Higher Interest Rates Are Nobody's Friend
Interest rates are on the rise again, and that's bad news all around. Major commercial banks raised the prime rate for the fourth time this year to 10.5 percent, highest in almost four years. And we may not be at the end of the cycle.</br></br>Higher bank interest rates have been expected in the wake of what banks claim have been their own rising costs of money. But there could be an element of greed, too, as banks try to make up for losses on Third World loans.</br></br>Meanwhile, the Federal Reserve Board is keeping an eagle eye on the recent slide of the dollar. A depreciated dollar helps exports, but it has two negative aspects: it threatens new inflation stemming from the higher cost of imported goods, and it also can discourage the flow of foreign investment necessary to finance the national budget deficit. The Fed is walking a tightrope between the desirability of low interest rates to spur domestic expansion and higher interest rates to prop up the dollar.</br></br>Unless he gets help on the deficit-control side from fiscal policy, Fed Chairman Alan Greenspan plainly warned in recent testimony, he may have no choice but to opt for higher interest rates.</br></br>That could choke off an already tiring, six-year domestic expansion and confront the Bush administration with sudden recession. Higher interest rates would also compound massive problems in the battered savings and loan industry, already losing $1 billion every month.