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1.5% worth of humble pie?

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Paul Mason | 12:07 UK time, Thursday, 6 November 2008

My snap reaction to the Bank of England's 1.5% rate cut: when the CBI only asked for 1% and analysts were expecting 75 basis points?
a) It is a total victory for Blanchflower who told the press two months ago rates would have to come down to this at the very least
b) The depth of the expected recession is huge: when Mervyn King was still trying to justify 5% interest rates he thought there was a 10% danger that inflation could reach zero. Now that danger must be looming much larger - meaning the Bank thinks there is a big danger of a deflationary recession.
c) The inadequacy of the transmission mechanism: to achieve even a small cut in high street mortgage rates they have to do a hug`e cut in base rates
d) The UK policy framework is looking very creaky: Darling intervened to tell Mervyn he can now target the 2% on a longer timeframe but is it not byzantine that decisions about growth have to be taken through the prism of inflation? If we are now targeting growth and saying we want growth to return, how does it help to have to justify that with a whole series of 18 month prognoses about inflation?
e) I can't wait to read the minutes: why was the 18 month view of inflation so much worse today than it was on 8 October, when the financial world had virtually collapsed?
We'll be debating all this on Newsnight tonight. Chip in now.

Comments

  • Comment number 1.

    This comment was removed because the moderators found it broke the house rules. Explain.

  • Comment number 2.

    1) Think you will find there is an important election in Scotland today.

    2) Irrelevant, see New Financial World order blog posts.

  • Comment number 3.

    Dear Mods,

    Refer away. But you better have a pretty darn good reason not to approve that post eventually.

    Otherwise I will have to presume Hazel Blears has found the prefect test bed from within her party's media comfort zone.

  • Comment number 4.

    The reason for the shock move is straightforward to understand for those of us citizens not taken-in by the general tendency towards complacency and platitudes from politicians and some so-called expert commentators.

    95% of the news media on this matter is aimed at people with a reading age of 9 years. The message generally is "This is bad, but not terrible; Gordon has a cunning plan for saving the world; give it 12 months and we'll all be in the swim again; try to behave as if everything is normal".

    The other 5% of heavy-duty analysis from politically unbiased experts often seems to be concluding that the situation before is hugely worse than "one reads about in the papers". Like, really bad.

    With some diligent research you realise that it doesn't take Sherlock Holmes to discover that the economic and social road ahead is going to be the rockiest in living memory. I'm neither an economist nor a politician, but I know damned well that this is going to hurt. Indeed, I think the potential social consequences of the economic disaster zone we're now entering will be a massive challenge for our (incompetent) politicians.

    A 1.5% cut in interest rates means that the MPC could now be reading the same analyses as me.

    Oh and by the way. Just wait until the effects of the end of cheap energy start to merge with the current mess.

  • Comment number 5.

    Either they have been leant on or a big cut was needed to have somee of it fed back into the high street.
    Surely you have either nationalization of the banks or they have to lend on a commercial basis as they perceive it. In these difficult times you would expect them to be lending more cautiously. I want my savings to be safe. All this screaming about making the banks reduce rates is wide of the mark.
    a) if there is sufficient competition then rates will come down if it is viable
    b) How can the banks reduce rates when the government wants 13% for its preference shares. How does this relate to the B of E rate.
    c) they and building socs are having to cover the cost of the Icelandic banks via the FSA (which borrowers will have to pay for.)
    If the banks are not now seen to be lending "sensibly" why would I want to lend them any money at low rates. A bit safer to lend to the government

    I would also add that we have no idea of what the rules for lending to the banks really are. I considered the risks of lending to the Iceland banks too high yet even sums over the £50k are being reimbursed. Why was there all the delay in increasing to this amount when the government decreed overnight that no individual savers would lose money.


    It is all mad mad mad mad and interference has to make it worse.

  • Comment number 6.

    Not quite sure I understand the glee at this cut in base rate, unless you are a banker of course. Bank lending rates appear to be quite unrelated to this symbolic figure. The belief that this will magically stimulate the economy is a tad naive. Banks will simply use this figure to cut the interest rate they pay to savers, whilst maintaining the relatively punitive interest rates on those who borrow from them. This will simply give them an excuse to stretch their profit margins on capital. The drop in base rate will likely trigger an outflow of capital from Sterling dragging the relative value of Sterling down. Imports will thus become more expensive particularly of commodities priced in dollars. We will all be made the poorer by that.

