Rate cut to 1%

Pete Boettke made an important point recently:

we have to remember that there is a systemic relationship between savings and investment that is at the heart of institutions of financial intermediation.  That is, in fact, why these institutions exist in the first place --- to coordinate economic affairs in a way that the savings of some become investment funds for others.

So I am glad to see some coverage for this point following the Bank of England's decision today to cut the Base rate to just 1%. Here's BBC News:

Following the rate cut Paul Broadhead of the Building Societies Association (BSA) told the BBC that savers were being "punished", arguing that the move could hinder the funds available to societies to lend as mortgages.

Over time it should be clear that talk of "the interest rate" is a cover for underlying relationships between the quantity of money and our time preference. The key issue is that although most people realise that  we need to save before we can invest, we are duped and possibly bullied into thinking in the short term. Apparently in a crisis we don't have time to build up savings, we need to invest by any means possible. But note that (i) this is what's caused the crisis (can anyone provide any real examples where the cure is also the cause?); (ii) the "crisis" proper has been going on since 15th September 2008, and the run on Northern Rock began on 14th September 2007. So before anyone else tells me to forget basic principles please reveal:

• Under what time horizon do you anticipate your remedy working?
• If slashing interest rates won't have an effect until the medium term, why not begin with structural reforms?

I hope everyone realises that policy errors are compounding the crisis, and that we're still waiting for a decent counterfactual history. We were promised that these remedies were necessary to get banks lending again. They haven't worked. Time for new ideas?

Comments

[Greg]

can anyone provide any real examples where the cure is also the cause?

Hangovers!

[michele]

can anyone provide any real examples where the cure is also the cause?
To some extent vaccination
more theoretically love is cause and cure of sadness

[Albert Tatlock]

"Under what time horizon do you anticipate your remedy working?"

To which the reply is surely that things may have got far worse if we had let banks fail. Yes the economy is still suffering but the pain would be far more severe had the govt not bailed out the banks last year. To have stood idly by would have caused a induced run on the banks and propbably the collapse of our banking system with disastrous consequences for the economy as a whole.

[aje]

Note that I said that "we're still waiting for a decent counterfactual history". You've provided an assertion, but if you can support that with evidence - i.e. actually support the idea that without the bailouts and intervention things would be even worse, then I'm all ears.

[albert tatlock]

Two things:

(1) I find it bizarre that an Austrian Economist asks for empirical evidence in response to a challenge to his theories. Whats happened to the essential complexity of economic phenomena which, in all the Austrian texts I have eveer read, is listed as a reason why you cannot test the soundness of an economic theory by simple empirical investigation. Apparrently this is okay as an argument for an Austrian to use as a defence of his argument but not by his opponent??

(2) There is clear evidence that the stimuli employed to date are beginning to work. For instance two indices which are universally taken as barometers of shipping traffic (and therefore a sign of improved trade and economic well being) have improved substantially in recent weeks:

- The Baltic Capesize Index measure of shipping costs has risen 337% from its early December low, and in percentage terms has recovered about half of its recent losses.

- the more inclusive Baltic Dry Index is up 200% from its lows.

These strongly suggest that the market is bidding up to ship goods, which is a very positive sign for the economy.

Maybe all that tosh about malinvestment, the need to balance investment and saving thru interest rates and the dangers of fractional reserve banking is infact just tosh then eh??