Friday, June 29, 2012
The limitations of ZIRP
Shaun Richards discusses Libor and recent trends in mortgage lending. Note that Richards regards a booming property market as a good thing - he is no HPCer. Regarding mortgage lending trends, Richards observes that if the trend of capital repayments exceeding borrowing in the mortgage market continues while we have ZIRP then we're entering new territory: "This development drives a possible stake into the heart of another economic orthodoxy. This is the one that says that reducing interest-rates always leads to net increases in factors such as borrowing which lead to a stimulus to the economy. My argument is that as we approach zero for interest-rates the relationship changes and that the stimulus declines and can go negative."