  • Comment number 7.

    Paul

    I'm no economist but all the recent talk of lowering interest rates has worried me in relation to the inflation risks for the medium term. Surely the reduction of interest rates will reduce the value of sterling and increase the price of imports and, as we import so much nowadays, one effect will be to increase inflation. Is this analysis correct or am I missing something? Presumably the BoE think that we are going into such a severe recession that either the inflation risks are worth taking compared to the alternative or that, even with the rate cut, demand in the economy will be so muted that inflation will be at 2% or under in 18 months time.


  • Comment number 8.

    NEW MONEY?

    I take it that is 1.5 imaginary parts of 100 that never existed in the first place?

    I guess, about now, Tins are rattled on Mainstreet and Coppers bearing down?

    Paul - can you put hand on keyboard and swear you understand the WHOLE of what is going on in global 'money'?

  • Comment number 9.

    Rather to my surprise I find myself agreeing with the Bank of England’s massive rate cut. I have so far argued for smaller cuts, with a maximum of ½%, My argument was that this would allow for a larger number of possibilities, where a 1% cut would halve the opportunities. A cut of 1½% should, therefore, have been unnecessarily large.

    My conversion comes partly from the fact that the industry does need a shock. Mainly though it comes from the fact that the existing rate was already too far out of line with that of other nations. Nothing could match the Fed’s 1%, though that is so low as to allow the US almost no flexibility, but we were too far away from that of the ECB. Allowing for the ½% cut of the latter, our 1½% cut brings us into line with it; and indeed slightly ahead of the curve. So it might be a shock but it now nicely matches us with our main collaborators.

    The shock rate might have one additional impact. So far UK rate changes have been ignored by most of the UK banks’ rates on the ground. This might have been because the LIBOR rate has gone its own way. It certainly reflected a degree of arrogance by the banks now their begging bowls have been filled by government. Have they not learned their lesson? It is arguable that they will not be able to ignore the cut of 1½%. Even LIBOR may have to follow; and unsticking that is a first step in financial recovery.

  • Comment number 10.

    A 1.5% cut is either a blind panic reaction to bad forecasts which the BoE has but we don't; or a mad Frankenstein experiment to see whether a huge cut will shake Libor downwards. Either way, it indicates that the economy is now beyond being managed by conventional measures.

    What is the logical endgame to this - negative interest rates?

    If our current system is so unmanageable then why not go the whole hog - mug up on von Mises and go back to the gold standard?

  • Comment number 11.

    IS GOLD THE NEW ALCHEMY?

    Now that diamonds can be manufactured to any size, and the distinction between 'natural' and 'manufactured' is as daft as that between original art and brilliant (sic) forgery, it willnot be long before manufactured gold appears. After all, a chicken (note 2 legs) can transmute elements; only a matter of time before we do. What price the gold standard then?

    I'll get me coat.

  • Comment number 12.

    I'm wondering whether the tail is wagging the dog here.

    The BoE is (possibly) bowing to pressure from the Government, the Government is (definitely) seeking advice from within the banking industry.

    If it transpires that this cut doesn't trickle down to the average person's mortgage rate or credit card rate, then it will be revealed as nothing more than a fawning to the banks themselves.

    A very high risk strategy indeed, as surely then, if not already a little rattled, soon the peasants will be revolting??

  • Comment number 13.

    low interest and more debt. Japan anyone?

    if the banks are not lending what is the point?

  • Comment number 14.

    Most people thing that this rate cut means that the BoE is anticipating a depression not a recession and it will be longer and deeper than the 1930's.

    OR

    They have got it terribly wrong as they did in the whole of the last decade by having interest rates too low for too long and that as everyone now acknowledges was one of the causes of the bubble and then the crunch.

    The test to distinguish between these two answers will be when they move interest rates up to a more sustainable level of 6 to 7 percent. The test runs fro 6 months.

    If in six months time interest rates are still at these (or heaven forbid lower) levels then we are all doomed to a catastrophic depression, or if rates are on the way up then the BoE has succeeded.

    My money is on the first answer at present.

  • Comment number 15.

