If the Monetary Policy Committee of the Bank of England wishes to be anything more than overpaid members of an academic seminar watching as the money markets go their own way, they need to cut interest rates tomorrow.
Market rates are almost 100 basis points or 1% above the MPC’s rate. Money policy is far too tight. The MPC is not in control of the markets.
If the MPC dithers and concentrates on the short term increases in prices, it will make the credit crunch worse. It will be as incompetent as the rest of the Brown government. House prices are falling, commercial property prices are falling, consumer confidence is falling. What more do they want? How much damage do they want to do?
Surely by now MPC members have learnt that changes in interest rates have an impact many months into the future. The inflation we are living with today is the result of keeping interest rates too low many months ago, and the consequence of ill considered banking regulations that encouraged off balance sheet excess. When will the regulators of the world revisit their folly, the Basel rules? When will they start to take some of the blame for the mess?
Today the credit crunch is the result of the unravelling of that mistaken banking regulatory model, and the result of interest rates that are too high.
The Bank of England, shorn of its old responsibilities to manage the public debt and to monitor the day by day balance sheets of the clearing banks, has lost its touch in the money markets. Gordon Brown’s botched “reforms” of the Bank of England did not make the Bank more independent, they made it less powerful.
IT IS VERY EASY : CUT RATES, CUT THEM BY AT LEAST 50 BASIS POINTS, CUT THEM NOW.
December 5, 2007
Another well put critique of the MPC. It is something of a paradox that the MPC has become more political since the days of its so-called independence. Knowing the hands-on approach of Gordon Brown I fully expect that there is political pressure on the MPC to do the governments bidding. The MPC, like the government seems to be continually playing catch-up and responding after events rather than pre-empting them. Gordon Brown will not want to see a cut in rates, so we almost certainly won't see one.
December 6, 2007
The problem lies with the lending system. It is unable to transmit a squeeze on interest rates in good order. There are nominal interest rates and there are real interest rates and there are true interest rates. Real and true interest rates are not volatile but it is these that govern the demand for short term credit such as overdrafts and working capital. The central bank has to curb these and so has to keep true interest rates up. (This is the excess rate above the rate of growth of average earnings – which governs the limit to credit expansion).
Longer term loans are supposed to respond to the same thing – and they could do so. But they choose to respond to nominal rates instead. Therefore long before the true rate rises, there is a crisis inthe housing market. The central bank is between a rock and a hard place.
Unlike true rates, Nominal rates are very variable. Result: –
Result: house price bubbles on the way down and the opposite on the way up with wealth effect on spending out of control.
PLUS
Massive arrears and lost consumer confidence on the way up as the true value of the mortgage payments gets forced up out of reach, by the same slavish following of nominal interest rates.
In practice what happens is that too little value is paid on mortgages when interest rates are low and too much is paid in the early years when they are high.
With the Ingram Lending and Savings (ILS) System, this problem is resolved, and lenders also have beeter control over their own cash flows.
There is a lot more that I can say, and that I am saying at seminars given to universities on the technical side of this new system.
The banks are not seeing the damage done, to the economy or to individuluals. They have only concerned themselves with insuring their own risk – not that of the population or that of the economy. Even that risk insurance has now broken down under its own weight. It is time for a new look. It was offered in 2004 in two specialist journals, but then they said that there is no problem. Who says?
Edward C D Ingram.