Bank Of England To Slash Interest Rates To 0%?
By Justin Gardner | Related entries in Economy, Money, The WorldWhen national banks start talking about lending money for absolutely ZERO interest, do you really need any other evidence that the market is not doing its job?
Governor Mervyn King said he is ready to reduce rates to ‘whatever level is necessary’ to counter the economic storm.He warned Britain’s economy could shrink by at least 2 per cent during 2009, pushing inflation into negative territory for the first time in almost half a century.
A worst-case scenario could see a slump of more than 3 per cent in gross domestic product, the biggest year-on-year fall since the beginning of 1981.
Former Tory Chancellor Ken Clarke, who led Britain’s recovery from Black Wednesday, warned the economy was heading for a ‘catastrophic crisis’ far worse than ‘anything that has occurred in my lifetime’.
‘There will be a very serious recession next year,’ he said. ‘I think the big problem in 2009 will be the catastrophic fall in consumer spending demand, spending in shops will get worse.’
The Bank confirmed the country has already entered its first recession since the early 1990s, blaming the slump in lending and chaos in the financial markets. It said national output will fall at an annual pace of around 2 per cent by the middle of 2009.
Listen, if you don’t believe that the market has failed us, then I’m not going to try and convince you otherwise. But I will tell you that none other than Warren Buffet favors government buying up shares in these key sectors that not only pay us interest but also give us equity at rock bottom prices. And do know that every single first world economic power on the face of this earth is set to take similar measures. Because when the market can’t spend, governments can. Why? Because they can print money. Yep, I know that doesn’t seem fair or right, but if you don’t understand that governments are simply the biggest businesses in world, well, reality check time.
But hey, go right ahead and keep believing that the market will just correct all of this and we can do nothing but just sit back and let company after company fail. No worries about any worldwide domino effect as consumer confidence completely evaporates and people only spend money on food, shelter and energy. Because, you know, that doesn’t effect anybody except all the industries that don’t sell food or shelter or energy. And really…how many of those are there out there?
Moving on…
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November 13th, 2008 at 9:00 am
Justin, I find myself again tempted to respond with quick colloquial scatology, but I will refrain lest I get anyone’s panties atwist a second time. Instead, I’ll say that I find the implications of the notions you express here contemptible. Perhaps even beneath contempt.I have yet to see anything resembling widespread conventional wisdom among fiscal conservatives that the appropriate response is to simply do nothing. So repeating this broad-brush smear is quite aggravating.
Go ahead, say that “the market has failed us” all you want. You are partly right, but you are missing a HUGE point. What the world is experiencing now is a crisis of faith, plain and simple. It’s not a crisis of ideology, or of the basic approach to people making transactions. It’s a crisis of faith.
So the answer to what to do, if anything, must be geared towards restoring faith. The important thing to notice is that doing something is only better than doing nothing if the something done makes things better and improves public faith over the long term. So for example, if GM gets “bailed out,” that’s only sensible if its reformed into an enterprise with long-term sustainability. Same thing goes for mortgage debt. The only loans worth preserving are ones that the debtor can afford to pay back and WILL WANT TO pay back because the loan still represents a good investment in something whose current value is close to or more than the debt and whose value can be expected to appreciate.
Very little long-term good will be created by propping up unsustainable enterprises. Our system must reach a new equilibrium. Propping up unsustainable enterprises, whatever the merits may in some cases be, can be relied upon to have one serious negative side effect, which is to prolong the time until a new is reached. delaying the inevitable will keep our economic and governmental systems highly volatile. Which means unstable and unpredictable, and therefore faith-reducing.
All of the above REALLY OUGHT NOT to be construed as an argument for doing nothing. Intelligent reasonable folks who agree with me on this deserve not to be continually smeared. This argument is an argument for serious vetting of all proposals, giant and small. It’s an argument against blithely supporting approaches which history has suggested are of questionable efficacy.
At base, it’s the difference between “as quick as humanly possible” and “with all deliberate speed.” Do you get this yet?
November 13th, 2008 at 10:10 am
Who are you addressing this to? As far as I can tell, very, very few people are saying we should do nothing. The debate is over what should and should not be done — not whether or not something should be done at all.
And the market hasn’t failed any more than my car would “fail” if I drove it into a wall. I’m tired of people acting like this was somehow caused by capitalism. It was caused by the negatice aspects of human nature. The market was abused by both private organizations and by government bodies. You abuse something, it stops working well. The free market is just a system for effeciently moving goods and services at reasonable prices and with high incentives for improvement and innovation. It’s not magic and, other than a few wild-eyed libertarians, I don’t know anyone who’s pretending that it is magic.
Look, if you smoke and stuff you face with fat and have a heart attack, does that mean your circulatory system is fundamentally flawed and should be replaced by a hand pump and PVC piping? No, it means you absued the system.
