* Argues low rates for too long can be counterproductive
* Similar views made earlier in week by Pimco
NEW YORK, Oct 28 (Reuters) - A near-zero interest rate policy is not aiding a U.S. economic recovery, as it reduces income to retirees and offers little help to companies sitting on vast amounts of cash, the COO of private equity giant Blackstone Group BX.N said on Thursday.
“I think that traditional economic theory which says that the lower the interest rate the more stimulation you get in the economy ... misses the point,” said Tony James, chief operating officer of Blackstone, which has assets under management of over $100 billion. “When interest rates get too low for too long, you get a structural shift in the economy and lower rates can actually be counterproductive.”
The Federal Reserve cut interest rates to near zero in 2008 and is expected to announce another round of asset purchases when it holds its next policy meeting on Nov. 2-3, after already spending $1.7 trillion on securities purchases to pull the economy out of the financial crisis.
The prospect of more market intervention by the Fed is again pushing U.S. bond yields lower, which reduces the cost of borrowing.
However, James said low rates do not help U.S. companies sitting on record amounts of cash and that have no need to borrow money. Leveraged companies which have locked in rates are also not aided.
“And I believe that American industry in general has plenty of capacity,” he said. “So I don’t see that lower rates are going to particularly encourage American industry to borrow and build.”
It also doesn’t help people who depend on money market accounts and savings accounts to live on, he said, as it gives them less income to spend.
“So it actually net-net doesn’t have any stimulative effect, it has a counter-stimulative effect by reducing income,” he said.
James was speaking on a conference call to reporters to discuss Blackstone’s third-quarter results, released on Thursday. For more details [nN28219848]
James’ views are shared in part by two top asset managers, Bill Gross, co-founder of Pacific Investment Management Co, and Jeremy Grantham, chief investment strategist at Grantham Mayo Van Otterloo & Co, who lambasted the Fed’s loose monetary policy this week. For more details [nN27228717]
The U.S. central bank’s bond asset purchasing program “is in fact inflationary, and, if truth be told, somewhat of a Ponzi scheme,” Gross wrote in his monthly investment outlook posted on Pimco’s Website.
Gross said the United States is in “‘a liquidity trap,’ where interest rates or trillions in asset purchases may not stimulate borrowing or lending because consumer demand is just not there.”
Grantham, who helps oversee over $100 billion at Grantham Mayo Van Otterloo & Co, said Fed policy has resulted in “extraordinary destructiveness” and “ruinous cost.”
The U.S. also next week sees voters go to the polls in midterm elections in which all 435 seats in the House of Representatives and about a third of the 100 Senate seats are up for grabs.
Public discontent with President Barack Obama and the ailing economy has put Republicans into position to gain control of the House and perhaps pick up 10 seats they need for a Senate majority.
“What I’m hoping for is a government that’s not so polarized that it can’t enact any legislation,” said James. “We are a country that needs ... people governing collectively for the collective good, not two extremes pulling each other and nothing getting done.”
James added that there needed to be focus on creating jobs, dealing with the deficit and facing hard issues around Social Security and Medicare, which is the U.S. government’s medical program for the elderly. (Additional reporting by Jennifer Ablan in New York; Editing by Bernard Orr)
Our Standards: The Thomson Reuters Trust Principles.