Sunday, March 1, 2009

MPC admit should have paid more attention to HP Inflation

IRs predicted to reach 0.5%

They could have re-written this article with a single sentence: "The MPC and BoE should have listened to housepricecrash.co.uk"....

Posted by voiceofreason @ 08:51 AM (1405 views)
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23 thoughts on “MPC admit should have paid more attention to HP Inflation

  • Sorry but I just can’t see how 1% down to even 0% is actually going to do any more for anyone.

    As previous articles have hinted at, with savers (who apparently out number borrowers) getting no interest on savings, are refusing to go out and spend. And are actually cutting back.

    The borrowers will borrow anyway and spend, it’s what they do, they are addicts. You don’t have to make the money cheap for them, they’ll take it and spend it anyway.

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  • japanese uncle says:

    They may have been stupid, but certainly not this bloody stupid.

    Just another incompetence defence. They had known what horrific mess should follow all along.

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  • yes if prices are falling in a zero IR rate environment it’s a pretty emphatic signal to most to stay well clear.

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  • Incidentally and aplogies as its self evident but if the housing bubble had been aggresively targeted here, in europe and the us we would have gone through a mild to medium recession (what the bubble was specifically engineered to avoid) ,from which we would now be emerging.

    If only!

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  • Should n’t this Gieve geezer be facing the same kind of public criticism or disgust as Polly Toynbee calls it as Fred Goodwin is getting?How you can convince yourself that house price inflation does n’t matter and that only wage inflation needs attending beggars belief.The standard buffooonish argument as evidenced by the bankers in front of the Treasury Select Committee is that everything was going just fine
    then something unexpected hit them. This is much the same as saying that three-quarters of the Titanic’s crossing was a complete success.

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  • Good to see some acknowledgement of the disastrous role the MPC have played in the collapse of our economy.
    Their panic IR cut in 2005 when the property market wobbled a bit reeked of vested interest and they should be held to account for this.

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  • We all are aware that the current low interest rates are not being passed on to consumers. I believe it is only of use to support the Banking system.

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  • I am becoming more and more convinced that interest rates are no longer a useful policy tool in a globalised world. I used to froth at the mouth when the BOE talked about raising interest rates to control the recent bout of inflation. This inflation (2005 to 2008) was caused by an extra 2 billion Chinese and Indians, hungry for commodities, joining the economic party. The MPC ignored this new reality and twittered on about adjusting rates as if it were still 1967. I think that their Quixotic attempt at controlling global commodity demand by increasing domestic interest rates was one of the most foolish central bank actions of all time.

    There is now a rising swell of opinion that the BOE has constantly cocked up interest rates. Its 2005 decision is infamous. There seems to be little support for this potential move to 0.5%, so are we about to see another decision that may will live in infamy.

    My suggestion is that we permanently set interest rates at a sensible rate of say 6%. The economy could instead be controlled by reducing/increasing public spending and by also by reducing/increasing tax rates. QE and Quantitative boosting could also be used in extreme situations. Sensible legislation controlling leverage and lending criteria would also contribute to economic stability. Is this crazy?

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  • yea bob you are one ker-a-zee dude :-).

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  • there’s no doubt about that techieman!

    Perhaps a saner suggestion is let the markets set the rates (they more or less do anyway). My main point is, can the MPC do harm, but no good?

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  • notaneconomicsguru says:

    7. Bob1. Totally agree with first 2 paragraphs. Seems I have not been the only one foaming at the mouth.

    As far as I have been able to understand it, inflation is really about an excess of money which generally pushes up the price of things. However, it must take a while for the prices to go up and then a while longer for IR’s to change and begin to have desired effect. Prices also increase if there is a surplus of demand over supply – but that’s not inflation its just supply and demand. The problem seems to be that a measure like an RPI or CPI or anything else that looks at prices are too crude to ever allow price increases brought about by increases in money to be differentiated from those brought about by supply and demand. In my view you have to look at the price changes of everything and be able to determine what changes are truly inflationary (due to increased money) and those which are fundamentally supply/demand related. Trouble is these are all coupled and probably non-linearly too and even more complex the coupling mechanisms as you say also change as the economy evolves which it has enorumously over the last 20 years and probably will continue to rapidly change I am not an economist – I am just trying to understand, but it seems to me that the economists really don’t know how to model this and so how can you expect the policy makers to cope – they can’t. But they can be blamed for totally ignoring asset inflation (equities, HP etc) caused by excess money supply growth and rightly so. They got us into this mess.