The government needs to repair the market, not supplant it. A lot of people are worried our government and others are tyring to stick in PVC piping when all we need is a bypass and a better diet. People concerned by the government actions don’t need a reality check. They just understand government has as much capacity to f something up as do private companies.
O.k., I didn’t even address the topic of the post. Sorry. I’m jsut reacting to the tone that assumes there’s this mass of people trying to throw up road blocks when many of us are jsut putting up caution signs. And I’m now down with the metaphors. One more and they’ll haul me away.
November 13th, 2008 at 12:05 pm
First off kranky, if you want to needle me because I called you out for saying “Bite me” then I can’t stop you. But why even bring it up? Especially since I talked to you via email about it. I’m disappointed you wouldn’t keep that conversation between us. Oh well.
Regardless…
I’m not missing anything. I know there’s a lack of faith in the market. Why? Because it has FAILED and is not rebounding. And as we both know, when the market fails so utterly and completely, then there’s virtually nothing that will restore that faith except government intervention.
You argue for serious vetting. Well, we’re past that point and now “the great” is the foe of “the adequate.” Our credit markets are still virtually frozen, otherwise you wouldn’t see the big 3 with their hands out. Because if the credit was flowing fine, these companies would have no problem raising capital.
So let’s be clear here…these are not unstable enterprises.
Concerning the auto manufacturers, these are companies with millions of employees and millions more customers who they have to support. So while you talk about their failure as somehow inevitable, you’re completely ignoring the idea that these companies have MASSIVE value, not only with their brand, but with the innovation they bring to the table.
Concerning the loans, you’ll be happy to know that the government isn’t buying those assets anymore. Instead, they’re buying the banks which can then determine what are good and bad investments. I was in favor of the TARP program when it was first proposed because it made sense. And then the bill got passed and they developed a better plan to dole out the money. Could they have done this if everything was thoroughly vetted, as you suggested? We won’t know, but the injection of capital into the market right now is an IMMEDIATE need, not something that we can take untold months to cross every T and dot every I.
And, by the way, I’m not just talking to you. In fact, I’d argue that who I’m really talking to is the group that is saying, “Let the market work.” Now, if you identify with those folks and take exception to what I’m saying because you want to do something in addition to just letting the market work, well, I’d say you’re different than that group and shouldn’t fire back at me and claim I’m smearing you. Because there are literally people who don’t want to do anything, and those are the people I’m taking aim at.
November 13th, 2008 at 1:04 pm
Justin, as you can see by Alan’s post, I’m not the only person irritated by your tone and your implications.
Close maybe, but no cigar. Because “the crappy” is just as big a foe of “the adequate” as “the great.” I’m not sure how one measures how “frozen” the credit markets still are. But I know that when I’m sick and go to the doctors and get a 10 day prescription of pills, I don’t expect the first pill to instantly restore me to full health. And I don’t keep taking pill after pill after pill hoping to get better in minutes. Because I know that an overdose could be ineffective, make me worse, or even kill me.
Here’s the thing: not only are we all stuck taking our medicine, we’re all stuck waiting patiently for the medicine to work. Your argument veers pretty close to simply suggesting that panic increases the utility of action and decreases the utility of judgement. I think that’s nonsense.
Notice that one thing you say in describing the viewpoint you are attacking is that it amounts to just letting the market work. Notice how the term “just” functions as a pejorative. For my part, I am not claiming that we should ONLY wait for the market to work. (And just like Alan, I’ve missed all the people who have said that). But allowing the market to absorb current circumstances and price in some new sense of valuation is not something we can force, or skip.
The conflict we are having is ages old and it’s matched by aphorism. You are all about “he who hesitates is lost” and I am all about “fools rush in where angels fear to tread.” So go ahead and keep insisting that the early bird gets the worm. Because the second mouse gets the cheese. :-)
November 13th, 2008 at 1:55 pm
The problem is not fundamentally raising capital — the problem (with the auto industry at least) is earnings that don’t support expenses. Beyond my ideological repulsion to fascism (which in economic terms this is), my problem with the bailout is that it is a VERY expensive band-aid that does nothing to solve the fundamental problems of the industry and will inevitably create an inflationary drag coupled with the re-emergence of the problem.
Honestly, Justin, while you are prone to spits of emotionalism (as am I), I’m surprised by your panicked tone and desire to simply do ANYTHING without serious consideration of its long-term value. These troubled times are nothing more than the wages of sin for economic lunancy of bygone decades and perhaps, we as a country, should consider our children’s future before erecting the girders for the next catastrophe 5-20 years from now.
Your manichean response (i.e. “the free-market failed us” and “government intervention is the only way to save us from doom”) is a total indicator of ideological bias against the free-market. A free-market by the way which has provides you and the rest of the U.S. population with unprecedent wealth and prosperity.
