Macroeconomic stabilization policy seems to have only two primary levers: interest rates and budget deficits.  Many  economists believe that we have used these tools to the limit and have not faced the structural changes (read microeconomic) our economy requires.  A cheap credit policy has fueled much of the growth of the past 25 years and especially in the past decade.  Consequently, when income generation becomes insufficient to pay the related debt service, our fragile economy stumbles.  We cannot continue to revert to cheap credit as the way to stable growth.

Raghu Rajan, in both an opinion piece in today’s Financial Times and in his marvelous book, Fault Lines, argues that ultra low rates (in both nominal and real terms) encourage allocation of capital into housing and cars but do little to help sustain long term economic growth.  In Chapter One  of Fault Lines, entitled “Let Them Eat Credit”, Rajan claims that United States policy makers (of all stripes) have used cheap credit as a way to assist low and moderate income groups with consumption to mask the growing income gap between these groups and higher income groups.  Abundant savings from  Asia in particular, as a response to IMF conditionality in the financial crisis of the late 1990s, has enabled the US to pursue such a low rate policy.  If Asians follow our advice and dramatically increase domestic consumption, the low rate policy will not be sustainable and the weaknesses our economy will become more evident.