Many economists believe a Recession has already begun.

The unemployment rate is at a decade high, record numbers of people are being forced from their homes and Wall Street is anything but stable.

Monetary policy affects the economy with long and variable lags. This much we know. How long depends on the state of the economy in question.

In 2001, the US got away with an unusually short recession helped by aggressive interest rate cuts and an expansionary fiscal policy. But in Japan in the early 1990s, and in Germany in the early part of this decade, it took ages for low interest rates to help the real economy.

One of the reasons was that those recessions were aggravated by crises in the financial sector itself. I fear that the US recession of 2008 will be similar in quality though not necessarily in length and depth to those in Japan and Germany, rather than to the US recession in 2001.

Interest rate cuts work their way through to the real economy by a number of transmission channels. During the 2001 recession in the US, the most important was housing credit.

The rate cuts came at a time when the housing market was already booming. They turned the boom into a super-boom. Inflationary expectations were low. People expected interest rates to remain low. It was a great moment to take on extra debt, and this was precisely what Americans did.

The current US downturn could not be more different. House prices are falling, and have further to fall before reaching a more sustainable level (in terms of the price-to-rent ratios as well as several other measures). Core inflation has been above the Federal Reserve's comfort zone for some years now. There is no way that either the Fed, the Bank of England or the European Central Bank could, at this stage, create another housing boom even if they wanted to. Housing downturns have a strong dynamism, which is not easy to break. This is not a great time to take on debts, but to pay them off.