Countries Move to Stimulate Economy

Lower interest rates are generally a stimulus for the economy because they make the cost of capital cheaper, encouraging businesses to expand and invest. However, in the current financial crisis, interest rates have not been the issue -- no one is willing to lend due to a lack of confidence that they will be repaid.

The Fed and European Central Bank worked together to cut rates after the Sept. 11, 2001, terrorist attacks. Such acts are highly unusual, and it would be more so if several nations worked together at once.

England and the European Central Bank are both expected to make cuts but other countries may be more reluctant.

The Bank of Japan already has its key interest rate at 0.5 percent. The central bank confirmed today, as expected, that it would leave the interestrate unchanged. Given that country's 2 percent inflation rate, the rate is essentiality negative.

David R. Kotok, co-founder and chief investment officer of Cumberland Advisors, said such cooperation "will send some psychological message."

"It really is not needed," Kotok wrote in an e-mail. But "each of them will cut anyway, so we will see serial cuts in close proximity."

Mike Ryan, head of wealth management research, Americas at UBS, said that the United States and other countries, so far, have taken a "parochial approach" to addressing the financial crisis by addressing it on a "local level."

"The approach is an almost exclusively done, on a country by country, event by event basis," he said.

Ryan said that, instead, the G8 countries should be working together to address the financial crisis with a "global approach."

That should include, he said, but not be limited to a coordinated effort to cut rates by the different central banks, including the European Central Bank, which has yet to cut rates recently because of inflation concerns.

"We are hopeful that what we'll start to see is some measures put in place that will send some signals that global policymakers are going to work in tandem," Ryan said.

Gerald P. O'Driscoll Jr., a former vice president of the Federal Reserve Bank of Dallas and Citigroup, also questioned the need by some countries to make a cut.

"What are the Japanese going to do? I guess they can go back to zero, which they are very reluctant to do," O'Driscoll said. "The Europeans have the most scope for cutting."

While the U.S. Federal Reserve has its main rate at 2 percent, O'Driscoll said in recent days the Fed has put so much cash into the banking system that it has essentially already pushed rates lower in the marketplace.

"I guess they could cut, but they have. It would just be acknowledging what they have already done," he said. "Then, what happens if it doesn't work?"

"Then he's stuck," O'Driscoll added. "Then everybody knows the next thing he has to do is pull a Japan and go to zero."

A rate cut is probably not going to calm the markets, he believes. The problem is that many firms are deemed risky because they borrowed too much money to finance their investments. The only cure for that is to deleverage those investments.

"It's ugly, but it's not susceptible directly to central bank action," O'Driscoll said. "Would it do a great deal of harm? Probably not. Would it do a great deal of good? Probably not unless it turned out to be the magic bullet that restored confidence, and so far, nothing that either central banks or governments have been doing is restoring confidence.

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