January 17, 2019
It doesn’t as far as I can tell. Cohan has been on a rant for years about how high-risk corporate bonds are going to default in large numbers and then…something. It’s not clear why most of us should care if some greedy investors get burned as a result of not properly evaluating the risk of corporate bonds. No, there is not a plausible story of a chain of defaults leading to a collapse of the financial system.
But even the basic proposition is largely incoherent. Cohan is upset that the Fed has maintained relatively low, by historical standards, interest rates through the recovery. He seems to want the Fed to raise interest rates. But then he tells readers:
“After the fifth straight quarterly rate increase, Mr. Trump, worried that the hikes might slow growth or even tip the economy into recession, complained that Mr. Powell would ‘turn me into Hoover.’ On Jan. 3, the president of the Federal Reserve Bank of Dallas said the Fed should assess the economic outlook before raising short-term interest rates again, a signal that the Fed has hit pause on the rate hikes. Even Mr. Powell has signaled he may be turning more cautious.”
It’s not clear whether Cohan is disagreeing with the assessment of the impact of higher interest rates, not only by Donald Trump, but also the president of the Dallas Fed, Jerome Powell, and dozens of other economists.
Higher interest rates will slow growth and keep people from getting jobs. The people who would be excluded from jobs are disproportionately black, Hispanic, and from other disadvantaged groups in the labor market. Higher unemployment will also reduce the bargaining power of tens of millions of workers who are currently in a situation to secure real wage increases for the first time since the recession in 2001.
If Cohan had some story of how bad things would happen to the economy if the Fed doesn’t raise rates, then perhaps it would be worth the harm done by raising rates, but investors losing money on corporate bonds doesn’t fit the bill.
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