Rate Cuts
The big news today is of an internationally coordinated interest rate cut. This seems like a good idea, but as Paul Krugman says the essence of our current problem is that such measures are unlikely to be effective. The practical availability of credit has become delinked from the central bankers’ interests rates, so the conventional monetary policy toolkit isn’t really working. Lower rates will still do more good than higher ones, and it’s important for the world’s financial authorities to be seen as acting in a united way, but this kind of thing can’t really solve our problems.
That’s why it’s so important for policymakers to reject the neo-Hooverism afflicting the elite media, and not give in to these perverse demands for an austerity budget. We need a green recovery plan that takes advantage of the government’s ability to borrow to put people to work — especially people in the hard-hit construction sector — building a new clean energy infrastructure. That will ensure that incomes and employment levels don’t fall too far during the downturn, and will lay the groundwork for a new recovery that doesn’t suck as much as the one we’re now all missing.
48 Responses to “Rate Cuts”
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October 8th, 2008 at 12:15 pm
Of course it won’t do any good. 50 basis points is what you cut in a mild slowdown not a potential Great Depression. Cut interest rates to 0 (or lower even?) then maybe you’d see some credit flowing.
October 8th, 2008 at 12:20 pm
Public Construction programs coupled with open borders and unlimited immigration will just create incentives for millions of additional illegal immigrants to come to the U.S.
The public works may have worked in the 1930’s after 20 years of almost no immigration and sealed borders but in today’s era of open borders will just create temporary jobs for illegal aliens.
October 8th, 2008 at 12:21 pm
Plus investing in “green” technologies and infrastructure actually has long term benefits above the immediate stimulus effect.
October 8th, 2008 at 12:24 pm
Interest rate cuts won’t help much because banks are just hoarding cash expecting much greater losses to come as the economy goes into the crapper, and people & businesses are poor credit risks with high debt loads and falling incomes & revenues.
Classic liquidity trap.
Matt’s eagerness for D.C. to “do something” should be tempered by Fleckenstein’s credo: “Whatever they do it will be wrong”. Crisis driven political fixes are almost never constructive.
October 8th, 2008 at 12:25 pm
“Scylla and Charybdis” anyone?
Free money vs. Austerity
Weimar vs The Great Depression
Beware of a demagogue with a toothbrush mustache. (I’m looking at you, Sarah Palin!)
October 8th, 2008 at 12:28 pm
superdestroyer:
Of course, I hardly recognized it as a strategy — but I SEE IT NOW!
We’ll make all the illegal immigrants leave by making Mexico look like a better place to live! Let’s trash our country so those brown folks leave!
And afterward, we’ll have a lovely third-world country to call home! Yippee!
And folks like Superdestroyer can feel secure that furriners won’t take their jooooobbbbbs!!
Just a tip, racists — there are folks who are whiter than you who are far more likely to have caused whatever gripe you bear towards folks different than you. It’s fairly unlikely poor and powerless immigrants have anything to do with whatever is making you so insecure. The only thing your bellyaching does is prove your racism and stupidity.
October 8th, 2008 at 12:34 pm
GOP – get ready for a majority in 2010. Thank you tax and/or borrow and spend liberals. With a 10+ trillion dollar debt austerity is the only way to go. We need huge cuts before we start spending money. Green spending is fine but has to be preceded by cuts or new taxes.
October 8th, 2008 at 12:37 pm
James,
Are you saying that illegal immigrants are not overrepresented in the construction trades and that any jobs created by government public works (read pork programs) would only go to American citizens in need of better jobs? I thought progressives were part of the fact based community?
October 8th, 2008 at 12:40 pm
“We need a green recovery plan that takes advantage of the government’s ability to borrow to put people to work”
I recomment Van Jone’s brand new book The Green Collar Economy. Kos blogged about it on Monday, and Van has shown up on Tom Friedman’s radar.
I heard Van Jones give an excellent lecture on why the green economy matters back in June, before the current scope of the crisis was known…he was right on then and is today!
October 8th, 2008 at 12:41 pm
Matthew, hate to tell you but you don’t have any money left to borrow. Whatever cash is left in this country is catching the 9:15 to Bern tomorrow.
October 8th, 2008 at 12:43 pm
Nara,
Given the current circumstances, the sensible thing to do would be to increase tax rates on the wealthy to fund new spending, not cut spending. In fact, obviously cutting spending in some areas in order to increase spending in other areas is going to have little net stimulus effect.
And yes, that is fairly described as a “tax-and-spend” plan, but it happens to be a very good idea if you are facing a deflationary recession/depression.
