Magazine article American Banker

U.S. Recession Requires Global Solution

Magazine article American Banker

U.S. Recession Requires Global Solution

Article excerpt

The U.S. recession is proving to be so stubborn because it is a product not only of cyclical forces but also of domestic structural and global forces.

We are quite probably at the point in the global economy where it is no longer sufficient for the Federal Reserve to ease, though it may well have to continue on such a course.

We also need easing around the rest of the world, where domestic sectors may be more responsive than ours, to spark a U.S. economic recovery that is being held back by homegrown structural weaknesses.

Fed Can't Do It Alone

It will be very difficult for the Federal Reserve, all by itself, to stimulate a satisfactory recovery.

I do not, incidentally, consider the so-called credit crunch a major structural problem that's holding back the economy.

Given the excesses of the 1980s, banks have no doubt tightened lending standards, as they should. The resulting negative effect of tightened credit on the economy can be offset to a large degree by lower interest rates. Better rates would make additional borrowers eligible under the stricter bank standards and would also make the open market more attractive.

Credit Costs Not the Issue

The domestic structural problems I have in mind are those that are making borrowers less willing to seek credit and less responsive to lower credit costs.

A clear example is in the area of nonresidential construction, especially for office buildings, shopping malls, and such.

Because of the wild overbuilding in the 1980s, the passage of time (and a lot of time in this case) will be a much more effective stimulant to new spending than lower interest rates.

People Aren't Buying

This is not an argument against lower interest rates, of course. It is an argument that their effect will be smaller than in recent decades, and that substantial cuts may be needed to achieve any significant effect in this and other areas. …

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