Sometimes, lower rates are simply not enough. The US central bank have already begun to find this out; the Bank of England and its monetary policy committee are about to learn the same lesson.
Ever since the Fed began cutting rates, auto sales in the US have tanked. Supposedly, auto sales are sensitive to interest rate changes. Despite all the head-line grabbing fed press releases announcing historically unprecedented rate reductions, US monthly auto sales are down 36 percent relative to August 2007, when the crunch first reared its ugly head. The US auto industry is now edging towards bankruptcy and a likely government bailout.
The chart above is telling us a hard and bitter truth. Monetary policy isn't working. Central banks may cut, but the real economy simply doesn't respond.
That is going to hit some policy makers and commentators very hard, particularly those who have invested naive faith in the power of monetary policy. That simplistic idea, that central banks could regulate the economy by adjusting the rate at which it lends to commercial banks, has proved to be a very unreliable intellectual construct.
The relationship between policy rates and the wider economy has collapsed under the weight of deeper contradictions in the economy. Both the US and UK economies are deeply disfunctional. When banks teeter on the edge of insolvency, asset prices are crashing, and households struggle to service their debts, interest rates are very unlikely to produce a surge in optimism and output.
Ed, my good friend over at the Credit Writedowns blog, always emphasizes the political rather than the economic imperative to cut rates. Only this week, he argued that the Bank of England had wanted to cut rates for some time and the MPC were looking for an any old excuse to issue a crowd pleasing press release.
He could be onto something there.