Why sometimes low interest rates fail to stimulate economy?

Answer 1

Manipulating interest rates have historically been used by the Federal Reserve Bank(Fed) in attempts to stabalize the nation's economy for many, many years. When the economy is growing, the Fed raises short term interest rates to slow down inflation. Invesly, when the economy goes bust, they lower the interest rates to spur lending, investment, and consumer spending. However, our latest, and convincingly most dramatic recession is spawning new challenges for the Feds. One such side-effect of this global financial crisis is frozen credit - the balance sheets of banks are simply too congested and no one is willing to lend money to each other. Is this respect, Fed chairman Ben Bernanke's recent near-zero interest rates have failed to encrouage banks to lend to businesses, invidivuals, and other banks - there's simply no certainty that anyone will be paid back. In the past however, as recently as the begining of this century, former Fed chairman Alan Greenspan attempts at spurring the economy through low interest rates(after the dot-com crash of 2000) HAVE succeded as evidenced by the housing boom(2002-2007). The housing boom is responsible for subprime lending - the heart of the financial crisis and credit freeze we're now experiencing. Low interest rates won't work this time, so go fish, Bernanke!