It's not working! Let's do more of it!

CityUnslicker at Capitalists at Work tackles the demented idea that lowering interest rates from 0.5% to 0% will solve all our problems:

If low interest rates are the answer...what was the question?
Interest rates are not the problem, the problem is too much debt to be serviced; this needs to be written off and the economy made more flexible. Maybe lower taxes would be a better way to provide the money to repay the debt or to reduce regulation so that new businesses may grow and prosper. The time for propping up the sick by juicing their rates is long-gone.
Read the whole thing.

I can't help but think that people are running out of ideas, and lowering interest rates further is a classic example of "we must do something; this is something, therefore we must do it." CU is quite right that underlying debt is (or at least, is a significant part of) the problem. People with huge mortgages that they can barely service even at rock-bottom rates are not going to be able to buy discretionary goods to stimulate the economy, will be stuck in their existing jobs as they can't sell their house to move, and will be praying (along with their loan holding bank) that their employer doesn't go under until "something turns up".

Let's not forget government, either; with increasing amounts of money going just on loan interest, and the UK credit rating only one imprudent Chancellor away from a plummet, the last thing any government can afford is to spend stimulus money even if it can find something useful and relatively short-term to spend it on (HS2, you really don't count).

What's the alternative? Well, "I wouldn't start from here", but perhaps CU is right and we need to write off the debt. Of course, in the case of mortgage holders this is going to be a bit tricky. This can only work, as far as I can see, by the mortgage-holding bank giving up on easing credit terms, acknowledging the principal will never realistically be repaid, and declaring the mortgage to be in practical default. Have a standardised deal where the bank repossesses the house, and allows the previous owner to move onto a shorthold tenancy with a guaranteed 2 year minimum residence which the now-tenant can end by giving 3 months notice (thereby giving them the opportunity to move somewhere cheaper / with more jobs). The bank is then left with a collection of houses which it can sell over time as the tenant moves or reaches the end of their contract.

Of course, the side effects of this are to ruin the credit (such as it is) of over-stretched home owners, force banks to realise actual losses on their loan portfolios, and of course progressively degrade house prices as more and more houses come onto the market with an owner (the bank) who actually wants to sell them and raise some cold hard cash. I can live with that, and it beats the current zombie situation hands-down.

CityUnslicker for membership of the Bank of England MPC, anyone?

No comments:

Post a Comment

All comments are subject to retrospective moderation. I will only reject spam, gratuitous abuse, and wilful stupidity.