Bernanke, Bush Fail to Stimulate Economy Sufficiently

Feb 25, 2008: 11:47 AM CST

According to a recent article by Rich Miller of Bloomberg entitled “Bernanke, Bush Fail to Build Better Economy with Cuts, Stimulus,” the recent economic stimulus may be nothing more than a short-lived, minor patch to a stumbling economy.

I wanted to highlight a few key quotes from the article for your consideration and education:

The U.S. may suffer a letdown afterward as the kick from the stimulus wears off, leaving the economy vulnerable to its underlying weaknesses: a retrenching financial industry, indebted consumers and slowing productivity growth.”

“So far, the Fed’s deepest interest-rate cuts since 2001 haven’t helped the financial markets or the economy. What they have caused is an increase in inflation expectations, with the price of gold soaring to a record $958.40 an ounce last week.”

“A Fed survey released Feb. 4 found that banks had become stingier in granting credit during the previous three months. Fed officials say they expect that to continue, making it harder for the central bank to stimulate the economy through lower borrowing costs.”

Consumers have also been pinched by the rising cost of food, fuel and other necessities. Inflation, as measured by the personal consumption price index, clocked in at a 3.5 percent year-over-year rate in December, the highest for that month since 1990.”

What’s striking is the mention that the Federal Reserve may be unable to stimulate growth by interest rate cuts alone, due to the fact that banks have tightened standards and are less willing to lend money as they have in the past.

The situation is known by some as the “Push on a String” theory, which is similar to the analogy “you can lead a horse to water, but you can’t make him drink.”

If a ball is tied to the end of a string, one can pull the ball towards yourself by simply pulling on the string. You cannot, however, push on the string to force the ball to move away from you.

The Federal Reserve can combat inflation by pulling on the string (raising rates) and slowing an over-expanding economy, but they cannot ‘push on a string’ by lowering rates and forcing a contracting economy to grow.

Banks and lenders still have to perceive favorable conditions ahead before easing borrowing practices, and companies must perceive improving economic conditions ahead before requesting money for expansion, and in the current environment, it seems that both are unwilling to do so.

2 Comments

2 Responses to “Bernanke, Bush Fail to Stimulate Economy Sufficiently”

  1. Temporary Test Blog » Blog Archive » Bernanke, Bush Fail to Stimulate Economy Sufficiently Says:

    […] Original post by Corey Rosenbloom […]

  2. Joe Says:

    Corey,

    Did stocks break out of the triangle today you have been reporting on?

    Thanks, Joe