Shouldn't Interest Rates be Increased?

Surely the root of the banking problem is that they have too few deposits and too many loans - lowering interest rates is going to mean that people are less inclined to make deposits and more inclined to use savings for other things. Wouldn't it have been a better idea to raise interest rates so that peoploe deposit *more* money in the banks?

Reply to
Maria
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It depends whether the goal is to get re-elected or sort out the problems in the economy.

Reply to
charlie6

No, because unless you pre-suppose that people have vast amounts of money lying around in their mattresses or under their floorboards, all their money is *already* deposited in banks.

The purpose of lowering rates is to stimulate the economy. This can come about in two ways. One is by encouraging businesses to borrow. Another is to encourage consumers to spend. If, as you say, lowering interest rates makes them "more inclined to use savings for other things", i.e. for buying stuff, this will allow those from whom they buy either to pay off their debts, or else to make them look more creditworthy if they should ask to borrow more.

It sort of seems to make some sort of sense, on paper. Whether it will work in practice is another question.

Reply to
Ronald Raygun

There is money lying around, but also, many British people (individuals) are saying that they have deposited their money in foreign banks where they are getting a better rate of interest. And then there is business - look how much councils had in Iceland. What's more, people are talking about removing their deposits because it makes more sense financially to use the money to repay part of their mortgages, which are being charged at a much higher rate than their savings are earning.

Also, as a consumer economy, it doesn't matter how much goods are produced, if people are not earning or can't borrow enough to buy them. Look at Nissan for example.

It seems to me that the problem is not encouraging businesses to borrow, which they already want to do, but encouraging banks to lend. Even Clifford Chance is touting for money today - if lawyers (purely a service) and what they earn is not even sufficient to prise money from banks, what is?

Banks are asking for 40 deposits to buy a house - are they even lending on loans or cards anymore? They haven't put their interest rates down, so what is to encourage the individual to borrow, and the banks to lend? Isn't it excessive lending that has caused this in the first place?

It makes no sense to me at all. Spending one's way out of recession makes no more sense to me than trying to spend your way out of debt.

Reply to
Maria

That is the general idea luv!

Trouble is it don't appear to be working o'er well!

Reply to
Mel Rowing

Not if they are actually going to be sensible and pay off mortgages or credit cards, or, more likely, are having to pay out a big chunk to cover their energy bills through this coldness.

Reply to
Maria

The economy in the short term respond to some degree to a Keysian type solution but in anything but the short term further artificial stimulation of demand will make matters worse because it will increase the UK economies structural problems - balance of payments deficit, huge unsustainable personal borrowing etc. If the problems were of different order such as to much saving and not enough spending then the current solutions might be appropriate. The only way the economy could be saved is by individuals getting much poorer - of course those solutions will only be applied after the election. I would guess that many people have simply run out of their ability to spend any more and that's why they are not spending. Big tax increases etc etc. will take place after the election. The recession will get much much worse and George Maynard Keynes will not save them. The sadness of it all is that the Government is descending to the level of the tabloid newspapers in simply saying it's not our fault. Why should there not be a real debate rather than the inane chanting of it's not our fault which is a sure sign of failure.

Reply to
charlie6

On Fri, 09 Jan 2009 10:27:48 +0000 'Maria' wrote this on uk.politics.misc:

Frankly, I see most of Brown's base rate reductions as nonsense window dressing to fool people into believing that he's doing something to help, whilst ignoring that banks mostly borrow money from the money markets using Libor. The major impact has been on savers who are now hugely worse off. So he's punishing the prudent people who didn't create the credit/debt problem in the first place.

One possible unintended consequence is that savers withdraw their deposits from banks and say "I won't lend my money to you for a measly return of 0.5%". That could add a further problem to the bank lending volumes. Sales of domestic safes have already risen!

The fall in the pound will add to inflationary pressures over time. That will be difficult to contain if/when the economy begins to recover and will probably mean tax rises to reduce the amount of money in the economy. That will slow or arrest recovery. Further tax rises to pay off his debts will add more problems.

Brown's swimming in a sea of muddle to fool people and no doubt has his eye on the polls in case they ever look favourable.

Too bad for him they don't...people are working out that he's a socialist dogmatist.

Reply to
aracari

Brown doesn't set interest rates. He might encourage the BoE to do this or that but it is independent and does what it thinks fit.

Reply to
Lou Ravi

"was another question"

I think that we have now tried it long enough, to see that it isn't going to work, BICBW

tim

Reply to
tim.....

