What The Current Interest Rates Cuts Will NOT Achieve

Y. B. Karasik,
Thoughts Guiding Systems Corp.,
Ottawa, Canada.
e-mail:karasik@sympatico.ca

TRIZniks pride themselves for knowing the patterns and trends of evolution but are shy on making short term forecasts based on them. The reason is that such forecasts are easily verifiable. Instead TRIZniks prefer safe vague long term forecasts like this: something which is currently a solid will eventually become a fluid and then even a gas. All such forecasts are akin to the promise of Hodja Nasreddin to teach a donkey to speak in 30 years, which he made to the shah. The advantage of such promises and forecasts is that when the time is up it turns out that either shah is up or the donkey is up.

This article is the first venture into short term forecasting based on TRIZ. The subject of the forecast is the effect of the current interest rates cuts on economy.

We start with the traditional TRIZ approach of collecting and analyzing the results of the previous rates cuts. Some of them are pretty fresh on our memory.

In the beginning of 1990s the real estate market was in depression. Prices dropped about 30%. There were fears that a further deterioration of the real estate market could undermine the whole financial system. That is why the Federal Reserve (FED) started slashing interest rates. But the real estate market did not improve. Instead stock market started growing which eventually resulted in the stocks bubble of 1990s. But stock market growth was not a result of the rates cuts either. The more likely causes were emergence of internet and expansion of the Western economies into the markets of Eastern Europe and the former Soviet Union. Thus, those rates cuts had no effect whatsoever on the economy.

Then year 2001 came and stocks crashed. Everybody yelled: "cut the rates !" And rates were cut to the next to zero. But stocks did not recover. Instead the real estate market boom began. After 3 years into this boom (and when interest rates started rising!) stock market started eventually recovering too. But what was the reason of it:

The rates cuts seem to be the least likely cause.

They even were not the cause of skyrocketing of the real estate, as many nowadays realize. People started investing into real estate not because rates were cut but because people lost faith in the stocks as a result of 2001 crash. Besides, lending policies were relaxed and they who previously could not buy a house (either because could not save a downpayment or did not qualify for a mortgage) started buying them. Thus, it is doubtful that those rates cuts had any impact on economy at all.

And then the real estate marked bubble burst. And now everybody cries for rates cuts again. And yesterday the FED slashed the rates for the second time in a row. I predict that these cuts will not achieve their objectives. They will not help real estate. Moreover, they will have no positive impact on economy whatsoever.

To me all this game of rates cuts and increases is just a clever resolution of the contradiction: something has to be done and nothing can be done. The government does something in order to not be blamed for doing nothing. May be TRIZniks should try and apply this new separation principle to technical problems too ?