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Garleek

Listed below are comments made by Garleek between Wednesday, 18th June 2008 and Monday, 6th July 2009.

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Bank of England wins victory - but for what? 11:42am on 06 Jul 2009 The bubble was partly due to the Fed / BoE intervening in credit markets to lower the interest rate, i.e., pushing the price of credit below its market clearing level. They thought this was a good idea, so even if they had had the authority they would have been very unlikely to intervene in credit markets to lower the supply of credit by raising capital requirements, i.e. restricting the supply of credit below its market clearing level.

The real problem here is excessive government intervention in credit markets. More intervention will not help: we need LESS.

(i) Don't try to set interest rates: we don't try to set other prices in the economy do we?? Let the BoE simply print enough money to keep notes and coins growing with real growth in the economy.

(ii) Don't provide a crazy backstop to the banks. If a big bank goes bust, the govt may in very special circumstances need to provide cover to the creditors, but the institution should then be wound down.

We are living in LA LA Land if more govt is the solution to this mess.
Debt and inflation 3:39pm on 18 Jun 2008 As a professional economist I feel I should point out that Mr Preston has misunderstood the impact of inflation on debt. Debtors care about the real rate of interest, not the nominal rate of inflation, as it is the real rate of interest they need to pay back each year to keep their debt constant in real terms. Only if higher nominal inflation reduces real interest rates can debtors be better off. Furthermore, debtors can be worse off even if real interest rates fall as higher nominal rates of interest may increase their risk of bankruptcy.

I think Mr Preston has got confused by the fact that if the debtor’s contract implies that she has to pay the nominal interest rate each year, she will pay off her debt more quickly with higher inflation for a given real rate of interest. But this is only because the higher nominal rate of interest is forcing bigger capital repayments as a proportion of the outstanding debt each year, making the debt more expensive to service early on and less expensive later. There is no overall gain though.

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