October 8th, 2008 at 12:44 pm
Sigh… We’ve done this before. We’ve been here before. We implemented deficit spending and tighter regulations DURING and AFTER the great depression. Isn’t it strange that the last vestiges of depression era regulation were removed in nineteen ninety nine.. (1999) and the market crashed within 10 years…
The only way the repubs can get a majority in 2010 is if they specifically repudiate deregulation and profusely apologize for their rank and utter cupidity. Until then, I’ll be welcoming the (old) New Deal back again…
October 8th, 2008 at 12:44 pm
I like the Green Recovery plan as outlined in the linked article. One minor complaint: the lower oil prices touted as a benefit of the plan should be countered with a carbon tax to cut consumption further. Otherwise, great forward looking plan.
October 8th, 2008 at 12:49 pm
GOP – get ready for a majority in 2010. Thank you tax and/or borrow and spend liberals. With a 10+ trillion dollar debt austerity is the only way to go. We need huge cuts before we start spending money. Green spending is fine but has to be preceded by cuts or new taxes.
Because, YES! Unemployed people appreciate austerity budgets! That’s almost as good a plan as invading Iraq!
Cut interest rates to 0 (or lower even?) then maybe you’d see some credit flowing.
Effective interest rate is already below zero, due to inflation. It isn’t helping. The banks are happy to take free money, but they don’t want to lend it.
max
['That's why it's called a liquidity trap.']
October 8th, 2008 at 12:56 pm
Didn’t Japan cut its lending rates to zero—or even lower!—for quite a few years during the 1990s Collapse, without doing much good?
Of course, it’s certainly possible that things would have been even worse if they’d kept their rates at a ridiculously high 1.00%!
October 8th, 2008 at 12:59 pm
Why would it go into an even riskier banking system? If you had said Paris, it might make some sense.
In case you hadn’t noticed, the consensus among people with money is that the safest thing to do with it right now is to lend it to the US government. Maybe it seems foolish to you, but people with money were buying 0.01% interest bonds from the US treasury. We should be borrowing every last dollar we can at these depressed rates. We can get a positive return on investment by simply paying off old debt with it, though there are probably even better things to do with it.
October 8th, 2008 at 1:03 pm
By the way, I always found this a helpful image when trying to explain the limits of monetary policy:
Now a real liquidity trap is more complicated, with financial intermediaries like banks standing between the Fed and consumers (it is those intermediaries’ lending policies which can “trap” new liquidity before it becomes new consumption). But the basic point is the same: if you have reached the point where the economy is unwilling to convert new money into new consumption, then you have to find another way to stimulate consumption.
October 8th, 2008 at 1:05 pm
In California, how did borrowing money to employ illegal aliens to build things such as houses and shopping centers work out in the long run?
Why do people want to try it again on the national level. Do you really think that people will move from Michigan to Pampa Texas to build wind generator farms or do you think illegal aliens will migrate to Pampa Texas just like they migranted to Orange County California to build things?
October 8th, 2008 at 1:08 pm
Re Njorl’s comment “In case you hadn’t noticed, the consensus among people with money is that the safest thing to do with it right now is to lend it to the US government. ”
————-
Actually, if you look at the Gold chart, a fair number of people seem to think Gold is the safe harbor. Let 10 percent inflation hit those Treasuries –along with a 10 percent drop in the value of the dollar –and see how long people keep money in them. (3 month Treasuries are made for capital flight — government has to give you cash back within a short time.)
October 8th, 2008 at 1:17 pm
Not that this argument is worth much consideration, but there is a big difference among different things you can build, so I don’t think one can make generic arguments against trying to stimulate the economy by having the government “build things”. So while I agree it would be a bad idea to encourage too many more resources to be devoted to building shoddy houses in inconvenient locations, that doesn’t tell you much about the merits of doing the things on the “green recovery” agenda–which, incidentally, are:
Retrofitting buildings to increase energy efficiency
Expanding mass transit and freight rail
Constructing “smart” electrical grid transmission systems
Wind power
Solar power
Advanced biofuels
October 8th, 2008 at 1:17 pm
Agreed on the need for a “green recovery.” The New America Foundation proposed something along those lines this summer — focusing on green tech and public infrastructure — and is revising that plan to reflect the recent meltdowns.
October 8th, 2008 at 1:21 pm
Financial guru (and Republican) Bill Gross has recognized for some time that major deficit spending will be needed in the next administration to shore up (save) the economy. See July and October newsletters.
An energy efficient infrastructure overhaul is exactly the right way to go about it.
October 8th, 2008 at 1:22 pm
DTM,
Since politicians are involved, much of the building will be either the wrong thing or in the wrong location. That is the way the government works. In addition, the costs will be well above market rate since that is also something the government insists upon.
Do you really want to base your recovery on an organization that is more interested in ensuring that a certain percentage of the subcontractors are of the appropriate gender or ethnic group instead of achieving good value for the tax payer?
