new thread: pushing on a string

[stephen block <stephenb@xxxxxxxx>]

I have a general question about the argument that lowering interest
rates to stimulate is like pushing on a strong.I am wondering if
anyone can tell me if anything has been written which looks at the
various problems involved in attempting to speed up a recovery. An
anecdotal example may put my query in proper perspective. Aside from
the theory involved, that a different approach (e.e. deficit
spending) must be embarked upon to stimulate a return to fuller
employment and hence economic well-being, has anyone examined bank
lending policies during downturns? Is there any literature available
which specifically examines bank policies during these periods? For
example, I ask rhetorically, if you were a banker, would you have a
preference to loan when interest rates are high or when they are low?
And if you were a lender, would you be more likely to loan during a
boom period or a bust?

The problem, that is to say, aside from the incentive to lend, or
lack of it, is that even if the FED lowers interest rates to 1%, does
that encourage bankers to actually lend? I have noticed several times
during my own life that lenders tighten up on individual borrowers
during recessions and are of course far more likely to carefully
monitor existing loan and payment patterns during these times. They
are, that is to say, far more cautious during these periods and
perhaps far more reluctant, even if/ when demand for loans goes up.
It becomes, in that sense, a lenders' (sellers')  market, even if
rates (in the abstract) favour borrowers.

So what good would it do me, or anyone else, to have loan rates
plummet if no one will lend to me? How will that stimulate me to
invest or spend?

Come to think of it, lowering interest rates during a recession tends
primarily to benefit those who already have excellent credit. In
other words, the benefits trend toward the supply side. And in this
case, just like on the upside, the benefit goes to so-called "savers"
rather than consumers (so what else is new?); surely one of the
reasons why lowering rates IS like pushing on a string.

That is the gist of my question, if anyone knows of any work that may
have looked into these issues, I'd be appreciative. Otherwise,
comments are welcomed on the hypothesis.

Stephen Block

Montreal
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