Re Patrick's [6117]: > Until 9-11 lower interest rates helped sustain a strong housing market. Yet, purchases of both new and used homes as well as apartment buildings have, in part, been speculative. To that extent, lower interest rates can stimulate increases in speculation rather than productive investment. > <snip, JL> Reducing interest rates on > automobiles from 7 - 11 percent to the currently fashionable 0 percent will > certainly keep the automobile sector from slumping as much as it might have. 0% financing is still not enough under recessionary conditions (which had begun long before 9/11) to significantly stimulate sales. So long as households anticipate that the recession will deepen and so long as they have a high level of uncertainty about employment and income then they are not going to go into the marketplace in large numbers to purchase 'big ticket' commodities. > Few working class households receive much by way of interest income. Numbers? > In any > case, today's interest income is largely the result of past bond > investments when rates were higher. So, with declining interests those > households who purchased bonds in the past - say anytime greater than 18 > months ago, are able to realize substantial capital gains. I was referring specifically to interest income for working-class households. For that group I believe that the majority of interest income comes from interest-bearing savings accounts (at both commercial banks and S&Ls) rather than interest on bonds. > If lowering interest rates is futile, do you prefer rising interest rates? > Constant nominal rates with declining inflation - in which case we get > higher real interest rates? No, I don't 'prefer' rising interest rates. My point had to do with the ineffectiveness of changing interest rates as a monetary tool under the current recessionary conditions (particularly, as you point out, since there hasn't been either a demand-side tax cut or a substantial enough increase in government spending yet). > > Nobody has a fail-safe plan for increasing aggregate demand. Greenspan's > stated objective has been (I paraphrase) "the maximum level of growth > consistent with price stability." This is what they always say -- full employment equilibrium and all that garbage. This is also an objective of the group of economists that Fred and you believe are particularly 'mad'. > In the past, the Fed seemed to have > interpreted "price stability" to equal zero inflation. Today, the Fed seems > to interpret "price stability" to equal a constant (predictable) but low > level of inflation, say 2.5 - 3.5 percent. They did the same thing with 'full employment'. Then they suggested that due to frictional unemployment, full employment should really mean 2-3% unemployment. > My guess: as long as AD is weak > and there is no sign of inflation being a problem the Fed will cut interest > rates. You could very well be right about that. My guess is that it won't be effective. So long as firms have unsold inventory and excess capacity, why are they going to increase borrowing and investment simply because rates of interest are decreasing? > But, monetary policy alone is not sufficient. On that point, we agree. > Ironically, home ownership rates stagnated for whites and strongly declined > among African Americans. Why? Extremely high real interest rates and > crushing household debt burden. Or was it because real wages were relatively flat yet construction costs, due to other factors besides interest rates alone, were increasing at a greater rate? btw, during the same period when you note a reduction in poverty rates, wasn't there a sharp increase in the numbers of homeless? And what about rents ... didn't they increase at a rate higher than the rates of inflation, interest, and real wages? In solidarity, Jerry
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