    1.5 percent seems sensible if you look at matter microeconomically. The price of petrol and food is falling rapidly. Gas prices are also falling. So the position for people in work should be improving - yet with the near bank collapses everyone is worried. Cutting base rates by 1.5 percent will cause the exchange rate to fall - so exports will improve, petrol prices will stabilise (since because petrol is priced in dollars the world fall in price will be countered by the fall in sterling) thereby continuing the drive to more fuel efficient cars, and will mean that offshore jobs (call centres and the like) can be done in the UK rather than in India because we will be a low wage economy. The reason this cut had to be done now and the reason why events changed since last month is the US election is now over and the banking collapse is past its worst.

    This is going to be a very deep but short recession. I think the game plan is for Gordon to stay onto next summer, then take over as Head of the IMF (when Dominique Strauss-Kahn goes because of his sex scandal at the IMF), David Milliband will take over leading to an election in 2009 where the Tories will come in with a slim majority but Labour will be poised for a fightback in 2011 just as matters are getting better again.

    Shyster

  • Comment number 16.

    Since much of such wholesale lending as is taking place is now being priced both on the basis of LIBOR and of the relevant CDS spread, it seems quite likely that 1.5% was deemed to be the minimum necessary to produce any reaction at all at the sharp end.

  • Comment number 17.

    Wow, the BoE have found the Holy Grail, 1.5% cut in interest rates. They must be totally relieved and can now sit back and watch the fruits of their labour.

    Complete bunkem! 1.5% 2% or 3% reductions how the hell do they know the correct reduction. They just didnt want to look like they didnt know what they were doing anymore. Sadly, they've no idea what the impact is going to be. If they'd done this 12 months ago, it would have helped and it would have been visionary. This is just a joke and far too little too late.

    If they mean business, slash the rate to 1% Until it makes a difference, then slowly increase them. Trouble is if they've got this wrong again, which I think they have, they dont lose anything.

    Frankly the whole team should be sacked for getting this wrong. Its unacceptable that people lose their jobs because these guys get it wrong, and they keep their own. How can that be justice?

  • Comment number 18.

    Paul - you write -

    "The inadequacy of the transmission mechanism: to achieve even a small cut in high street mortgage rates they have to do a hug`e cut in base rates".

    Can there not be an element of compulsion? The banks are really pushing their luck with this. The government now owns significant proportions of the banking industry and ought to be in a position to influence commercial interest rates to the point where the rest either compete or sustain unacceptable losses of business.

    After the chaos that the banking sector has already unleashed, it is nothing short of disgraceful that they appear ready and able to pay so little regard to signals sent by the BOE. Unless, of course it is a toothless and spineless institution that just happens to have lots of dosh hanging around.

  • Comment number 19.



    PAUL

    Do We Need More of Keynes Now?

    10/31/08

    Printing money by the central bank produces exactly the same damaging effect as...counterfeit money does.

    ...[S]ince government is not a wealth generator it therefore cannot grow the economy...the more government spends, the worse it is for the health of the economy and thus for economic growth.

    Now that governments and central banks are subjecting their economies to aggressive monetary and fiscal-stimulus policies, many people say that the ideas of Keynes are back in fashion. We heard that Keynesian remedies can save world economies from plunging into a severe economic slump. In the United States, for instance, Republicans and Democrats are competing against each other to subject the American economy to various stimulus packages. On this the Financial Times recently wrote,

    The lapses into Keynesianism take different forms. For Republicans, it is a time to propose new tax cuts for small businesses, including a waiver of the capital gains tax, which many believe would help stimulate economic activity. For Democrats, the preferences are for an extension of unemployment insurance, food stamps and assistance to struggling homeowners.

    Despite trillions of dollars that central banks worldwide have pumped, some prominent commentators still maintain that it is not enough. For example, Martin Wolf writes,

    Yet, in current conditions, monetary policy will be insufficient. This is a Keynesian situation that requires Keynesian remedies. Budget deficits will end up at levels previously considered unimaginable. So be it.

    It is extraordinary to suggest that Keynes's ideas are now coming back to save the world. Keynesian ideas have never left the rooms of government and central-bank decision makers. The essence of the thinking of the most influential economists was and still is Keynesian. So various stimulus packages that are now introduced are a continuation of the same Keynesian policies we have been subjected to for many decades. The present economic crisis is the outcome of the large dose of Keynesianism we have been given over many decades.

