Many economists and lay people ask if interest rates go to zero what else can the banks do.  Or to say it differently will what they are doing work?  Keep in mind that “normally” central bank actions with respect to interest rates take up to 18 months to take full effect.However these are not “normal” times as we of course know, and the banks’ actions have been more drastic then in normal times still it is a good question, what happens when the interest rates are at zero and therefore we do not have that tool available anymore?  Here are the options

1.  Central banks will keep interest rates low for a sustained period of time to allow the rate decreases to take a firm hold on the economy, therefore look for the interest rates to be very low throughout 2009.  This a revised forecast for me as I had previously been saying that we could see inflation and therefore higher interest rates by the fourth quarter of 2009, I am now pushing that back…it will still happen but look for that in 2010.
2. Governments around the globe will have unprecedented stimulus packages coming soon.  The Obama years are starting right away and he will come in with a bang, count on it.  Harper needs to stimulate the economy to be sure, but he also needs to save his government look for a big package from him.
3. Central banks will switch to the other tools they have.  Purchasing large quantities of debt and mortgage backed securities to inject capital into the housing market to stimulate more mortgage lending to help consumers buy a home.  I might as well take another club at this dead horse, but 2009 will be an EXCELLENT time to buy a house, prices are down and mortgage rates will be DOWN.
4. Central banks could buy long term bonds to keep long term interest rates down as well.  As this develops it will bring even more relief to homeowners getting new mortgages or those people who are renewing their mortgages next year.

They have tools left and let’s watch as they use them to see what will happen, I’ll keep you posted

The Conference Board of Canada has waded in to the discussion about what the government should be doing regarding the economy. As central banks lose one of their most important bullets, the central bank interest rates, due to the fact that these rates are approaching zero percent, many thinkers are calling for governments around the world to jump in and provide some stimulus.In Canada’s case we are fortunate that our balance sheet can handle it.  Many people will call for the heads of the government for taking us into a deficit, but trust me we need to do it.  Brace yourself this deficit could go to $20 billion in order to accomplish what we need.  Keep in mind we have had a good ride and if the government does not help the recvery will be longer and more painful then having a deficit would be.