Charles Schwab channels his inner Walter Bagehot and says interest rates need to increase

I almost missed this, but in a Wall Street Journal column, Charles Schwab came out and said that the time has come for the Fed to stop pursuing zero interest rate policies and let rates increase.

Mr. Schwab provides his reasons for why Walter Bagehot was correct with his 1870s observation that savers require a minimum of 2%.

We're now in the 37th month of central government manipulation of the free-market system through the Federal Reserve's near-zero interest rate policy. Is it working?

Business and consumer loan demand remains modest in part because there's no hurry to borrow at today's super-low rates when the Fed says rates will stay low for years to come. Why take the risk of borrowing today when low-cost money will be there tomorrow?

Federal Reserve Chairman Ben Bernanke told lawmakers last week that fiscal policy should first "do no harm." The same can be said of monetary policy. The Fed's prolonged, "emergency" near-zero interest rate policy is now harming our economy....

Average American savers and investors in or near retirement are being forced by the Fed's zero-rate policy to take greater investment risks. To get even modest interest or earnings on their savings, they move out of safer assets such as money markets, short-term bonds or CDs and into riskier assets such as stocks. Either that or they tie up their assets in longer-term bonds that will backfire on them if inflation returns. 

They're also dramatically scaling back their consumer spending and living more modestly, thus taking money out of the economy that would otherwise support growth...

This is a point that your humble blogger made over a year ago.

In short, the Fed's actions, rather than helping, are having the perverse effect of destroying the confidence of businesses and individuals to invest and the willingness of banks to loan to anyone but those whose credit is so strong they don't need loans.

The Fed's Jan. 25 statement that it would keep short-term interest rates near zero until at least late 2014 is sending a signal of crisis, not confidence.

To any potential borrower, the Fed's policy is saying, in effect, the economy is still in critical condition, if not on its deathbed. You can't keep a patient on life support and expect people to believe he's gotten better.

Yet the economy doesn't need life support. Just the opposite. The patient needs to get up and start moving. We could get out of this mess, if only the Fed believed in the free-market system. In free markets, supply and demand find an equilibrium. That's true whether we're talking about the supply of grain and housing or cash and credit. But a functioning free market requires confidence that the government isn't imposing itself unnecessarily in the works, preventing supply and demand from returning to equilibrium.

All this can change with a shift in Fed policy. This is what investors, business people and everyday Americans should hope to hear from Mr. Bernanke after the next Federal Open Market Committee meeting:

"The Federal Reserve used its emergency powers effectively and appropriately when the financial crisis began, but it is very clear that the economy is on the mend and that the benefit of inserting massive liquidity into the economy has passed. We will let interest rates move where natural markets take them. Our experiment with market manipulation will stop beginning today. Effective immediately, we will begin to move Fed rate policy toward its natural longer-term equilibrium. 

With the extremes of the financial crisis of 2008 and 2009 long behind us, free markets are the best means to create stable growth. Our objective is now to let the system work on its own. It is now healthy enough to do just that. We hope today's announcement does two things immediately: first, that it highlights our confidence—supported by the data—that the U.S. economy is out of its emergency state and in the process of mending, and second, that it reflects our belief that the Federal Reserve's role in economic policy is limited."

Of course, the Fed cannot do this because of the massive losses still hidden in the financial system.

As your humble blogger has been pointing out since the beginning of the credit crisis, the only way for the Fed to exit zero interest rate policies is for the banks to be required to disclose their current asset, liability and off-balance sheet exposure details.  With this information, market participants can assess for themselves the condition of the financial system.