A few, possibly random thoughts on lower rates:
Lower rates might encourage people and businesses to want to borrow (I'm refinancing my home right now, so I'm happy rates are low as I will soon have a few hundred extra bucks every month);
But, lower rates do not stimulate the desire to lend. Banks and bond buyers want to invest when their perception of default risk is low and real rates are high.
OTOH, businesses with significant portions of their capital in the form of floating rate debt (assuming they haven't swapped to fixed rates) will see their profits enhanced.
Today's rate cut in particular, assuming we get the 1/4 to 1/2 everyone expects, is more of a formality, IMO. Fed funds has been frequently and sometimes significantly below the target rate since 9/11. But, business debt is usually priced off of CP rates or Libor for short-term (or floating rate LT) borrowings.
At this point, fiscal stimulus - putting money in people's pockets through gov't spending and/or tax cuts - is likely to be more effective. Private spending is better long-term, but if people and businesses are too fearful to spend, gov't spending can help to get things moving again (pump-priming).
I haven't read Krugman, so I don't know his concerns or the examples he uses to make his case, but others like to use Japan as the image of what we can expect here over the next decade. I don't buy it. Our banking system is healthy (some will surely claim derivatives will sink it, but I don't buy that either) for one thing. We are not Japan.
What will bring things around? Waning of fears (of terrorists and job loss), confidence that the future is bright, pent-up demand exceeding our capacity to keep it pent-up (at some point, want of a new car becomes need of one). Low interest rates help, but real rates will have to come back up to stimulate normal lending activity. Fiscal stimulus will get us their faster than we would without it.
JM2Cents, BWDIK, etc.
Bob |
