boom and bust yes or no?

Question

If the fed drops interest rates will it not just prolong the agony and the level of debt before the recession finally hits. At least with boom and bust scenarios you can take stock of your situation and re-evaluate your own financial position. I will never forget the recession of the 1990 s, and new then I would never be so vulnerable again to fluctuations in the economy, I learned a valuable lessson. Does anyone have the same experiences as me.

Answer 1

I don't think lowering interest rates is the panacea. It seems the credit crunch is the long predicted phenomenon of foreign lenders finally saying enough is enough. We can't go on borrowing forever. So, when they stopped lending to us it caused the liquidity squeeze. If we lower interest rates, the dollar gets hammered. Foreigners dump more of their dollar denominated investments, inflation spirals and interest rates rise.

It's an economic quagmire to go along with the Iraq quagmire.

Thanks, George (not!).

Answer 2

The recession of the 1990's and the one in 2001 were very mild, ( the unemployment rate only got above 7% briefly) in part because the fed lowered rates . In the early 80's the fed was fighting inflation so did not lower rates fast enough, and the unemployment rate was almost 11% and it was above 7% for years. When you take into account that there is about 3 or 4 % unemployment from people entering the labor force and changing jobs the difference between 11% and 7% has a big effect. Monetary policy makes recession both less deep and shorter, but it acts with a delay of about 6 months, so what ever the FED does now will not change anything until next year.