1% might not be the final cut
TEXT OF INTERVIEW
Kai Ryssdal: Just last week former Fed Chairman Alan Greenspan was on Capitol Hill in part because five years ago he did exactly what Ben Bernanke did today. That is cut short-term interest rates to 1 percent. To find out why cheap money then was bad — it’s blamed, in part, for the housing bubble, but now somehow it’s good — we’ve called Kenneth Rogoff at Harvard University. He’s a professor of economics there.
Good to have you with us.
Kenneth Rogoff: A pleasure.
Ryssdal: What is the difference between the rate cut that Alan Greenspan gave us five or six years ago and the one Ben Bernanke gave us today, down to 1 percent?
Rogoff: We’re facing the financial mess of the century. We’ve been in it deep for more than a year. We’re in a recession. There’s really no credit flowing in the economy. Unemployment’s rising. There’s a global recession going on. So, it’s really quite appropriate to cut rates here. In fact, we see credit still very tight despite the Fed having such low interest rates.
Ryssdal: Do you think they only did it half a percent to give them room on the downside to cut more if they need to?
Rogoff: They’re going to cut more. They’re not done. I think we’re going to end up down at zero. But they don’t really want to get there, because they don’t know what they’ll do next. After it’s at zero.
Ryssdal: Down at zero percent?
Rogoff: I think it’s very likely that we’re going to see that. Things are that difficult in the credit market. It’s a mess. They’re having to take other measures to try to pump up liquidity in the economy.
Ryssdal: Once you get to zero percent, then, what do you do if you need more rate cutting.
Rogoff: Well, you can’t cut rates, but you can print money, basically, and drive up inflation that way. And that’s really what it does. And even though that doesn’t cut the interest rate — you can’t go below zero — in some sense, it makes it even cheaper to borrow, because you can pay back later with money that’s worth less. So it is possible, in a sense, to still cut the rate that’s relevant to investors. We call it the “real interest rate.” And Ben Bernanke’s talked about that. Even before he became Fed governor, he criticized Japan for not doing it. Now the ball’s in his court.
Ryssdal: In the statement that the Fed issued today, they packed a lot of stuff in a couple of paragraphs here. Concern about the global economy. Concern about consumers here. Is there an upside to this day’s events at the Federal Reserve?
Rogoff: Not really. I mean, it’s a very difficult situation and there’s no particular end in sight. All the risks are still to the downside, especially as this crisis is morphing out into the global economy. I mean, the good news is that these things don’t last forever, but they don’t want to get anyone’s hopes up that it’s gonna be gone in just a few months.
Ryssdal: Where do we go from here, then? What do the next six months bring us in this economy?
Rogoff: You know, honestly, I think, when the next administrations takes office, they’re going to have to take much more radical steps than we’ve seen so far to jumpstart things. Probably cast a much wider net around, propping up mortgages, helping mortgage holders directly, probably a very aggressive fiscal stimulus and a number of other policies — investing in infrastructure. We’re going to need to see a lot more than has been done so far. Things just aren’t working yet.
Ryssdal: Harvard economist Kenneth Rogoff. Professor, thanks a lot for your time.
Rogoff: My pleasure.
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