Can Expansionary Policies Stem the Tide?
To stem the economy’s frightening plunge over the course of 2001, the Federal Reserve lowered interest rates extremely sharply and extremely rapidly. The idea of course was to encourage spending by encouraging borrowing by making its real cost exceedingly cheap. Nevertheless, it was pretty evident from the start that this policy would have little effect on corporations. They already had too much plant and equipment, so had no desire to invest. They therefore wouldn’t borrow no matter how little it cost to do so. In this sense, the Fed was, in Keynes’ famous phrase, “pushing on a string.” The historic reduction in interest rates has been quite successful, however, in its main short-term goal — i.e. to spur consumer spending. Super-cheap credit thus has provoked an extraordinary increase of household borrowing, especially by means of the re-financing of home mortgages, even as unemployment has steadily increased. Rising personal consumption has single-handedly saved the economy, at leas
