• Visitors can check out the Forum FAQ by clicking this link. You have to register before you can post: click the REGISTER link above to proceed. To start viewing messages, select the forum that you want to visit from the selection below. View our Forum Privacy Policy.
  • Want to receive the latest contracting news and advice straight to your inbox? Sign up to the ContractorUK newsletter here. Every sign up will also be entered into a draw to WIN £100 Amazon vouchers!

About time interest rates were slashed

Collapse
X
  •  
  • Filter
  • Time
  • Show
Clear All
new posts

    About time interest rates were slashed

    http://www.telegraph.co.uk/opinion/m.../27/do2705.xml

    Financial Crisis: The next decade could be our very own Great Depression

    For the first time in as long as I can remember, I find myself on George W. Bush's side. It's rather lonely. The US President has been wrong about so much during his eight years in office that it is tempting to dismiss his warnings of the impending financial apocalypse as yet more hyperbole - the boy crying wolf.

    Unfortunately, this time I suspect he's right. Treasury Secretary Hank Paulson's bail-out is far from perfect, but without it the American and British economies face a crunch the likes of which we can hardly imagine. But how much money would you put on the likelihood of the lamest of lame-duck presidents driving the plan into law?

    Not much, if the chaotic negotiations in the White House on Thursday night are anything to go by. As the $700 billion plan to prevent the world's biggest economy slumping into the worst recession in living memory was thrown off the road by a cabal of conservative Republicans, the administration suffered an apparent nervous breakdown. Having survived the invasion of Iraq and Afghanistan and the terrorist attacks in September 2001, it took a financial crisis to bring true chaos to the heart of the free world.

    Is this the way the modern economy ends? In a scene of Beckettian farce? If the bail-out does collapse, the consequences are hideous. We are in the early stages of one of the worst world slumps in living memory.

    The financial system on which the economy depends has frozen. In the past few weeks, we have seen some of the world's most venerated names in finance collapse. The US government has in effect nationalised Fannie Mae, Freddie Mac and AIG. Lehman Brothers is no more; Merrill Lynch has been eaten by Bank of America, and even Goldman Sachs has had to go cap-in-hand to Warren Buffett.

    Bush was half-right: one "sucker" did go down. In the late hours of Thursday, America suffered the biggest bank failure in history, as Washington Mutual was shut down by regulators and the remnants sold to JP Morgan.

    History shows that whenever there is a banking crisis, an economic slump, with all that entails - mass redundancies, falling house prices, widespread bankruptcies - invariably follows. The scale of the recession depends on the size of the banking crisis; the past year has brought the biggest systemic financial collapse since the 1930s.

    We know this because economists, including Federal Reserve Chairman Ben Bernanke, have spent decades studying the causes and potential solutions for episodes such as the Great Depression. They may not have discovered a vaccine for financial panics. We make the same mistakes over and over again: borrowing too much, convincing ourselves we have minimised our financial risk, forgetting that money must be paid back and that house prices go down as well as up. But the quality of the cure has improved.

    The worst thing to do now would be to impose medieval remedies. Back in the 1930s, the depression was cemented not by the Wall Street Crash of 1929, but by the hard-nosed policies of the US politicians, who allowed so many banks to fail that they set off a domino effect that took almost a decade of thrift to recover from. It was the financial equivalent of leeches and blood-letting.

    In Britain, we had a comparatively benign 1930s, with not one major bank collapsing and the economy faring far better than the US. This time is different. Two of our biggest mortgage lenders have already had to be rescued. We are as vulnerable as the US - if not more so. Indeed, most likely we are already in recession, and the economy will continue shrinking until at least the latter stages of next year. Unemployment will rise by almost a million. House prices - already down by a tenth - will fall by the same margin again, probably more. The problem is that the recent lurches in financial markets could make this far worse. In short, unless the Government is prepared for some radical rescue plans, the next decade could quite easily be our very own 1930s.

    Which makes it all the more shocking that, so far, the major initiatives announced by the Government and the Bank of England have been tantamount to handing a paracetamol to someone suffering a heart attack. The Bank has pumped billions of liquidity into the market and it injected more cash in yesterday. However, the lesson from the US is that at some point the Government will probably have to spend a significant chunk of taxpayers' cash to keep the financial system - and hence the wider economy - afloat.

    This may involve a similar plan to Paulson's - a toxic waste dump for poisonous investments - or merely an injection of public money into the financial sector. It will be expensive, and the consequence, in the long run, is higher taxes or spending cuts once the economy has recovered. The Government has at least the luxury of learning some snatched lessons from America, though there is no telling how soon our own lifeboat may need to be launched.

    In the meantime, the authorities must get the cost of borrowing down, or watch the housing market tumble to new lows. The Bank of England ought to have cut interest rates some months ago, but, better late than never, it should do so at the next possible opportunity. It is time to stop lecturing the patient; it is time to start applying the cure.

    #2
    In the meantime, the authorities must get the cost of borrowing down, or watch the housing market tumble to new lows. The Bank of England ought to have cut interest rates some months ago, but, better late than never, it should do so at the next possible opportunity. It is time to stop lecturing the patient; it is time to start applying the cure.

    And what's so bad about the house market tumbling? Wasn't it Liebour who said we need more affordable housing....

    Comment


      #3
      Interest rates should have been slashed almost a year ago. Jobs and people's homes should come before inflation, but Brown in his wisdom put the country in a straightjacket with the MPC only having to care about infation. Yet another failure of New lie policy!!