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  • sorry bob i didnt really engage there. OK some time ago someone on this site suggested that a lowering of rates down to zero would make no difference. AT THAT time i disagreed – saying that because sentiment had not turned such a reduction would have not been pushing on a string and probably would have re-ignited the fire (in the short term at least). The alternative squeezing and losening of monetary policy does work in “normal” times. However its part of an armoury that cannot adjust quickly enough to events which unfold exponentially.

    For that reason i dont agree that we should keep rates at a pre-determined level and then adjust other components of the economy, because they dont respond quick enough. We basically need a new tool – is QE such a tool? I dont think so.

    So what is the problem? People arent spending like they used to. Is that a problem? Not if it was down to one individual but as everyone seems to have cut back and the new cool is thrift then yes its a problem. All of this is predicted in cycles and K-waves. Those are of no real value though because they can be (IMO) skewed for relatively long periods of time, although eventually they hold true (as we have seem the longer they take to kick in the more violent they are when they do).

    Should GB et al know this – YES – so when they talk no more BB its complete b0ll0cks OR worse they actually believe it!

    So what to do about big ticket discretionary items? Well reduce the price! Now the only way i can see that the government can assist is not by reducing IRs (cant make banks lend and people/compaies borrow). At best that has a longer term effect (aside from mortgages potentially – annd there are caveats to that too as we know). No but by actually increasing subsidies – how? By tax relief.

    Do i agree thats what they SHOULD do – no i dont but that is a way to get aggregate spending going in areas of the economy. Will they do this – a. I hope not and b. there would be all sorts of implications re protectionism etc. An alternative? Give the money to people but for them only to use by a certain time and only for use on certain products in the hope it will kick start things. (not my advocation either).

    To go back to the post about – we could lower IRs to nothing and people still wouldnt buy. I think this is the time when we are pushing on a string… but the use of the tool has been so dramtic that i can see support for a DCB in HPs in some areas.

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  • notaneconomicsguru: when I was a slip of a lad, I did an economics degree but I am completely bamboozled by what is going on now. I used to love doing all the equations and coming up with solutions, that I youthfully considered to be brilliant. These days I tend to the opinion that it is a pseudo science and any knowledge of it, is best denied.

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  • britishblue says:

    One of the biggest looming problems that has not been tackled by the government is a looming credit card crisis. Whether interest rates are 1,2 3,4 or 5% will pale into insignifigance for many mortgage holders compared to this coming credit card crisis, that will hit at some stage this year.

    Many people have outstanding balances on credit cards. Some through reckless borrowing, others because circumanstances have changed and they have needed the cards to keep them going, plus some small businesses have been forced to use credit cards because banks have removed overdrafts.

    However, within the small print all credit card companies contracts they reserve the right to put up interest rates. In the past an average rolled over balance interest rate was around the 15% mark and cards only changed the interest rate if there was bad behavior by the borrower or base rates changed.

    This has all changed. In the last three months most credit card companies have been putting these up rates by between 5% and 7% in some instances much more. It is no longer about charging more to high risk credit card customers, it is all about trying to grab as much money back as possible to replenish their balance sheets. I have an example of a friend who has a perfect credit score (we checked it out at Equifax and there had been no late payments in the last 5 years.). He has a large outstanding balance on his card (but not up to his limit) and his credit card company have put up his interest rate from 14.9% to 29.9% since Christmas. The credit card company response to his complaint was, ‘we are doing the same as our competitors.’, ‘Your credit score is only one factor, we look at each case individually.’ However, on his outstanding balance of 10k he will now pay and extra £120 a month interest – just like that, with no recourse!

