The problem starts with the Prime Rate.

This is the interest rate that the Fed. Reserve charges private banks on the money it loans out.  The current Prime Rate is almost zero.  MEaning it costs banks almost nothing to borrow from the Federal Government.

At the same time, interest rates on Federal Bonds is in the 3% range.  These bonds are typically purchased by institutional investors.  This includes banks.

Right now, banks can achieve a guaranteed, risk-free rate of return of 3% on the money they borrow from the Fed. by simply buying Government Bonds.  Banks have very little incentive right now to give the money they get from the Fed out in the form of private loans.

The only way to solve this problem is to raise the short-term Federal Rate to the point where simply buying Government Bonds is no longer a viable option for banks.  That means a hike in interest rates to the 3% range.

This comes after President Obama excoriated banks for not loaning out the money they were given.

Well, if he wants banks to loan money to private entities, he really needs to take a good long look at the policies of his administration.

Right now, he is giving banks the incentive not to loan that money out.

Another example of the President needing to look in the mirror when it comes to the economic problems currently facing this country.