What if the Federal Reserve Board kept lowering its discount rate and commercial banks still remained cautious and tight-fisted about making loans? The result probably would be a prolonged recession rather than the shallow and short one that is so widely predicted.
Since the Fed dropped the rate it charges member banks to 6 percent on Feb. 1, little seems to have changed in bank lending policies. Many bankers have been too scorched by bad real estate loans and too traumatized by zealous federal regulators to open their loan windows. In contrast, a lot has happened to the dollar, which stands at an all-time low against the German mark and is widely expected to sink even lower.
Optimists would argue that the drooping dollar will boost U.S. exports and hence provide one of the few economic stimulants available. Pessimists would lament that low interest rates here and high interest rates in Germany will encourage the flow of capital and assets away from our shores. On the facts, both sides are correct, but the optimists are thinking short-term and the pessimists long-term.
The nation is awash in debt: federal, state and local debt, corporate debt, personal debt and record foreign debt. These are the obligations run up in the go-go Eighties that make this recession different from other recent downturns. With bubbles bursting in air -- see-through office buildings, houses that don't sell, jobs disappearing, businesses trying to borrow to service existing loans -- it's no wonder that lower interest rates aren't proving to be the stimulant they are supposed to be.
The recession and the Persian Gulf war have sellers and buyers hunkered down. Banks beset with plunging profits, risky portfolios and government pressure to strengthen their capital base are being so wary that President Bush himself asked them to step up lending.
These factors reflect structural problems in the U.S. economy that will not be quickly overcome. Until government deficits are curtailed, until better productivity rather than a low dollar sells U.S. goods overseas and until Americans individually and collectively get back to sound budgeting, the relative U.S. standing in the world economy will keep slipping. The credit crunch is part of a message that should concentrate minds not only in Washington but in state capitals, city halls, corporate boardrooms and family circles.