What options remain after rate cuts?
Fraser Nelson 12:55pm
As expected, base rates are down half a point to 1.5% - so, yet again, drinks are on those lucky few with variable mortgages. I suspect they'll hit 1% before Easter. Then what? "Nobody is talking about printing money" says Alistair Darling - but this is a little Brownie. Quantitative Easing - the equivalent of printing money - is being spoken about by everyone and can come in many forms. The Bank of England can start buying stuff - Treasury IOU notes, company bonds, or even shares. So you'd attempt to lower market interest rates by boosting asset prices. Darling is right: he can fund the deficit through issuing gilts, then have the BoE buy the gilts without another banknote printed. Or the BoE can order the state-owned banks to start lending more money to less credit-worthy people, thereby shovelling more cash into the system. But this is how Fannie Mae got into such trouble: private banks didn't compete with non-commercial lending decisions and the state ended up taking a huge chunk of the mortgage system.
Anyway, there are a million ways to debauch the currency without turning on the printing press. With the BoE running out of rate cut options, you can bet Brown will be as inventive as ever.
UPDATE: The Royal Institute of Chartered Surveyors said the rate cut won't make a blind bit of difference in the mortgage market. The cut, it says, is "unlikely to provide any meaningful encouragement for banks to increase the availability of finance to either households or businesses. Indeed, the risk is that lenders are set to become even more restrictive over the coming months in the face of the worsening economic climate. With many first time-time buyers unable to find the finance to take an initial step onto the housing ladder and existing owner-occupiers needing to move similarly blighted, the time has come for the government to take direct action to restore an orderly property market.”
In other words: forget your rate cut, and let's move on to Quantitative Easing - ie, force Northern Rock etc. to lend at low, non-commercial rates. In my view, RICS is being hysterical and asking for a bailout which it should emphatically not have. Greenspan spent ten years trying to cover up economic slumps with cheap money, and look where that got us! All eyes are now on next month's BoE meeting: that's when the other weapons may be wheeled out.
But the RICS is right to point to the disconnect between base rates and mortgage deals. Here's the 75%LTV two-year fix, courtesy of Graham Turner:
Previous
Rhoda Klapp
January 8th, 2009 1:24pm Report this commentCan anyone explain to me just how 1.5% is going to achieve something that 2% could not? To whom is the extra 0.5% supposed to make a difference?
And, if you think it WILL work, give an example of a country which has managed to get out of a recession by lowering rates to silly levels, confirming this (to me) dodgy economic theory.
C Powell
January 8th, 2009 1:25pm Report this commentThe currency is already being debauched. It's just going to get worse and anyone with any assets will be stuffed.
Frankly, a do-nothing Government would be better than this.....
luke
January 8th, 2009 1:27pm Report this commentYou are opposed to any quantitative easing or supportive?
Tiberius
January 8th, 2009 1:39pm Report this commentI imagine Capt Darling is trying to avoid the charge that he'll be storing up inflation problems.
Perhaps a more knowledgeable poster will contribute, but I would have thought a little bit of inflation, when faced with deflation, might help a little.
But Capt Darling has shown that he can disagree with his boss. He's probably afraid that if the printing presses roll, Brown will repeat his mania over the pensions raid and gold sale (I'll take £50b, no make that £100b; sell at the bottom, no pre-announce and force the price lower), and grab hold of the handle and crank it, tongue hanging out, until Weimar Republic Marks become an atractive alternative.
Short the UK
January 8th, 2009 1:46pm Report this commentIt didn't work in Japan and our bubble is bigger. I highly recommend seeking out the thoughts of trend forecaster Gerald Celente. He is totally out of consensus. I think he is correct. His motto: current events form future trends. The depression began in Q4.
Angry of SE1
January 8th, 2009 1:46pm Report this commentSee John Redwood "quantitive Easing " has begun
Fraser Allonby
January 8th, 2009 1:48pm Report this commentHow about deleveraging? some Darwinian pain and increasing savings recapitalising the crumbling UK PLC? Please can stop trying to reinflate the busted flush.
Steve
January 8th, 2009 1:52pm Report this commentHmm, is that the sound of the printing presses whirring into life? Prepare for a dose of full on Mugabonomics.
Paul B
January 8th, 2009 2:06pm Report this commentI think Rhoda may have hit upon something inadvertently. Doubtless Brown & Co will try to make a virtue out of having historically low rates. This needs to be be backhanded back them hard, with loads of top spin.Go & Dc need to point out that the low interest rates have only come about because of the disaster Brown has made in the running of the economy.
As an aside,I would positively welcome IMF moving in now, although embarrassing for the nation, its the only organisation thats going instill some sense into the economy, which has fallen off a very large cliff. Brown & Co are clueless, totally clueless.
PayDirt
January 8th, 2009 2:07pm Report this commentIf every country devalues their currency (this is a global problem) then it’s a race to the bottom and it’s not necessarily a worry about “printing” more sterling. Investors will usually look to land where there is the best hope for future value, with conservative government the UK should be relatively OK. It gets messy if besides devaluing to gain export/import advantage, national groupings also start to impose trade protection measures, a al 1930’s. As Martin Wolf is saying in FT, a lot depends on US and China rebalancing.
