Saturday, September 27, 2008

The role of central banks in the financial crisis

The role of central banks in the financial crisis

We've read a lot in recent months about central banks 'injecting' money into markets – but how does this work? And how deep are their pockets?

Posted by damien @ 02:01 PM (678 views)
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3 thoughts on “The role of central banks in the financial crisis

  • They are restricted by inflation in the end. This is from Jim Callaghan (1976).

    “We used to think that you could spend
    your way out of recession … I tell you in all candour that option no longer exists, and in
    so far as it ever did exist, it only worked on each occasion since the war by injecting a
    bigger dose of inflation into the economy, followed by a higher level of unemployment as
    the next step”.

    Now this is where I don’t really follow because what would normally be inflationary measures by government borrowing are not going to be inflationary during a period of credit collapse. So the Japanese government debt expansion to 200% of GDP never shifted inflation above zero. The government took out debt instead of the population at large. Which to me seems preferable in some ways.
    The UK government is not going to borrow to stimulate the economy with additional government spending though, which is different, they are going into debt to maintain the existing level of spending. Which won’t be additional help for the private sector.

    Anyway, the UKs economic woes are simple, the workers in the street has insufficient money to buy things from each other leading to fewer and fewer opportunities for employment, and making their debts harder to repay.

    The only solid answer is not going to be coming from the BoE, the answer is to allow them(us) more money to repay debts, buy food, cars etc. The massive chunk of money the poor brit spends on debt repayment cannot be eased by accountancy tricks, so the only answer will ultimately be to reduce taxes and by doing so the size of the public sector. As long as we delay doing this inevitable task, which New Labour will never do, then the situation will get worse and worse, unemployment will get higher and higher, and any absurd moves to shift people into jobs in the already bloated public sector will simply increase the price of our food and energy imports, vicious spiral etc.

    “When we reject unemployment as an economic instrument — as we do — and when we reject also superficial remedies, as socialists must, then we must ask ourselves unflinchingly what is the cause of high unemployment. Quite simply and unequivocally, it is caused by paying ourselves more than the value of what we produce. There are no scapegoats. ”

    This is the same speech. The UK government is, and has been, spending more than UK production can spare on the public sector, and we will have unemployment as a consequence. The tragedy is that New Labour will not accept the need for temporary unemployment of former public sector workers, so they can, amazingly enough, get jobs doing something else, and so we are completely doomed with two years of the situation worsening.

    Which does mean house prices continue to go down, and almight crash etc etc.

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  • The government could also, and this will probably happen anyway (thanks to scared banks, -not- New Labour who have said nothing apart from basically threatening some kind of high price control for housing), mandate that instead of bidding entirely with borrowed funds for houses, sending prices into the stratosphere, buyers must compete on the basis of deposits(!). Thereby reducing the amount of money that gets directed to debt servicing, and so increases disposable income. Too late for many now of course.

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  • “Anyway, the UKs economic woes are simple, the workers in the street has insufficient money to buy things from each other leading to fewer and fewer opportunities for employment, and making their debts harder to repay.”

    This is utter nonsense. if there is little money around then prices simply drop. People buy things off each other by working for each other. we only use money to recognise who has done work that benefits us and as long as we work we do not have to worry too much (except if you’ve bet on a /dropping/ value of the pound by taking out a loan in pounds at 5 times your salary – oops 😉

    If we do not export things so that people that import food will not increasingly desire pounds at the same rate as people here then people here will sell up their land for arable purposes and move out making themselves wealthier (by moving nearer the existing food supplies) along with those who stay where the new food supplies are setting up.

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