Mixed opinions on interest rates

By the end of Thanksgiving week, a not especially gratitudeinspiring word was on American lips: "recession."

Monday reinforced the thought, as the Dow Jones industrial average sank 237 points, putting the index 10 percent off its high-water mark for the year and signaling a bona fide market correction. Not a good sign. And then, on Wednesday, stocks shot up. Why? The immediate answer is that Donald Kohn, vice chairman of the Federal Reserve Bank, spoke publicly of how the uncertain economic outlook requires "flexible and pragmatic policymaking." In the usually cryptic language of the Fed, this is as close as one is likely to get to a promise to cut interest rates.

That's how Wall Street heard Kohn's words, setting off a stock-buying spree that reflected traders' belief that the easy credit that has buoyed the U.S. economy would not dry up just yet. But when the Fed meets on Dec. 11 to vote on a potential rate cut, it will do so in the midst of a debate at the Bank and in wider economic circles about whether continuing to cut rates is really such a good idea.

On one side of the debate are those, like Kohn, who think that there are times when it's necessary to use interest-rate cuts to stimulate the economy. One could look at this side as the short-term thinkers. On the other side are those who think that cutting rates now will reward (or at least fail to punish) those financial institutions that made the bad credit decisions that created the subprime mortgage mess in the first place. We might call these the long-term thinkers.

What the short-termers have going for them is the acknowledgment that ordinary Americans do not eat or put a roof over their heads in the long term. As Kohn put it, "People should bear the consequences of their decisions about lending [and] borrowing ... [but] when the decisions do go poorly, innocent bystanders should not have to bear the cost."

The long-termers, however, believe that innocent bystanders will have to bear the cost sooner or later, and that keeping interest rates where they are is not only about making financial institutions bear the consequences of their actions - it's also about choosing whether we want a hard or a soft landing from our national flight on the wings of credit. They look at the huge amounts of debt that American families are racking up and say, sooner or later, the bill will have to come due. The bursting of the housing bubble and the resulting wave of home foreclosures seemed to represent just such a day of reckoning.

But if the Fed opens the credit taps wider now, that day may be postponed only to face potentially greater economic pain down the road. The big question is whether such pain can be postponed indefinitely.

Long-termers say no, and point out that the decisions about when that day of reckoning comes may ultimately rest with nations such as China that hold so much of America's debt.

Short-termers say that the U.S. economy is fundamentally strong and has shown remarkable resilience in recent years. So why take a poison pill to avert a disease that may never arrive? Which side to believe? Americans of a certain age know that good economic times are not assured, but this country has known relative prosperity for so long that memories of leaner times have all the resonance of ancient history.

Dan Rather, a native of Wharton, was Managing Editor of the CBS Evening News for 24 years. His column appears by arrangement with King Features Syndicate.