October 8th, 2008 at 1:22 pm
Whoo. The habit of blaming our troubles on the least-powerful people in society is pretty ingrained on the right, ain’t it?
October 8th, 2008 at 1:36 pm
Even assuming this, which isn’t always accurate, it’s worthwhile.
By building during a time of high unemployment and preferential borrower status the government can afford to screw up and still achieve more than private industry can do in boom times. “Above market rate” today is well below market rate 6-10 years from now. “Buy low sell high” means the government should be buying labor and renting money now, and auctioning off the finished assets when they peak in value at the height of the next recovery.
October 8th, 2008 at 1:45 pm
I’m not sure there is a good answer. The kind of government spend you want likely won’t do what you expect though – Roosevelt’s various stimulus plans didn’t help (and based on unemployment rates by 1937, they arguably did damage). A level of spending akin to WWII levels might help, but bear in mind that the norm after such spend outs is a crash – it didn’t happen after WWII only because the entire rest of the world was face down, and the US economy was able to produce without any competition.
That’s simply not the case now, and it won’t be the case again. Ultimately, we are going to have to do things that neither liberals nor conservatives will like: reduce Federal spending drastically, and just get the government out of most things (which would have the effect of reducing the scope of potential corruption). That means that most social welfare programs are going to have to die, and the vast majority of military bases (including most, maybe all of the ones overseas) will have to be shutdown. Instead of worrying about policing the planet, we’ll have to content ourselves with a navy and air force of sufficient size and scope to keep trade lanes open (mostly anti-piracy work, IMHO).
Right now, everyone – liberals like Matt, neo-cons like Kristol, and everyone in between, is in denial. I recommend having a listen to Dan Carlin
October 8th, 2008 at 2:38 pm
superdestroyer,
Well, as an aside for some sorts of things the government, despite all its shortcomings, is a more efficient distributor of resources than private entities. That is not because of superior competence, but rather because the government has better incentives in certain areas, largely due to the ability of the government to recoup long-term and diffuse benefits through taxation.
But in any event, even if ideally we would like private entities to take on the role of distributing all these resources, the precise problem in a deflationary recession/depression is that private entities will be unwilling to do so–you can even hand them cash, but they will refuse to consume it. So a generic preference for private entities making distributive decisions doesn’t have much relevance in a deflationary recession/depression, because in effect those entities have removed themselves as an option.
October 8th, 2008 at 2:41 pm
So what you are saying is McCain talking about energy independence in response the economy made sense.
October 8th, 2008 at 3:36 pm
I’m not sure there is a good answer. The kind of government spend you want likely won’t do what you expect though – Roosevelt’s various stimulus plans didn’t help (and based on unemployment rates by 1937, they arguably did damage).
Actually, the problem with FDR’s economic policies was that they weren’t stimulative enough. The 1937-38 recession was arguably due to FDR trying to reduce deficit spending.
October 8th, 2008 at 3:45 pm
Peter,
My point is, govt stimulus didn’t help until it reached the level of WWII spending. That was a short term fix that stuck around after the war because of the unique world situation – the US was the only developed economy left standing.
That situation simply isn’t going to happen again. Thus, if we ratcheted up govt stimulus enough to make a difference, we would eventually – when it was scaled back – have the same situation that prevailed in the US after other wars – a fairly large economic downturn.
My point being, a large enough stimulus to make a difference will – at best – create a roller coaster ride up. We’ll have to come back down after that ends. Since we’re already down, I’d just as soon not bother.
I think the best thing govt could do right now would be something like this:
Don’t just do something, stand there!”
October 8th, 2008 at 4:36 pm
I don’t think anyone is suggesting Keynesian policies can eliminate the business cycle. Rather, the goal is to moderate it.
October 8th, 2008 at 4:52 pm
DTM,
We are in a place created by large scale Keynesian stimulus: we just went on a multi-decade (loosening the rules all the time) effort to make it easier for people to buy homes.
That’s worked out so well, hasn’t it? Perhaps we should pull back and try less of that.
October 8th, 2008 at 6:23 pm
it’s a pity that the $25bn that was directed to car manufacturers with old plants recently wasn’t directed to them to retool to build wind turbines rather than SUV’s.
October 8th, 2008 at 7:51 pm
James Roberston,
Actually, the housing boom was fueled not by fiscal policy, but rather by a period of exceptionally easy monetary policy, starting specifically in 2002 and ending in 2006.
I also don’t understand why you describe the “multi-decade . . . effort to make it easier for people to buy homes” as a Keynesian stimulus. In any event, all that had nothing in particular to do with the housing boom, which again occurred only recently. In fact, housing prices up to the recent boom had gone through the same “Great Moderation” (lower volatility) as other asset prices, starting in the early 1980s. Again, it was only when monetary policy went extremely easy that the housing boom (and then bust) occurred.
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