      Comment


        #4
        Originally posted by Cyberman View Post
        Interest rates should have been slashed almost a year ago. Jobs and people's homes should come before inflation, but Brown in his wisdom put the country in a straightjacket with the MPC only having to care about infation. Yet another failure of New lie policy!!
        That's a very un-Tory like attitude, Thatchers Government kept interest rates high for years to combat inflation, those high rates did no favours at all to business and forced tens of thousands of reposessions. In Thatcher and Majors Governments the interest rates were set by the Chancellor too rather than the Bank of England so the blame lay entirely with the politicians.

        Recent base rate drops have not been mirrored by mortgage lenders and some even put their rates up 2 days ago because of the interbank money costs going up.

        Comment


          #5
          If inflation has been largely due to external factors then I can't quite see how it is reduced by higher interest rates anyway. The fear of joblessness in current conditions should curb wage restraint, assuming the goverment has the guts to face up to the public sector of course where market forces do not apply.

          PS Agree with previous, in these conditions rates to savers and lenders are going to be severely modified from base rate and would a reduction just be used to get increased profit?
          Last edited by xoggoth; 27 September 2008, 08:37.
          bloggoth

          If everything isn't black and white, I say, 'Why the hell not?'
          John Wayne (My guru, not to be confused with my beloved prophet Jeremy Clarkson)

          Comment


            #6
            Originally posted by xoggoth View Post
            If inflation has been largely due to external factors then I can't quite see how it is reduced by higher interest rates anyway.
            Foreign investors want to lend into the UK economy to get the better interest rates, and buy sterling, increasing the value of sterling, and as most of our goods are imported, lowering our cost to buy - which lowers inflation in the UK.

            Comment


              #7
              Originally posted by FarmerPalmer View Post
              Foreign investors want to lend into the UK economy to get the better interest rates, and buy sterling, increasing the value of sterling, and as most of our goods are imported, lowering our cost to buy - which lowers inflation in the UK.
              Very true; as much of the inflation is coming from imported commodities then the exchange rate is the key here. Cutting interest rates will not help. However, commodity prices have fallen a lot from their peak earlier in the year.

              If you hold an asset, like a house, of course you don’t want to see the price go down. However, most people believe that they were over valued. They idea that it could be overcome by stagnant growth in house prices and let general inflation discount the excess away is nonsense.

              Each day I find myself moving more towards the “Let ‘em crash” school with regard to the financial institutions. They problem is that they will not lend to each other because of the fears of failure of the counterparty. We have seen negative rates on US government paper, but simultaneously record highs on LIBOR. A bank would rather pay the government to take their money overnight rather than lend it to another bank because they had no confidence that the counterparty would be there in the morning.

              To get that fear out the market cannot be done by these idiotic plans of the taxpayers in the US and UK buying the toxic debt from the banks. Banks have failed in the past and I am sure that they will fail in the future. This is one of those times that the market needs to give people a good spanking to teach them a lesson in how to behave and play nice. Get it over with, have a cry, and then we can get back to some sort of order. This has to apply to idiotic bank lenders and equally idiotic borrowers.
              Last edited by HairyArsedBloke; 27 September 2008, 10:39. Reason: Added YouTube link to 'Airplane' clip - nb. KentPhilip original idea.
              How did this happen? Who's to blame? Well certainly there are those more responsible than others, and they will be held accountable, but again truth be told, if you're looking for the guilty, you need only look into a mirror.

              Follow me on Twitter - LinkedIn Profile - The HAB blog - New Blog: Mad Cameron
              Xeno points: +5 - Asperger rating: 36 - Paranoid Schizophrenic rating: 44%

              "We hang the petty thieves and appoint the great ones to high office" - Aesop

              Comment


                #8
                Originally posted by TykeMerc View Post
                That's a very un-Tory like attitude, Thatchers Government kept interest rates high for years to combat inflation, those high rates did no favours at all to business and forced tens of thousands of reposessions. In Thatcher and Majors Governments the interest rates were set by the Chancellor too rather than the Bank of England so the blame lay entirely with the politicians.

                Recent base rate drops have not been mirrored by mortgage lenders and some even put their rates up 2 days ago because of the interbank money costs going up.
                That is very true. But there is now a very real risk of deflation in 2 years time? If that happens times will get very tough indeed.....

                Comment


                  #9
                  Originally posted by HairyArsedBloke View Post
                  Very true; as much of the inflation is coming from imported commodities then the exchange rate is the key here. Cutting interest rates will not help. However, commodity prices have fallen a lot from their peak earlier in the year.

                  If you hold an asset, like a house, of course you don’t want to see the price go down. However, most people believe that they were over valued. They idea that it could be overcome by stagnant growth in house prices and let general inflation discount the excess away is nonsense.

                  Each day I find myself moving more towards the “Let ‘em crash” school with regard to the financial institutions. They problem is that they will not lend to each other because of the fears of failure of the counterparty. We have seen negative rates on US government paper, but simultaneously record highs on LIBOR. A bank would rather pay the government to take their money overnight rather than lend it to another bank because they had no confidence that the counterparty would be there in the morning.

                  To get that fear out the market cannot be done by these idiotic plans of the taxpayers in the US and UK buying the toxic debt from the banks. Banks have failed in the past and I am sure that they will fail in the future. This is one of those times that the market needs to give people a good spanking to teach them a lesson in how to behave and play nice. Get it over with, have a cry, and then we can get back to some sort of order. This has to apply to idiotic bank lenders and equally idiotic borrowers.
                  It should have happened to LTCM in 1998 - by slasing interest rates then and in 2002 the "Greenspan put" got us to the current situation. I don't mind one going under - it is if it is more than one we should worry.

                  Comment


                    #10


                    I'm Spartacus
                    No next.
                    Yes Next.

                    Sorry but I could not let an economic thread have a whole page without some total nonsens. Its just not cuk form!

                    Comment

                    Working...
                    X