Saturday, January 10, 2009

Mostly sensible article on how the BoE has failed

Cutting interest rates is not the answer

One thing is for sure – relying on the Bank to save the economy with rate cuts is no longer an option.

Posted by paul @ 11:43 AM (1726 views)
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26 thoughts on “Mostly sensible article on how the BoE has failed

  • japanese uncle says:

    Pretending to have panicked, BoE is just helping banks to hoard cash at the cost of savers as banks would never pass on the IR reduction to the borrowers. As I repeatedly mentioned earlier, BoJ did exactly the same, to be of little help in recovering the economy. BoE, Treasury, banks and all concerned are fully aware of that. They believe that they can convince or fool the public just by threatening ‘Systemic Risks of financial meltdown for the first time since 1929′.

    What we can do as savers is just switch banks as frequently and quick as possible whenever they reduce IR, to punish their arrogant complacency. Recent behavior of ING Direct (massively reducing and then increasing IR apparently in view of their savers’ exodus) clearly proves this point. Let’s keep them scared and fearful of the savers wrath at all times.

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  • Japanese bank example is not all that valid. If you want to go there the lack of write downs by the Japanese banks created a very different outcome compared to how quickly the British banks have taken large write downs.

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  • The irony is that the banks have already lost liquidity in the securitization markets and hence now rely even more on savers deposits, so cutting rates is actually the last thing they should be doing.

    I’m sick of all the Keynsian refernces to 1929. They are not relelvant. In 1929 the depression was in full flow before the monetary policy reacted. That’s why Keynes seemed to work. Surely the 70’s taught us that if we are not in depression, Keynsian spending is even more damaging than having a natural slowdown. It’s equivalent to jump-starting a car when the engine is still running. It worked when the car was dead in 1929, but it’s dangerous and pointless when the battery isn’t completetly flat.

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  • gardeniadotnet says:

    2. jackas said… The irony is that the banks have already lost liquidity in the securitization markets and hence now rely even more on savers deposits, so cutting rates is actually the last thing they should be doing.

    So why are they doing it? Haven’t you worked it out yet?

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  • gardeniadotnet says:

    Seem like I’ll have to provide the answer myself:

    The banking system effectively collapsed, August 2007.

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  • @Gardenia,

    I agree. The banking system was holed below the water line when Northern Rock went down. It was a failure of regulation.

    The government have since been trying to fix the system. The last cut of 0.5% shows just how ineffectual they have become. For the past 3 months I’ve read articles suggesting James Daley’s conclusion:

    “The Government (should be)….. helping to increase liquidity for the banks, investing in job creation and cutting taxes where necessary are all measures that can help. One thing is for sure – relying on the Bank to save the economy with rate cuts is no longer an option”.

    …The problem is that Gordon doesn’t have the cash. He never put any away in the better years of the UK economy.

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  • gardeniadotnet says:

    5. alan said…The problem is that Gordon doesn’t have the cash. He never put any away in the better years of the UK economy.

    Hence the money printing that will inevitably have to take place before long.

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  • Alan

    Could GB have put enough money away in the good times – better to have not let things get out of control, when they clearly were.

    All

    Any guesses as to how long B o E will keep rates below 2% ?

    And will savers shopping around force mortgage interest rates up regardless of where the B o E base rate is ?

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  • gardeniadotnet says:

    7. str 2007 said… Any guesses as to how long B o E will keep rates below 2% ?

    Anyone can guess – below 2% for 3 months but 15% by the end of the year – see what I mean, it’s easy!

    An informed prediction is another matter altogether. Anyone want to try? I think not.

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  • 7. str 2007 said…

    All

    Any guesses as to how long B o E will keep rates below 2% ?

    And will savers shopping around force mortgage interest rates up regardless of where the B o E base rate is ?

    crunchy Below 2% at least 9 months. Brown wants to make lending as cheap as possible whilst deleveraging/fake deflation is still taking place.

    I think saver rates may rise by a little but don’t know when. The big thing to watch is the money supply. That’s the biggy here!

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  • I’m going to put my neck on the line and predict that Blanchflower will vote for a rate cut at the next meeting.

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  • Sorry that should be head on the block!

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  • I can’t understand why anyone wants to return to the economy pre-August 2008, which was so obviously flawed.
    Also since the human race is rapidly consuming itself out of existence, this recession would seem a good opportunity to reduce consumption and maybe give the planet a bit of a breather at the same time.

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  • gardeniadotnet says:

    12. cyril said… I can’t understand why anyone wants to return to the economy pre-August 2008

    At the risk of being pedantic, August 2007 was the approximate peak of the derivatives bubble and the start of the ‘economic downturn’.

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  • From the article: “However, there’s little evidence that this extra cash is being spent on the high street. Instead, I suspect many of those with lower mortgage payments have been using the spare money to pay down their debts quicker, or to bolster their savings.”

    Over-hearing a conversation in my office on Thursday when the interest cut was announced. One of the guys commented how the cut was designed “to get us all spending”, and was then asked if that’s what he’d do. He replyed: no chance, any savings from his regular mortgage payments he’d use to pay the mortgage down anyway.

    I think many people would be using money saved from lower mortgage rates to make some voluntary overpayments, to keep themselves in as much ‘positive equity’ as they can as house prices fall.

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  • happy mondays says:

    gardeniadotnet said…7. str 2007 said… Any guesses as to how long B o E will keep rates below 2% ?

    Anyone can guess – below 2% for 3 months but 15% by the end of the year – see what I mean, it’s easy!

    Me no understand gardeniadotnet? How can this be, i have no head for all this finacial twisting & turning.

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  • happy mondays says:

    Sorry thats financial, obviously no head for spelling either!

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  • 15. happy mondays

    Brown or BOE will leave raising interst rates till too late as usual. 9 months below 2% at least unless there is a run on the pound.

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  • @phdinbubbles

    Time to chop off your head! Blanchflower is no longer on the HPC. Makes you wonder why, when the rest finally lose their senses and start to agree with him.

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  • The low rate is to stop a flood of repossessions – they can acheive that if nothing else.

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  • What we can do as savers is just switch banks as frequently and quick as possible whenever they reduce IR, to punish their arrogant complacency. Recent behavior of ING Direct (massively reducing and then increasing IR apparently in view of their savers’ exodus) clearly proves this point. Let’s keep them scared and fearful of the savers wrath at all times.

    Savers need to exercise more power. We should all target a bank on a particular day and ALL of us take our money out. – That’s the power of the savers used to smash the explotation of the banks.

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  • IR 15% by end of year?

    Easy. They are being kept artificially low for political purposes. They will go up, and Gordon will go at the same time.

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  • At last the myth that the BOE was independent has finally ended.

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  • stillthinking says:

    GB could not really have put away money during the boom, because there was no real boom. He could however, have held onto the virtual profits which are now collapsing our economy, in the same way you take a dangerous toy away from a child.
    Still sterling is holding up…!?

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  • GB could not really have put away money during the boom, because there was no real boom.

    At the very least there would have been a huge amount of revenue from stamp duty…….so there were opportunities to ”put something away”……

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  • Thanks guys – no clue then, me neither.

    Did wonder if there was something other than the dmise of sterling that force their hand, or if indeed savers could effectively demand higher rates from banks.

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