Well no one really knows because this is the first time rates have hot rock bottom.

The US Federal Reserve is writing a new economic chapter by following the theory of British economist John Maynard Keynes.

Keynesian economic theory includes ‘quantitative easing’, which is what the US government is following now.

The problem is the banking system is broken and credit has dried up because the banks have lost so much money on bad investment decisions. The banks have no confidence in lending to each other as they don’t know if the loan will be repaid or if the borrowing bank will collapse, leaving the lending bank in more debt.

The solution is to encourage the banks and credit markets to free up money by creating a confidence culture. This is why the government has poured billions of taxpayers’ cash in to rescue schemes to shore up the banking system.

Traditionally, raising and lowering interest rates control money supply and spending. Even this has failed to ease the system, so in the US, the Federal Reserve wants the banks to lower interest rates and has taken the lead by underwriting bad debt.

In the UK, the Bank of England and Treasury are looking at following the same policy – dropping interest rates below 1%, which for all intents and purposes is 0%.

For businesses and consumers, this means the cost of borrowing falls even further.

The worry is if the policy fails, speculators will force down the value of the pound.

The other options are:

• Do nothing. Other economists argue that shoring up a failed system is just delaying the inevitable crash and governments should let a new system rise out of the ashes of the recession.  

• Impose fiscal policies by public spending and cutting taxes – like the VAT cut announced recently and the public works program announced by President –elect Obama in the US.