    I think this has a lot of relevance to a house price crash, because many people with a mortgage who lose their jobs are now going to get sucked into paying nearly 30% interest on loans (credit cards) when the base rate is 0.5%, plus there are many householders who have managed rolled over balances for years and are now going to find that they will be paying thousands extra in interest.

    see http://whatconsumer.co.uk/interest-rate-hikes-for-mbna-customers/comment-page-1/.

    I sense the area of credit cards not mortgage rates could be the killer blow for many householders who through no fault of their own will end up handing their keys back and going bankcruptcy as this new form of loan shark sucks whatever it can out of them.

    Reducing base rates at the moment is no more than a red herring.

    The credit card companies like the banks have made a lot of bad lending decisions, but unlike the banks they havent

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  • techieman: As you probably guessed, I was trying to stimulate a debate on what “new” tool, as you put it, might be more useful to us in these difficult times.
    If I am reading you right, you are saying that a major problem with nearly all the tools I mentioned, is that they react too slowly. You are probably right. The question, then, is what tool(s) would work quickly enough and to good effect.

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  • Bob inflation (increasing amounts of money chasing finite goods) was in my view rampant for the past decade albeit expressed in asset prices rather than day to day living costs. This was partly as a result of holding interest rates too low from 2001 to encourage a credit bubble. I think not speciifcally doing things to cause these kinds of bubbles is critical. Because of the amounts of people and money involved housing bubbeles are inevitably the worst.

    This boom gave the chinese the means to grow and the additional purchasing power but that is not in itself inflationary but a shift in wealth , if we find we can buy less its because we are poorer as a nation. Not that the distinction probably matters much

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  • letthemfall says:

    If one believes in waves and cycles, one might say that the boom and bust we’ve had was inevitable and nothing realisable could have prevented it. If, as notaneconomicsguru suggests, govt cannot be expected to understand these things if the “experts” don’t, then who is to apply the appropriate policies?

    Given that large sums of money came from China as their productivity took off, how could this have been prevented from pouring into assets without govts tightening down hard on credit, and how could this in turn have been done in the face of the public opposition it would have surely encountered? So much for the self-regulation of free markets.

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  • letthemfall

    I think that the huge imbalances could have been prevented.

    The Chinese should have spent more on developing their own internal demand and less on buying foreign bonds. They also spent considerable resources on currency manipulation and on imposing unfair trade barriers. The West occasionally complained but I suspect that this was just posturing. The western politicians were weak and naïve. They also didn’t want to be seen as the the ones who ended the party

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  • bellwether. there probably will one day be a transfer of wealth to the East but I am not sure that we have already experienced it. Classic economic theory says that the velocity of trade dictates whether or not we are in a boom. It also claims that a high velocity of trade usually causes almost everyone to share in the increase of wealth. That was certainly true of the boom. Everyone did well in it which of course means that we all consumed our share. (hence the commodity inflation). If there had merely been a transfer of wealth then there would have been no inflation because they would have bought the stuff instead of us. Now that the velocity of trade has slowed down we all seem to be suffering equally (hence the deflationary tendency that they are trying to fight)

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  • letthemfall says:

    bob1

    In principle, yes. But apparently the Chinese didn’t want to, and the West probably did not have enough clout to do much about it, at least not if it wanted to maintain stability and good relations. No, govts did not want to end the party, because the electorate (especially those with loud voices – eg. bankers) did not want to.

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  • voiceofreason says:

    techieman and bob1. re: a new tool.

    How about using the IR / MPC tool properly ?
    Make the RPI include the projected cost of paying off the total loan for the house rather than just the next 12 month’s interest.

    When bananas go up, the impact the RPI directly. If bananas were treated like house prices, then it would be assumed that everyone takes out a mortgage to buy their bananas. Then only the repayment cost of the banana mortgage would affect the RPI.
    So bananas could soar in price provided IRs are falling, and the net effect on RPI would be to lower it..

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  • voiceofreason ~~~~ “The MPC and BoE should have listened to housepricecrash.co.uk”….

    interesting statement, and what does it tell us?

    what is the most logical reason for this ‘odd’ state of affairs?

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  • voiceofreason says:

    troy…

    They chose not to listen … ?

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