It is funny how Gordon Brown’s best move seems to have been his decision not to make decisions in future. When he made the Bank of England independent, it appears he heralded a new era – the seeds were sown for the victory over inflation. Interest rate decisions would never again be subjected to short-term political considerations.
But it has changed now. It appears arguments for an independent central bank are so very last week.
In the US, the Fed has a dual responsibility – to keep the lid on inflation but to encourage growth too. Many are now arguing the Bank of England’s brief should be similarly changed.
That is to make sure the Bank of England focuses on inflation, and forgets about growth, for as long as growth is strong anyway.
We are now witnessing what happens when the full force of the media turns on a bank that focuses on long-term considerations.
This weekend, quite respected commentators argued that Mervyn King, governor at the Bank of England, has been behind the curve.
Well, maybe he was, but quite frankly so was everyone, Mr King’s critics especially so.
It seems inevitable that the rate of interest will fall. The Bank of England’s Monetary Policy Committee is meeting on Thursday, it will take a very brave committee indeed not to cut rates. Indeed, rates may well fall by half a per cent.
Don’t be surprised if rates fall below 3 per cent next year.
Of course, some will immediately go out and see this as a reason to expect surging house prices again.
But they will be wrong. Falling interest rates at a times like these are a sign of desperation – and the need for desperate measures is a bad thing, not something to be celebrated.
When stocks rise on news of big rate cuts, just remember that.
Besides, right now, the real problem is one of a shortage of credit. Who cares what the official rate of interest is, if you can’t get a loan, or if you do, the spread between rates available from the banks and official interest rates is so large?
Maybe the real problem with interest rate policy in recent years was that it was too low to encourage savings. And maybe, actually, that is the real problem behind the credit crisis now. Banks did not have enough money they could call upon from customers’ deposit accounts to meet demand for loans, so they went elsewhere for their money.
For years, interest rates were too low, The irony is, that as the queue of commentators wanting to put the boot into Mr King grows, their accusation is almost the precise opposite of the truth.
Monetary policy was too lax for years.
Will cuts in interest rates solve the problem now?
We have a crisis born of too much debt; getting people borrowing again will not solve that.
It is not to say interest rate cuts are not a good idea right now, but it is wrong to think they will make that much difference in the short-term.
The cause of the crisis has been too much debt and not enough saving. So the way forward is to lower interest rates thus making loans cheaper and saving a complete waste of effort.
Did I fall through the looking glass while I was asleep?