Richard Salsman, President & Chief Market Strategist of economics consultancy Intermarket Forecasting Inc., has made available a recent research report "ZIRPs Make Credit (and Prosperity) Scarce, Not Plentiful" on RealClearMarkets.
Salsman explains exactly why the Fed's zero-interest-rate policy (ZIRP) has been an utter failure.
ZIRP does not provide economic "stimulus" despite its supporters protestations to the contrary. Like any other price control, ZIRP works by limiting supply, in this case the supply of precious capital needed by the entrepreneur to fund a promising business concept or the management of an existing business looking to finance a new piece of capital equipment, to cite two examples.
The economics is quite basic. Salsman provides an illustrative graph of the supply and demand for credit. If the price of a good (in this case, credit) is held below the equilibrium rate that would exist without central bank manipulation (i.e. in a free market), expect there to be a shortage of credit! This stuff is supposedly taught in introductory microeconomics classes at the college freshman level but is apparently lost on the masterminds over at the Eccles Building.
Savers quite simply will not offer up their capital if the expected return (the rate of interest) does not compensate him for the risk taken. According to Jean-Baptise Say (and quoted by Salsman on page two), "...many will prefer to keep their capital inactive, concealed and unproductive...".
If you are the government or a multinational corporation, financing hasn't been a big problem. However, if you are a small- or mid-sized business, the credit spigot is choked. Impossible to know is the number of businesses that never got off the ground for lack of capital investment during the past six years of ZIRP. They are Bastiat's "unseen".
Something so simple is complete lost on central bankers, our Federal Reserve as well as others around the world. They are so wedded to their Keynesian models that they can't even contemplate that their theories, disproved through historical experience, are just plain silly. Please see the quote from Lawrence Summers that Salsman cites beginning on page six. It says it all...and demonstrates just how worthless a Ph.D in economics obtained from Harvard University is these days.
An excellent article by John Tamny of Forbes Opinions entitled, "The Fed's 'Loose' Monetary Stance is Making Credit Tight" is also cited in Salsman's footnotes and can be found here.
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