Although the Fed has slashed short-term interest rates by 35 percent from their prerecession peak, bank lending has been flat since May. More important, the growth of total private credit (including such lenders as insurance and mortgage companies) is one third of its normal rate, the lowest on record, says Lyle Gramley, a former Fed governor. “The recovery simply cannot continue into 1992 with so low a rate of growth in private borrowing,” says Gramley.
The Fed could fix the problem by cutting rates until borrowing becomes irresistible. That’s a move the inflation-wary Greenspan won’t make lightly: it means putting rates far below the level normally needed for a recovery–thus risking a credit explosion and a rekindling of inflation. But without it, Americans are in for a long, hard winter. And Bush may be in for a tougher election year than he thought in 1992.
