Big Government made the credit crunch
Margaret Thatcher was fond of saying that if you try to buck the markets, the markets will buck you. As the financial crisis deepens, it’s important to remember that the events unfolding are not a failure of the markets - it's the market response to a problem created by Big Government.
For years, central banks - particularly the US Fed and the European Central Bank - have kept interest rates lower than they might otherwise have been. The industrial revolution in China gave us lots of cheap goods without inflation rising.
But it meant too much cheap money for too long.
Governments and people had more incentive to spend and less to save. That meant that public and private debt in the West grew horrifically - and with people thinking themselves richer than they were, there was an asset bubble (think house prices).
All those years of low, low interest rates will now be matched by higher costs of borrowing.
There's still a Neanderthal-tendency - notably the Confederation of British Industry - demanding an interest rate cut. Those calling for the Bank of England to cut interest rates simply don't get it. When it comes to the cost of borrowing, it's not going to really matter a fig what the BoE does. There ain't enough money to lend out. Banks that can still lend money will charge more for doing so.
Demanding that the Bank cut rates is like demanding that the television weather man forecasts lots of sunshine for tomorrow in order to prevent it from raining. The Bank today now needs to set rates on the basis of what is going to happen - not on the basis of wishfully thinking that it's in a position to change the economic weather.
Not only does the BoE no longer set the cost of borrowing the way it did a generation ago, but I’m starting to wonder – as a monetarist – if it can even control the money supply. The past decade has seen an explosion in the new financial instruments of liquidity. I don’t think that the conventional levers of economic control once available to officials can work anymore. We’re about to find out.
Posted on 16 September 2008 by Douglas Carswell