Wily Trout
January 8th, 2009 2:07pm Report this commentRaise interest rates! It will then be more profitable for banks to lend, and they can balance their books at the same time. And savers will invest more for banks to lend with. It's the lack of available credit that seems to be biting businesses, not the cost of it. All the low interest rate does is encourage more irresponsible borrowing.
Raised Eyebrows
January 8th, 2009 2:20pm Report this commentWould a little 'debauched' currency be such a bad thing Mr Nelson? Glad to see you're keeping up with your Keynes, but surely the boost our exports would get would strengthen the economy.
Even if 'booze-cruises' become slightly less economically sensible...
Ian C
January 8th, 2009 4:02pm Report this commentThe headless chickens are centre stage, right now. RICS calling for gov't "to take direct action to restore an orderly property market” is a special pleading of the worst most blatant and short sighted kind. And when could gov't do anything it has no right to be doing do it (or anything for that matter)effectively?
The next bull market will start when interest rate cuts are reversed, not before.
oldtimer
January 8th, 2009 4:35pm Report this commentNot so much an option as an intended consequence is "screw the savers" to help fund the government deficit at minimum cost to the Exchequer.
This is achieved as follows:
(1) FSA requires banks to raise their capital ratios.
(2) The extra capital raised by the banks must be held in government bonds - newly issued by the Bank of England.
(3) interest rates are reduced to zilch, thereby screwing savers who have c1£trillion on deposit.
(4) Put about talk, see Anatole Kaletsky in the Times, that savers should be penalised for being savers!
You just have to join the dots tosee how Brown intends to destroy private savings. It sounds like a scheme that even Mr Madoff would be proud of. What will be next I wonder - outright expropriation?
The bahaviour of this government is a national scandal. The only question is how much more damage will it do to our national fabric and future before it is removed from office.
Verity
January 8th, 2009 4:53pm Report this commentPaul B, what makes you think that Rhoda K hit on your point "inadvertently"?
Paul B
January 8th, 2009 6:02pm Report this commentMistake,I withdraw graciously Rhoda, thank you Verity.
TGF UKIP
January 8th, 2009 6:08pm Report this commentCOFFEE HOUSERS, DON'T FORGET TO GO TO:
http://petitions.number10.govt.gov.uk/Fianance/
to sign up to Alex Wallace's petition:
"We the undersigned petition the Prime Minister to resign due to gross financial incompetence in running the British economy"
A million plus signatures means the media have to pick it up as they did with the Jeremy Clarkson and traffic charging petitions.
So get signing and don't forget to tell your mates.
PS "Fianance" is not my misspelling, that's how Jacqui's illegal immigrants working in No. 10 choose to spell it.
Hysteria
January 8th, 2009 9:36pm Report this commentTGF - only 800-odd at the moment - big in comparison to many others but tiny really in comparison to the problem
apathy rules - if you like, whatever......
Timestheyareachanging
January 9th, 2009 3:01pm Report this commentToo little too late, as the white rabbit might be quoth to say. Sadly the interest rate reduction should have happened in Q4 of 2007 after Lloyds TSB should have been allowed to take over Northern Rock etc. Raising interest rates now is the only way, methinks or all the savings will fly from the Country.
Maybe Jeremy Clarkson could also lead the way on the UKIP petition so that Broon goes asap. He has always made a mess and the labour party must have known he was just a big spending spree with more spin than Blair.
hadrian
January 9th, 2009 8:48pm Report this commentOne wonders what savings Anatole Kaletsky has stached away 'unproductively'? Honestly, did you ever read such tripe in your life? One minute we're tole we're all in this mess owing to utterly irresponsible borrowing and debt, next we're being told- oh, by the way, don't tighten your belts at all, don't be prudent, get out there and splash out even more dosh you don't actually really have the right to ( you debt ridden lot) or if you do have the right to it, having painstakingly and with some present self sacrifice, acculumulated over the years to finance a modest income and not be a complete welfare dependent- well, never mind, get on a mad spending spree, that's our 'big plan' to pay our way in the world. Any dimwit can see the crashing incoherence here.
Bungler Broon and co are indeed 'bankrupt' ideologically as well as financially.
Sabine K McNeill
January 9th, 2009 10:30pm Report this commentThe questions are "who prints money?", "at what cost?" and "for whom?"
Notes used to be printed and coins minted as Cash: free of interest, by sovereign Nation States. But nowadays, nearly all (97%) money in circulation is Credit, created out of thin air, by banks, at interest.
So if the Government were to print money and spend it into circulation, GREAT. But it thinks it has to borrow, bailout and practice usury (making money out of money) on every conceivable level...
What if politicians and economists studied the effects of compounding interest on interest over time?
With 'globally warm' regards,
Sabine K McNeill
Organiser, Forum for Stable Currencies
http://tinyurl.com/666rwd
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