While it is really good to know that Bank of England are as stupid as all the rest. I simply thought that the FSA, the Treasury, the Bank of England and the Chancellor of the Exchequer and the BBC were all following the wishes of our great leader - if there is some measure of independant thought on the matter and they have all come to exactly the same conclusions then we are indeed as an economist would say 'buggered'. Of course they could at this very minute be moving the goalposts. It was only a few months ago that they were saying there would not be a recession - what will next weeks excuse be? Watch out for a few heads to roll - a few scapegoats to be paraded, a new economic theory to be wheeled out.

Reply to
charlie6

It may work too well. A £1000 per month that would pay the interest on a £200K home loan at 6%, could stretch to a £1.2m home at 1%. That could however be the same house! That's if house price inflation were to take off again. And once rates go back to normal...

But there must be something wrong in the reasoning because a 0% mortgage rate suggests that a house price of £infinity then becomes affordable, which would cause chaos, at 100% LTV anyway.

Reply to
Bartc

Look!

It is NOT "Different this time"

tim

Reply to
tim.....

If you think you are ever going to obtain a 0% mortgage rate or even

1% then you live in cloud cuckoo land.

Why should any provider incur administration costs and risk for nothing or next to nothing?

The best mortgage on offer at the moment would seem to be at 4% before reverting to 5.69% after two years and be ready to put down a 40% deposit and a £1000 set up fee.

Houses have not fallen by 16 to 17% because people are queueing up to buy them.

Buyers are not reluctant to buy because mortgages are limitless, cheap and easy to get.

Those days are gone - for good!

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Reply to
Mel Rowing

On Fri, 9 Jan 2009 15:55:32 +0100 'Lou Ravi' wrote this on uk.politics.misc:

Officially Brown doesn't set IRs, unofficially he does. I think that's widely accepted since the crises arose. Further, before that, Brown defined the extremely narrow parameter (CPI) by which the BoE have to operate under to set IRs. That is what caused the huge housing bubble as housing costs are excluded from CPI.

Reply to
aracari

I wasn't being too serious with my 0% and 1% mortgage rates.

But, getting 0% to 1% on savings is a real possibility. And if you have enough funds, you might as well buy a property with them, with it effectively costing you, each year, only 0% to 1% of the value (for a £200K property, that's less than £40 per week). (Of course there are a few extra costs and a cap - determined by your funds - on how much you can spend.)

Reply to
Bartc

you're confusing several complex and inter-acting issues.... you must look at *all* the factors...

for low bank of england 'interest rates' read increased inflation....

(interests rates set by the boe are highly detached from what you mean by interest rates)

you can't get money at those rates....

meanwhile you can and will be able to borrow...just as long as you'll pay enough interest and the banks believes you can service the debt at that rate....

the high street banks are all part controlled by the government

the government is **only** interested in one thing...fooling you into voting for them again...

it is markets that set interest rates....

the bank's are suffering from several problems...including falling house prices...which undermine their risk calculations... they are trying to stitch that back together....

now to the next stage... the government, through the boe, is inflating hard....

in due course that will feed through to the markets in increased interest rates... it will also feed through in higher prices....eg house prices....

*now* that is really what the government is trying for.....

meanwhile inflation erodes the real cost of your house loan.... it also erodes government pretendy debt.....

interest rates in the sense of the boe rates tend to take very vaguely...approximately 18 months to feed through.... keep firmly in mind the clown's real time frame is also around 18 months....he's gambling as he clings to office.....

the clown doesn't care a damn about anyone but his own skin and he and his socialist side-kicks are members of a cult....

that's because he/they are *lying* to you...every day in every way....

almost everything you hear and read is government handouts...and the government don't have a clue either... the boe is managing this...not the clown.... the clown doesn't have a clue! but the bank will be roughly telling the party the consequences to them in electoral terms....which is **all** the clown cares about....

regards

Reply to
abelard

But they always have been as far as I know so how does that explain the housing bubble?

Reply to
Lou Ravi

On Fri, 9 Jan 2009 19:45:58 +0100 'Lou Ravi' wrote this on uk.politics.misc:

Housing costs were included in the old RPI. Even so, that was not a very accurate measure of retail inflation. The CPI is a joke, which is why Brown introduced it.

Reply to
aracari

Were they? I'll take your word for it but I still don't think it has much to do with the housing bubble.

But even if it had been and the ridiculous rising prices of houses put the thing out of skew any government would simply have introduced a counter statistic of some sort, based on these very house prices possibly (private assset value or something).

Reply to
Lou Ravi

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