Well, it all depends on the current market conditions, as well as events around the world. The Fed just threw a lot more money to the banks. Turns out inflation worries were badly off. The dollar’s value, instead of declining, is increasing. This has to do with the European debt situation. People are flooding towards dollars.
Even if we hadn’t had the European situation, the economy is close to or in deflationary mode. That’s worse than inflation, because everyone holds off on spending until their dollars are worth more. Inflation encourages people to spend now, while their dollars are worth more, instead of waiting. And we need spending like a drunkard needs a pissoir.
You want a little inflation. I don’t know what the ideal level is. Maybe two to three percent. We have barely one percent, if that, right now. We need to prime the pump, make loans cheaper so that people will be encouraged to buy now, before rates go up, perhaps due to inflation.
Inflation is not always your enemy. There can be too much fiscal tightness. We are in complicated times, and events such as the recent dumping of new money into the system, which we would expect to lead to inflation and devalue the dollar has had the opposite impact.
It’s all relative. Relative to so many other things that even the best economists are surely guessing most of the time. Who would have predicted the European debt crisis (or whatever it is) would come along just when we want the dollar to get cheaper?
Oh, as to banks making loans in times of inflation—that’s the risk they take. Inflation is always rising or falling, and lenders and borrowers are always making bets on which way inflation will go. It never stops lending from happening. What stops lending is lack of confidence. Inflation is not a problem, per se. Banks just raise rates or lower them, depending on the markets. Inflation gets to be a problem when it exceeds five percent (I’m guessing). We are far from that, now.