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Why stimulus isn't working

Updated: May 3, 2013 12:14PM

'You can lead a horse to water, but you can't make him drink."

How true that old saying is. And here's another along those lines:

You can stuff the banks with money, but you can't make them lend. . . . And you can lower interest rates to zero, but you can't give people and businesses the confidence to borrow.

The Dow's 265 point drop Wednesday shows that the market has it figured out -- even if the Fed and Congress don't.

All the stimulus Congress can create -- including Wednesday's promise to send an additional $3 billion of TARP funds to struggling homeowners -- won't get consumers past the fear zone. In fact, it will just prolong the housing crisis as this failed program already has done. And it will further destroy the confidence of buyers and builders.

All the money the Fed can create won't get business going again without the critical ingredient called confidence. And confidence is just what the Fed undermined with its latest promise to keep creating new credit in the banking system and keep interest rates near zero -- all in an attempt to "stimulate" the economy. The uncertainty factor

There's actually plenty of money around -- trillions of dollars held by banks in the form of Treasury securities, plus nearly $2 trillion in cash on the balance sheets of businesses.

But there's so much uncertainty about future growth that banks don't want to take the risk of lending to businesses. They know they can pay savers close to zero percent interest and then redeposit the cash in risk-free 10-year Treasuries earning 2.5 percent.

And there's so much uncertainty about consumer demand that businesses don't want to invest their cash in new plants or stores or products -- or even in new employees. The fact that health care and financial services reform bills are layering new and uncertain costs on business is just one more reason for companies that have cash to hoard it.

And there's so much uncertainty about the future that even potential homebuyers who have good credit, and could make a down payment on a new or existing home, are scared to do so because they don't know if they'll have jobs in the future. And they figure real estate prices will go lower, or stay low longer.

So the economy is grinding to a halt -- or at least to very slow growth. Low rates: solution or problem?

But does the Fed have the right remedy -- or is it just making things worse?

Consider this possibility: Low interest rates may actually be slowing the economy down!

Seniors who have lived on the interest they earn on their savings have had to cut back their lifestyles -- cutting into consumer spending.

Workers trying to save for retirement realize they have to spend less and save more, slowing the economy.

Pension funds must project lower returns, so the trustees of state and business pension funds have to contribute more -- diverting resources from economic growth and expansion.The only winner

About the only winner in this "game" is the U.S. Treasury. It gets to borrow money to fund its deficits at the lowest rates in history. With two-year Treasuries yielding only about half of 1 percent, and 10-year Treasuries yielding 2.75 percent, the government saves a fortune on interest -- for now.

In fact, if rates were only at the "normal" low levels of three years ago, according to economist Brian Wesbury, the Fed would have to spend an additional $230 billion this year to borrow -- adding to the deficit.

While these low rates aren't sparking consumer or business borrowing, they are serving as an incentive for the government to keep spending and borrowing.

Consumers and businesses have learned the lessons of frugality in uncertain times all too well. What a shame the government hasn't begun to learn that lesson. We'll all pay for its mistakes. And that's The Savage Truth.

Terry Savage is a registered investment adviser and a co-host of "Monsters and Money in the Morning" on WBBM-Channel 2 from 5 to 7 a.m. weekdays. Post questions on Terry's blog, and at

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