Unemployment and Interest Rates

What if things were so easy, lower interest rates, fix the unemployment, and voilá, the Economy is fixed. Some thoughts for those who still think that lower interest rates will lead to lower unemployment. By World Complex.

Observing the change is easy (if we disregard Keynesian axioms). Deducing the nature of the change is more difficult.

One observation that leaps out at me is this. Real interest rates fell to an extreme low in August 2005, followed by an extreme high in October 2006. They fill to an extreme low in June 2008, and rose to an extreme high in November 2008. In the first case, there were no dire effects on unemployment. But the second time around, we got a bifurcation.

Is the answer here?

House prices were still rising in late 2005. They were falling in late 2008. Perhaps a fluctuation in interest rates when people believe they are becoming more wealthy is not harmful, but one that occurs during a time when our perception of wealth is falling led to a massive loss in confidence. Or at least a sudden realization that we couldn’t afford all this debt.

If the change in economic dynamics is caused by a sudden negative perception of debt, then manipulating the interest rates downward will not and cannot bring us back to a paradise of low unemployment. Particularly if it is accompanied by declines in the Case-Schiller index and the stock market.

Full article here.