    In a nutshell, John Maynard Keynes held that one cannot have complete trust in a market economy, which is inherently unstable. If left free, the market economy could lead to self-destruction. Hence there is the need for governments and central banks to manage the economy.

    Successful management in the Keynesian framework is done by influencing the overall spending in an economy. It is spending that generates income. Spending by one individual becomes income for another individual, according to Keynes. The more that is spent, the better it is going to be. What drives the economy then is spending.

    Consumption and Production

    In the Keynesian framework, the largest chunk of spending is on account of consumer outlays. Therefore consumer outlays are regarded as the motor of the economy — consumption sets in motion real economic growth.

    But is consumption the motor of the economy? We suggest that one must make a distinction between productive and nonproductive consumption. While productive consumption is an agent of economic growth, nonproductive consumption leads to economic impoverishment.

    Productive Consumption

    A baker exchanges his ten saved loaves of bread for ten potatoes. The potatoes are now sustaining or funding the baker while he is engaged in the baking of bread. Likewise the bread sustains the potato farmer while he is engaged in the production of potatoes. The respective production of the baker and of the potato farmer enables them to secure goods for consumption.

    What makes the consumption productive in this example is the fact that both the baker and the potato farmer consume in order to be able to produce. The consumption of both the baker and the potato farmer maintains their lives and well-being. This is the only reason for production.

    The introduction of money doesn't change what was said so far. For instance the baker can exchange his ten loaves of bread for $10 — he then uses money to secure ten potatoes. Likewise the potato farmer can now exchange his ten dollars for ten loaves of bread. Observe that, apart from fulfilling the role of the medium of exchange, money has contributed absolutely nothing to the production of bread and potatoes.

    Nonproductive Consumption

    So far we have seen that to secure potatoes, the baker had to exchange bread for money and then employed money to secure potatoes. Something was exchanged for money, which in turn was exchanged for something else — or something for something is exchanged with the help of money.

    Trouble erupts when money is created "out of thin air." Such money gives rise to consumption, which is not backed by any production. It leads to an exchange of nothing for something.

    For instance, a counterfeiter has printed a perfect $20 note. Since he secured this money by means other than the production of some useful goods or services, the counterfeiter has therefore obtained the $20 by exchanging nothing for it.

    The counterfeiter uses the $20 to buy ten loaves of bread. What we have here is the diversion of real funding — ten loaves of bread — from a potato farmer towards the counterfeiter. Note that the diversion takes place by the counterfeiter paying a higher price for bread — he pays two dollars per loaf. Previously the price stood at one dollar per loaf. Also note that since the counterfeiter doesn't produce anything useful he is engaged in nonproductive consumption.

    The potato farmer is now denied the bread that he must have to sustain himself while he is producing potatoes. Obviously this will impair the production of potatoes. As a result, fewer potatoes will become available, which in turn will undermine the consumption of the baker, thereby impairing his ability to produce.

    We can see that, while productive consumption sustains wealth generators and promotes the expansion of real wealth, nonproductive consumption only leads to economic impoverishment.

    Printing money by the central bank produces exactly the same damaging effect as the counterfeit money does. Likewise the creation of money through fractional-reserve banking produces the same damaging effect. The expansion of money sets the platform for nonproductive consumption — an agent of economic destruction.

    In the Keynesian framework, during a recession when consumers tend to lower their outlays, it is the duty of the government to step in and boost its expenditure. For instance, the government could employ various unemployed individuals to dig holes in the ground.

    The money that the government pays these workers will boost their consumption, and this in turn will lift the overall income in the economy. According to this framework, it doesn't really matter whether holes in the ground contribute to individuals' well-being; what matters is that people are getting paid and then using the money to boost consumption.

    Government doesn't earn money as such. It is not a wealth generator. So how then does it pay various individuals who are employed in non-wealth-generating projects? It secures the money through taxation, by asking the central bank to print money, or by borrowing. If we ignore overseas borrowings, it basically amounts to the diversion of wealth from wealth generators to government activities. This is the same outcome achieved by printing money: it sets in motion nonproductive consumption.



    there is need to emphasize the truism that a government can spend or invest only what it takes away from its citizens and that its additional spending and investment curtails the citizens' spending and investment to the full extent of its quantity.

