We are reaching – or may already have passed – the practical limits of “economic stimulus.” Last week, the Federal Reserve adopted an open-ended bond-buying program of $40 billion a month to goad the economy into faster growth. But even before the announcement, there was skepticism that it would do much to lower the unemployment rate, which has exceeded 8 percent for 43 months. The average response of 47 economists surveyed by The Wall Street Journal was that a similar program might cut the jobless rate 0.1 percentage point over a year.
At a news conference, Fed Chairman Ben Bernanke explained what the Fed hopes will happen. By buying mortgages, the Fed would push interest rates down. They’re already low (3.6 percent in August for a 30-year fixed-rate mortgage) and would fall further. Lower rates would stimulate more homebuying and construction. Greater housing demand would raise home prices. Fewer homeowners would be “underwater” (homes worth less than mortgages). Banks would refinance more existing mortgages at lower rates because the collateral – the homes – would be worth more. Feeling wealthier, homeowners would spend more and cause businesses to hire more.
Good news would feed on itself. The brighter outlook would boost stock prices (the Dow jumped 206.5 points the day of the Fed’s announcement). This rebuilds Americans’ depleted wealth. Optimism, consumer spending and hiring would revive even more.
It could happen. Why, then, so much doubt?