My doubts come on two fronts. The first is the ability of QE to affect long-term real rates, and the evidence is somewhat favorable on this point, though not 100 percent compelling. It does seem that the Fed can lower long-term real rates, mortgage rates in particular, though why we want to stimulate investment in new housing in the aftermath of an housing bubble is a question we might want to ask.
My second objection is related to this – even if we do lower long-run real mortgage rates, will that stimulate new investment in housing given the inventory problem that already exists, and given the condition of the economy? I’m doubtful, and that doubt extends generally. The mechanism described below relies upon lower real interest rates stimulating new investment, but even if long-term rates fall across the board, will firms be inclined to go out and buy new factories and equipment when so much of what they have is sitting idle?
I think the answer here lies in Google’s automatic word-matching. All this talk of mortgage interest rates inspired Google to try to interest me not in buying a new home, nor in building a new home, but in refinancing an existing mortgage. If low interest rates let people refinance on favorable terms, then they’ll have more money left over to spend on things that aren’t housing. That should reduce the extent of idling and/or stimulate new investment in non-housing sectors, depending on what it is consumers with more cash on their hands turn out to want.
I agree with Thoma that fiscal measures—especially aid to state and local government and acceleration of infrastructure projects—is desirable, but I wouldn’t underestimate what central banking could achieve.