    From this we can conclude that since government is not a wealth generator it therefore cannot grow the economy. Contrary to popular belief, the more government spends, the worse it is for the health of the economy and thus for economic growth.

    Rescue packages aimed at saving the economies of the world are just laying the foundation for more misery in the months ahead. Many commentators and economic experts who advocate strong government stimulus measures never bother to ask how those measures are going to be funded — and by funding we mean real stuff: where are all the bread and the potatoes going to come from?

    It doesn't occur to the Keynesian sympathizers that it is the fiscal and monetary policies of the past several decades that have given rise to nonproductive consumption. The outcome of all this is the vast amount of bubble activities. How can more of the same Keynesian policies — policies that have inflicted massive damage on wealth producers — revive the economy?

    What is now required is not more Keynesian policies but rather allowing wealth producers to move fast and start generating real wealth. What is required is plenty of productive consumption. More government spending and the massive pushing of money by central banks only strengthens nonproductive consumption, thereby delaying prospects for an economic recovery.









  • Comment number 20.

    With my very limited knowledge of economics , I would have had fears of Sterling's decline in value with such a large interest rate cut, but it has not (as of 15:40).

    What has changed ?

  • Comment number 21.

    More on Macbeth (aka... to those of superstitious thespian bent), with a bonus for any who appreciate the Hitch-hikers Guide to the Galaxy.

    After wall to wall US 'news' up to and including today, to the exclusion of all else, I have wondered what else might get a mention.

    Seems special House Rules are in effect during Polling Days.

    So... nothing discussed that isn't fancied before, can't during, and only the possibility of passing reference afterwards, unless it works out better than expected, in which case it will doubtless be top of the news for days.

    Where's a Vogon Constructor Fleet when you need one?

  • Comment number 22.

    #21 Junkmale

    Keynes and the Sand Eel Conundrum

    Ah caught up with you at last.

    here is a brief history, trying to avoid all the legal pitfalls.

    There are things which if I put the Mods will object. There are things which the Mods will allow but break Company Law. As I have a leather jacket and used to ride a motorbike, I have to be careful of Mods.

    That we would have a recession/depression was known from 1991. Politicians, economists, media etc all use the inclusive "No one could have foreseen this". Only because they didn't.

    To resolve this and sort the global environmental situation out a proposal was entered to use the Millennium Dome as a global environmental management centre. (Magrathea).

    This would have generated £50 billion per year for the UK economy, ie we would not now have a recession. It was short listed but lost out eventually.

    In 2006 consultants at Perth Business Gateway (Scotland)looked at my portfolio and asked if I could rewrite an executive summary for Scotland to put £30 billion per year into the economy. Again in the national and international interest.

    http://thecelticlion.blogspot.com/2007/12/development-strategy-for-scotland.html


    (Mods- this was sent to all MSPs, all political parties and independents. Non partisan and in the national and international interest).

    Is this the source of an arc of prosperity, the rebranding of a party and a dog sleigh trip to a glacier? Scroll to Northern Tundra Alliance.

    The answer to your Sand Eel questions at Susan Watts' blog was included. See the Oceanographic Research section.

    http://www.bbc.co.uk/blogs/newsnight/susanwatts/2008/10/two_go_mad_in_silicon_valley.html#commentsanchor

    Everything is connected. The definitive answer to your question would have also put £30 billion in to economy.

    But that's the post quantum world of applied planetary engineering.

    The 1.5% interest rate cut will not do anything, the problem is much deeper and the solutions required more radical or more appropriate and sensible.

    As to Macbeth. I live more or less exactly half way between Birnam Wood and Glamis Castle.

    Macduffs men would have had to walk through our house to cross the River Ericht just over the fields at the front.

    Celtic Lion

  • Comment number 23.

    I would probably describe it a bit less politely than 'The inadequacy of the transmission mechanism'.

    This is not only what counts to people paying mortgages, and needing small business liquidity, but is a litmus test of who is acting in whose interests.

    I can't be the only one who is puking to keep hearing Darling, Brown and Uncle Tom Cobblers urging, encouraging, cajolling, the banks to pass on interest rate cuts. Puke again, sorry.

