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Background: Boosting the Economy

October 2, 2001 at 12:00 AM EDT


JIM LEHRER: First the question of what to do about the hurting U.S. economy. The Federal Reserve provided one answer today. We begin our look with an economic snapshot from our business correspondent, Paul Solman, of WGBH-Boston.

PAUL SOLMAN: Anticipating today’s rate cut, we spent yesterday in downtown Boston, at the headquarters of New England’s biggest bank, Fleet. Chief economist, Wayne Ayers.

WAYNE AYERS, FLEETBOSTON FINANCIAL CORP.: From the business point of view, of course, the interest rate is the cost of borrowing money. If businesses can borrow more cheaply the hope is — the expectation is — they will do so. Likewise with consumers, by lowering the cost of money to consumers they too will borrow and spend.

PAUL SOLMAN: Expecting a further drop in rates Tuesday, then, many folks might have been expected to flock to Fleet on Monday to ready their loan applications. Instead, the bank’s main branch was bare.

WAYNE AYERS: I personally I’ve almost never seen it this quiet.



PAUL SOLMAN: Let’s ask this woman here…Hi how are you?

CAROLINA MONNEY, Teller: Fine, how are you?

PAUL SOLMAN: How quiet is it today compared to what you thought it was going to be?

CAROLINA MONNEY: Extremely quiet. It’s just so sad because ever since the tragedy none of the customers want to come in anymore; they’re just so afraid.

PAUL SOLMAN: They’re frightened of an event actually in the bank itself?

CAROLINA MONNEY: Yes. Customers come up to me or they come up to the other tellers and they tell us that they are afraid, and that’s why they don’t come in.

PAUL SOLMAN: Tight building security here, at Fleet headquarters, stoked the fear, but the emptiness surprised everyone; and even nearby stores seemed deserted. Some were shut. And business was bad almost everywhere.

DEAN KAHR, Photo Shop Owner: Since September 11 it dropped down about 10 percent slower compared to last year in the same time period and it just is sitting there at that, you know, slower rate.

PAUL SOLMAN: Now, not every business is down. Flowers are booming, up 40 percent since the disaster, at least at this kiosk. And at the chocolate shop down the block, the truffles were moving.

ED BOYER, Chocolate Shop Owner: We’ve seen actually an increase in sales, and things are going OK, [chuckle] no complaints, really.

PAUL SOLMAN: But Ed Boyer’s good news might actually be bad tidings for the economy at large.

ED BOYER: At Christmas let’s say you want to spend $50. You now want to spend only $30. We fit that niche, because, you know what I’m saying?

PAUL SOLMAN: You’re counter cyclical.

ED BOYER: Exactly.

PAUL SOLMAN: In other words, when people have less money they spend more here.

ED BOYER: That’s right.

PAUL SOLMAN: The Fed’s goal, of course, is to pump the economy so that people and businesses will have more money, and spend it. And even at Stone Photo, though they’re skimping on their window displays, Dean Kahr has responded to the rate cut by investing in new high-end digital technology.

DEAN KAHR: There’s some good assistance with the lowered rate. So we purchased.

PAUL SOLMAN: So you purchased after Sept. 11?

DEAN KAHR: Oh yeah, actually, we just made a purchase; I think it was last week some time — a capital purchase that was financed at a low interest rate — a lowered interest rate.

PAUL SOLMAN: And yet the Fed has been dropping rates all year – and business investment in general hasn’t picked up, which raises a famous accusation: that the Fed isn’t as good at revving up the economy as at reining it in. Or, to illustrate an old saying the economist knows only too well:

WAYNE AYERS: This is pulling on a string. When the Fed wants to slow things down it raises interest rates, raises the cost of borrowing, they pull on the string to slow this economy down. Pushing on a string is cutting interest rates, and people say, well, it works when you’re pulling but not when you’re pushing. I think that’s wrong but that’s sort of the cliché.

PAUL SOLMAN: So in other words, everybody agrees that the Fed can pull on a string and slow down the economy by raising interest rates, choking off the amount of money that’s in the system and then this economy slows. But it’s not clear that if you try to stimulate you aren’t in fact pushing on a string.

WAYNE AYERS: You know, one thing that comes up — guaranteed — every cycle is that very charge: Gee, the Fed’s policy is not going to work this time around; they’re pushing on a string, you can lead a horse to water but you can’t make it drink — all of those kinds of clichés.

PAUL SOLMAN: Unfortunately, there was evidence for the clichés from one of Ayers’ own colleagues. Lani Davis’s job is making loans to small businesses.

LANI DAVIS, Loan Officer: Customers are doing a wait and see. They don’t want to get more debt than they need to at this time. So I think everybody is just on hold. It’s a good time to borrow; it will help them in terms of cash flow, but it’s a scary time to borrow when you think I have to pay this money back and I don’t know what next week holds.

PAUL SOLMAN: A few doors away, small businessman Raymond Buckley wasn’t about to undertake new spending now –

RAYMOND BUCKLEY: It’s been pretty slow.

PAUL SOLMAN: — no matter how cheap the money.

RAYMOND BUCKLEY: I think we’re just going to wait and see what happens. We’re still contemplating doing things, but we’re just holding off for a while.

PAUL SOLMAN: But, the bank economist insists –

WAYNE AYERS: It does work. It always has in the past. It will again this time around.

PAUL SOLMAN: You guarantee that?

WAYNE AYERS: I guarantee it. If there’s one thing I’ve learned in my long career as an economist, I know that recessions end. And they end in large part because of what the Fed does in terms of cutting interest rates.

PAUL SOLMAN: Loan officer Davis, however, was still skeptical.

LANI DAVIS: People are still going to be hesitant. You don’t want to have that debt, you don’t want to have that over your head at this time.

PAUL SOLMAN: But the economist would say: Eventually, that’s how we get out of recessions, and that’s always how it’s worked in the past.

LANI DAVIS: This isn’t the past. This is a whole new ballgame.

PAUL SOLMAN: And that may be the key question: Is it a whole new ballgame, or isn’t it?