By Scott Lanman and Simon Kennedy
Raghuram
Rajan accurately warned central bankers in 2005 of a potential
financial crisis if banks lost confidence in each other. Now the
International Monetary Fund’s former chief economist says the Federal
Reserve should consider raising rates, even as almost 10 percent of the
U.S. workforce remains unemployed.
Interest rates near zero
risk fanning asset bubbles or propping up inefficient companies, say
Rajan and William
White, former head of the Bank for International Settlements’
monetary and economic department. After Europe’s debt crisis recedes,
Fed Chairman Ben
S. Bernanke should start increasing his benchmark rate by as much
as 2 percentage points so it’s no longer negative in real terms, Rajan
says.
“Low rates are not a free lunch, but
people are acting as though they are,” said White, 67, who retired in
2008 from the Basel, Switzerland-based BIS and now chairs the Economic
Development and Review Committee at the Paris-based Organization for
Economic Cooperation and Development. “There will be pressure on central
banks to follow an expansionary monetary policy, and I worry that one
can see the benefits, but what people inadequately appreciate are the
downsides.”
He and Rajan will have the chance to make
their case at the Fed’s annual symposium in Jackson Hole, Wyoming, this
week. In 2003, White told attendees central banks might need to raise
rates to combat asset-price bubbles. In 2005, Rajan, 47, said risks in
the banking system had increased. They were met with skepticism from
then-Fed
Chairman Alan Greenspan, 84, and Governor
Donald Kohn, 67.
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