    I have just got a TV license renewal form and there isnt a hint of 'urging', 'encouraging' or 'cajolling'. And the Government hasn't even put £1 little billion in my account.

    No mention of 'choice' either - but the banks have got choice.

    When I said on this blog that the social function of banks, at this stage of the game, is too important to be left to private capitalist motivations and that they must be nationalised, someone wrote that that is not possible because many banks are international. Those that are not will be deeply embedded in international finance anyway, for sure.

    Yet I have just heard Digby Jones on PM 'urging' the banks to be nationally responsible (along with all other sections eg consumers - your country needs you to buy a t-shirt)

    Seems like a bit of slippage here. Big money tries to limit the horizons to the national, so we behave like good little piggies, give it to the banks, keep paying the mortgage, pensioners quietly freeze, while the context of finance is obviously international.

    While Darling is 'urging' himself to death, is there anything to stop the banks lending or investing the money that we taxpayers, have put in, overseas, if it looks like a better deal than lending it to a small business here relying on hard pressed consumers?

    If there is indeed nothing to stop that, and it is going on, it would only be rational standard capitalist behaviour - as opposed to responding to 'urgings', which is not capitalist reasonable - at least not with the option of international money movement.

    It is not the scenario that if people are doing it hard here, banks will necessarily suffer. Or Digby Jones suggestion - that perhaps we just won't like them if htey dont lower their rates (is this a bank execs nightmare?). Jones was, in fact, bshtting.

    If there is indeed nothing to prevent that preference for lending (our money) overseas if it looks like a better bet, and the predictions that the UK will be hit harder than anywhere else in the EU may encourage that tendency, then I come back to the need to fully nationalise the banks.

    And to do it before we are in a very bad way in survival terms, while our cash is still there to be lent back to us, and before it is too late to make any useful difference.

    If the capitalist model's gotta give, so be it. Unfortunately Brown shows again and again that he can't think beyond the pattern of his last 10 years, or stretch his imagination as is needed. I can imagine that he couldn't handle it if the banks didnt like him - sad creature that he is.

    India's banks, though not well capitalised, have not been subject to these shocks because they have been almost all nationally owned. Of course international finance wants to change that model - that would ensure that they are fully at risk, too.

    And Santander, in Spain, has been well regulated - but we are beyond that now.

    The drastic action has got to come. But Brown shows himself over and over, to be a very slow learner.

  • Comment number 24.

    And if it wasn't explicit in my previous post -
    I very much hope the Newsnight discussion has a breadth of possibilities that includes full nationalisation - cos nothing is going to change direction now till it happens - and its your job to articulate it, cos we cant.

  • Comment number 25.

    Excellent summary from Paul Mason. This is a key point I think:

    "The inadequacy of the transmission mechanism: to achieve even a small cut in high street mortgage rates they have to do a hug`e cut in base rates"

    And I think we need to watch the exchange rate .........?

  • Comment number 26.

    I cant believe what Im seeing.


    This p00 pile was created by easy lending.

    This drop in the base rate is just the message not to give out...borrow more

  • Comment number 27.

    Am I being totally cynical to think that all decisions now come from GB and his spin team and that the Bank of England the chancellor and all the other "hangers on" are largely only there for show.
    The only thing G B ( this goverment) really cares about is being re elected and indeed if we have any more incidents like the George Osbourne debacle it could just happen
    I believe that all of GB'S actions and decisions are self serving and designed only to obtain the right sound bites and headlines
    All I can say is that if we do re elect this disaster crew the country will have the government it so richly deserves and will spend many months getting slowly taxed to death.




  • Comment number 28.

    #2 above

    1) Think you will find there is an important election in Scotland today.



    Obamaomics

    14. At 1:08pm on 06 Nov 2008, KingCelticLion wrote:
    #13

    Barrie

    SMART

    The Scottish Government had this thing about a SMART Safe Scotland. Eg

    http://www.scotland.gov.uk/News/Releases/2004/11/01081903

    Then the SNP got in and in October 2007 came up with this idea of a 'Celtic Lion' economy, based on high and sustained economic growth rates.

    http://news.bbc.co.uk/1/hi/scotland/7042726.stm

    (I thought it was a pretty name so decided to rescue it).

    You'll never guess what happened next?

