It's no secret that the Bush administration has consistently held interest rates down to obscenely and absurdly low levels. The Boys on Wall Street have been allowed to "borrow" money from the public at ridiculously low interest rates (i.e. 1%), then turn around and loan that same money to the public through financial institutions and charge 6% (mortgage) 8% (car) or 25% or more on credit cards, which are the only loans for which the majority of Americans qualify. That means on credit card loans, the financial institutions are making a 24% return on the money while doing nothing except paying some off-shore 8 year-old billing clerk to generate a bill every month. These low interest rates have contributed to creating the bubble which has burst all around us and to further consolidating wealth in the hands of the few.
But low interest rates have created another problem. The traditional mechanism by which the government has historically been able to stimulate the economy when we were headed into a (recession or depression) is to cut interest rates. Well, that tool has been eliminated by this Bush policy. So what now?
Rising unemployment (Goldman Sachs is predicting unemployment will reach 8.5% by the end of 2009) means cuts in consumer spending, triggering more layoffs, more business closings, more hard times. What to do?
Paul Krugman, Professor of Economics and International Affairs at Princeton, winner of the Nobel Prize in Economics, New York Times columnist, and all-around really smart guy is weighing in on the debate in an article at today's New York Times entitled "Depression Economics Returns." (Link at bottom of this post).
According to Krugman, we need an immediate and emergency stimulus package to get money into the hands of the public and keep our economy from crashing:
"[W]ith no possibility of further interest rate cuts, there’s nothing to stop the economy’s downward momentum. Rising unemployment will lead to further cuts in consumer spending, which Best Buy warned this week has already suffered a “seismic” decline. Weak consumer spending will lead to
cutbacks in business investment plans. And the weakening economy will lead
to more job cuts, provoking a further cycle of contraction."
"To pull us out of this downward spiral, the federal government will have to provide economic stimulus in the form of higher spending and greater aid to those in distress — and the stimulus plan won’t come soon enough or be strong enough unless politicians and economic officials are able to transcend several conventional prejudices." [He includes on his list of conventional prejudices the fear of creating more debt or of acting too quickly].