Yes, great idea. Hopefully not too little too late.

If the Fed would like to put some exstra money into the economy without the short term interest rate dropping to zero, put me down for borrowing about $200,000 at 0.5% interest.

I’m just an amateur and don’t understand all the interest rate stuff, but won’t lowering interest rates just create more inflation? Can the Federal Reserve just keep lowering interest rates and printing more money at will? Isn’t this what causes the bubble economies? Please explain.

I’ll respond to John’s question about whether lowering interest rates won’t create more inflation. The answer is no in the near term and yes in the longer term.

The way that the Federal Reserve lowers short term interest rates is, essentially, to “print” more money. Right now, this is the right policy because it counters what has essentially been a massive contraction of credit that is equivalent to money. Just about all economists now recognize (thanks largely to Milton Friedman) that a contraction of the money supply causes recessions, and — in the extreme case — the Great Depression.

But once the necessary economic adjustments are made (such as people engaged in real estate and investment speculation finding more productive employment) then too much money in the system will cause inflation.

So the delicate balance that the Federal Reserve needs to target is to pump up the money supply now, but to ease off as the economy recovers. And the inherent risk is that the “stagflation” of the 1970s will be repeated, whereby the economy becomes “addicted” to growth of the money supply and its only effect is to cause inflation without stimulating growth.

While the Federal Reserve has the primary influence over the level of employment and prices at the national level, the way that individuals and firms can best cope with an economic downturn is to lower their wages and prices and keep up their production. If everybody did that quickly enough, then drops in the supply of money/credit would have little impact on real economic output. The fact that prices are “sticky” in the downward direction is the reason that the Federal Reserve sometimes needs to jack up the supply of money to maintain aggregate demand — in other words, to maintain people’s financial ability to buy things.

That was a great explination and it was appreciated. I know pretty much how the whole inflation/deflation thing generally works, but that explination hit it on the head and was easy to follow. Thanks