    ---------------------------

    The real Celtic Lion rests it's case

  • Comment number 29.

    Who exactly pays the central bank's minimum base rate? And to whom?
    I read lots of postings about the transmission system not working; but it would help me to understand if someone could explain clearly who will now be paying the 3%. (Can I borrow money at 3%? Please)

  • Comment number 30.

    How to overcome the inadequacy of the transmission system ?

    Base rates and now mortgagae rates are firmly in the political arena.

    Are the nationalised banks seriously expecting to get away with reducing variable standard rate morgages by less than the cut ?

    As the new controller of these organisations the state can simply insist that the likes of TSB , Northen Rock, B&B, RBS, offer their standard rate mortgage deal at base rate plus 1%. This would bring market pressure on the other banks ( HSBC, Barclays etc ) to follow suit.

    I see that UK base rate and Euro rate have now converged to within .25 % . Is it time to seriously consider joining the euro currency ? especially at an exchange rate that will boost future trade ? The US may revert to it's old protectionist ways very soon leaving UK hung out to dry.

  • Comment number 31.

    RE comment 30

    Ay, there's the rub - to this point the Govt hasn't taken any 'control' of the banks its pouring money into, and is still insisting that it cant run bank lending policy

    This has to shift, quickly.

  • Comment number 32.

    To answer your last point, ask yourself

    WHY did oil and commodities rise to the dizzy heights seen and then return to lower levels? Equities have continued to fall, but commodities have not since risen again

    What caused this
    Who caused this
    How did they do this

    If you can answer these questions, you will find the answer to the disconnect between the inflation prediction then and now



  • Comment number 33.

    Vince Cable said interest rates would be cut and they were. He says they will probably have to be further cut (perhaps even to 0). They will therefore be cut again.

  • Comment number 34.

    #31 PK

    Does it rhyme with "wedge siphoned"?

  • Comment number 35.

    I find out from the BBA website that:
    "The Bank of England’s Monetary Policy Committee meets every month to determine what needs to be done to keep inflation at the Government’s target level. Its main means to do this is through increasing or reducing its official bank rate – the interest rate the Bank pays on its deposits from other banks.
    This is the key point: the official bank rate is not the rate at which the Bank of England lends money to high street banks. When the Bank makes money available to other banks, it usually charges a rate higher than its official bank rate."
    So am I right in thinking that, since banks can get only 3% for lodging funds with the BoE, banks will become keener to lend to businesses at a reasonable rate?

  • Comment number 36.

    This is the "Hair Of the Dog" solution to economic problems. We got drunk on debt and credit, had a great party but now have a hang-over. Solution? Keep on getting sloshed and the pain will hopefully go away.

    So we got into this mess my having too low interest rates and the banks lending too much money through mortgages to people that couldn't afford them along with loans and credit. And the solution? To extend the lending so people can carry on buying stuff via loans and credit cards as well as obtaining daft mortgages.

    The banks should be encouraging people to save money to prop up their failing institutions, but people will continue spending money they haven't got as they won?t have the incentive to save. Cheap credit got us into this mess, it won't get us out. Alas, the government panders to the good-timers who recklessly borrow money and thinks that spending money for the good of the economy is the answer.

    We need real solution and a have a proper strategy - not putting off till tomorrow what should be sorted out today. Yes, it's going to be painful but it needs doing. Oh, wait - I know why they are putting off any real remedy that people may find discomforting and make the government look unpopular - any real solution (if done at all) is for after an election. This is typical of the self serving government who have the audacity of calling themselves "Prudent".

  • Comment number 37.

    NEWSNIGHt REVIEW: ABANDONING REASON FOR EMOTION?

    LeisureHat (#36) Alternatively, they tried to cripple economies at the end of Bush and Blair's stint but didn't QUITE make it, so now they're trying a little bit harder. Still, it's only the old and other reactionary who will have saved for their security, and what do they matter? Take interest rates down to 1% and make them suffer whilst the young borrow at almost nothing to play the casinos. Look at those in power, have they not been feminised through 'equalities' efforts?

    A (Deacon, 18th Aug 2008) harsh, but lucid statement from the 1990s which has a kernel of unpalatable truth to it based on sound research. That of course is just the consequence of a five point mean difference and a more conservative range for females (cultures have acted on this for centuries up until the middle of the last, and those who have given up on this basic truth are now paying with their own, and their children's futures according to all the demographic data.

