Comments on: Is the Monetary Policy Committee as incompetent as the government? http://johnredwoodsdiary.com/2007/12/05/is-the-monetary-policy-committee-as-incompetent-as-the-government/ Incisive and topical campaigns and commentary on today's issues and tomorrow's problems Thu, 09 Feb 2012 20:05:58 +0000 hourly 1 By: Edward C D Ingram http://johnredwoodsdiary.com/2007/12/05/is-the-monetary-policy-committee-as-incompetent-as-the-government/#comment-650 Edward C D Ingram Thu, 06 Dec 2007 15:02:10 +0000 http://www.johnredwoodsdiary.com/2007/12/05/is-the-monetary-policy-committee-as-incompetent-as-the-government/#comment-650 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. 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.

]]> By: Tony Makara http://johnredwoodsdiary.com/2007/12/05/is-the-monetary-policy-committee-as-incompetent-as-the-government/#comment-649 Tony Makara Wed, 05 Dec 2007 14:44:24 +0000 http://www.johnredwoodsdiary.com/2007/12/05/is-the-monetary-policy-committee-as-incompetent-as-the-government/#comment-649 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. 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.

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