Ryan: Raise Interest Rates

Members of congress rarely offer their opinions on monetary policy issues, which I think is too bad. The Fed’s operational independence doesn’t mean this isn’t a subject people should have opinions about (politicians talk about the Supreme Court all the time) and it’s important. But Paul Ryan seems to have some odd views on how this works:

UnderpantsGnomesPlan 1

We need to do things to free up credit. We need regulatory forbearance there. Right now, the policymakers and regulators are doing opposite things. So you’re right that there’s a lot of capital parked out there, and we need to coax it out into the markets. I think literally that if we raised the federal funds rate by a point, it would help push money into the economy, as right now, the safest play is to stay with the federal money and federal paper.

The analysis of the “safest play” here is right, but raising interest rates would exacerbate that problem. He’s talking about paying banks a higher yield on the reserves they keep parked at the Fed. This is what central banks do when they want to suck money out of the system.

Perhaps he misspoke and meant to say something else, but my suspicion is that Ryan is really just outlining an underpants gnome theory of growth here. He knows that tight money is the “right-wing” position and he also knows that the general theme of this summer’s right-wing talking points is that we need to be more business-friendly to boost investment. So he’s decided to say that tighter money (right-wing!) would spur investment (right-wing!) even though there’s no causal story he can tell about this.