    Now take on board a 15 point or higher mean racial difference.....

    Still everyone knows somone who is an exception, so the statistics don't matter right? Sadly, no. People are prone to 'heuristics and biases'.

  • Comment number 38.

    #37 Disclaimer: The rest of the material associated with the site off the first link in the second paragraph above appears to be more than a little rabid/unreliable. But there is some truth to the stereotype provided by the commentator. The second link suggests why. This is a frequencies/relational point.

  • Comment number 39.

    KingCelticLion

    I was checking out your biog

    "Returning to ecology he sought to improve on the predictive system techniques of the Massachusetts Institute of Technology behind "The Limits to Growth". "

    Have you got a link for this work, my Dad used to scare the pants off me with this club of Rome stuff about 30 years ago and I got hold of a copy of the book a few years back.
    I'm a systems engineer so this sort of think fascinated me - I'm off to re read it now.

    Still screaming

  • Comment number 40.

    #39 I WANT TO SCREAM

    I have put an answer at the Newsnight 11 Nov.

    There is a limit to what I can say.

    1) It could break house rules of the BBC blogs.

    2) It could break Company Law. Having transferred work to a limited company.

    As a director if I put work on these blogs, that really should be done commercially through the limited company. That is a conflict of interest.

    see # 95

    http://www.bbc.co.uk/blogs/newsnight/paulmason/2008/10/new_world_financial_order_what.html

    3) Though it is a limited company it works in the interests of the planet. So it is not really in self interest.

    So I have to write here as an individual, that does not have a conflict of interest as a director and does not break house rules.

    Celtic Lion

  • Comment number 41.

    Paul,

    I saw you put the boot into Merv yesterday, had to be done, keep it up :)

  • Comment number 42.

    praxis22 (#41) I'm intrigued. Do you not think Mervyn King's response to Paul Mason was both sound and measured?

  • Comment number 43.

    Not a single politician, not one commentator or presenter (including you) and certainly not a single 'expert' in the news has correctly identified the two interlinked problems the world is facing today:

    1. The little financial difficulty: True, it started with sub-prime mortgages, BUT it is far deeper than that. After all the total of sub-prime mortgages is reported as being some $1.5 trillion, whereas Governments have so far pump close to $10 trillion into the banks. If the problem was just sub-prime mortgages, or 'banks not lending to each other', this $10 trillion cash injection would have solved in one go.

    No, the problem is 'derivatives'. These debts and bets are worth some $500 trillion. Compare that to the GDP of the whole planet of just $50 trillion and you get some idea why this fantastic burden of debt can NEVER be repaid.

    The only solutions are
    a) hyperinflation to degrade the whole of that debt (following Zimbabwe)or
    b) legal cancellation of all derivative contracts (!!) or
    c) collapse of the whole financial system incl just about all banks, and starting all over again.
    We need to choose one and go for it. The future is bleak whatever Gordon does, but pumping borrowed money into the economy in the utterly vain hope of recovery is just about the worst possible strategy.

    2. The little problem of Energy and Growth.
    Next year the world production of crude oil will, for the first time in history, decline for geological, not political or economic, reasons. Peak Gas will follow some 10 years later.

    2008 is the end of the Era of Growth (as growth is predicated on the availability of cheap energy) and the start of the Era of Decline.

    No matter what investment is made in oil or gas fields, the total production from 2009 onwards will decline every single year by perhaps 4%, thus our energy sources will halve every 20 years or so. This has already happened in 60 oil producing countries around the world, incl USA (1972) and UK(1999) and now, in 2009, global production will begin to decline.

    The 1930s depression was bad enough, but this decline will be on a massively larger scale. To start with, it will be at least 40 years long. 40 years will take us to about 25% of current energy usage, which is what we can expect from all renewable sources combined. So at that stage, provided Governments have been wise enough to have invested massively in renewable energy, renewables may be able to take over from fossil fuels and perhaps stabilise the world economy.

    So, the budget should
    a) embrace the Green New Deal (£50 billion per year invested in renewables)
    b) forget about tax cuts or other increases in current spending
    c) choose a strategy for the self inflicted financial crisis - and follow through

 

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