So what is the answer? To the extent that this “crisis” represents a business cycle, which it certainly does to a point, then it should be allowed to play out and the market should do what it does the best, which is correct itself. To the extent that this “crisis” represents an anomalous “happening”, then we should take the time to pinpoint the primary causes and to deal effectively with it.
Certainly, we should identify the innocents that are most threatened and respond to the basic needs of the citizenry should they be jeopardized. But we are not to the point, and large-scale layoffs, while painful are the price we pay for freedom and the prosperity that economic freedom brings.
I am very fearful though that what we have is D.C. now is a combination of charlatans and twits, in which if all their bones were fused together would not constitute a single backbone. Now they are running around like frightened little school girls with a loaded revolver shooting at every shadow on the wall.
The real question here is: Will we be able to recover from what we are about to do to ourselves?
November 13th, 2008 at 4:58 pm
Not in defense of Justin or in explicit response to Alan and Kranky, but I consider the *let ‘em fail* crowd to be quite sizable and of the *just* let the market work mindset, a mindset I consider to be highly questionable. So yeah, to that degree there are a lot of people out there who seem to think gov’t inaction and existing mechanisms are the answer I think there is a subgroup who think this mess will fix itself. Maybe if there were a couple of entities or only one market sector under attack but there is a sense that we’re on the edge of a global tipping point into the lower consumption leading to less production leading to higher unemployment leading to lower consumption leading to…cycle.
November 13th, 2008 at 5:50 pm
@Alan,
I’m addressing those who are arguing that the government should essentially do nothing because their ideology dictates that governments should not be involved in the market place in the capacity that these rescue packages suggest. That, to me, is doing “nothing” and letting the market work.
And trust me, there are plenty of those folks out there. Just go to reddit, Digg, Fark…they’re ALL over the place.
And agreed, it’s not the market’s fault if you don’t view it as a living breathing thing. But I include all the pieces of it in my definition. In that sense, a panicked market that will not pick itself back up needs some amount of forward action, even if it’s not as carefully considered as you guys would like. Ordinarily I would agree with you, but these are not ordinary circumstances and you can’t treat it as such.
Meanwhile, 240,000 jobs were lost last month alone.
@kranky
What Alan has said in regards to my post does not excuse your poor behavior. So please don’t bring him into this.
As to all your other points, I appreciate that it’s a basic disagreement. And that’s all it has to be. But when nearly every single economic indicator is pointing toward a crisis of historical proportions, we can not afford to just wait and let the market sort it out while we discover the absolute best way. And no, I don’t buy that you’re arguing just for a “good” way because that’s what I’m arguing for. The deals that have been put forth make sense from an economics standpoint, they just fly in the face of free market ideology, which has clearly failed us.
J. Harden…
First off, when you start lecturing me about my tone, especially given your past history, it doesn’t make for a receptive audience. Try to just leave that out of the conversation please. It’s not needed, nor is it helpful.
But to the issue at hand…
You and I both know that the big 3 would have been able to secure loans if the credit market wasn’t completely upside down. These are massive companies with a ton of value. And if you don’t believe that, well, I’m not sure what I could do to convince you. But perhaps you’d accept that reality that they’re going to the government instead of the banks because they know the banks are currently digging themselves out of bad debt on their books?
And I’m not proposing that we do just ANYTHING. There are specific proposals being laid out and I think taking equity stakes in these companies and demanding the same accountability shareholders would is a good idea. And it’s really the only way we can do it unless we just let these companies go bankrupt, which is all that free marketers are proposing at the end of the day. Yes, they’re all saying we need to study things carefully, but your ideology is very clear about it, “This too shall pass.” Of course, but at what price?
As far as unprecedented wealth…you’re ignoring historical trends that show a family in the 50s and 60s could only have one parent working and afford a house, two cars and sending the kids to college. But ever since the lates 70s, wages for the middle class have remained stagnant when adjusted for inflation, while the top 5% have enjoyed massive wealth creation. Unprecedented in that sense, yes. Class warfare has been extremely successful…for the rich.
So yes, this is an ideological argument. But I’m certainly not claiming that elements of the free market don’t work, I’m just suggesting that free market purist like yourself are ideological bankrupt at this point because all you have left is the same talking point you’ve had from the beginning. And in the meantime, countless millions would made to suffer because you can’t see the economic reality that’s screaming at you.
One last point…2.5 million jobs have been lost in the last 13 months. So perhaps you’re not paying attention, but large scale layoffs are happening every single week. Put down your Milton Friedman essays and pick up a paper.
November 13th, 2008 at 7:14 pm
Justin, I don’t think we disagree much on basic principle (that there is a positive role for the government to play to avoid a catastrophic loss of jobs) but we do disagree on degree. You have a more optimistic view of the government’s ability to remedy the situation without causing more problems. I’m far less confident in that regard. I’m more confident in the market’s ability to mitigate the losses, you’re far less so. That’s an ideological difference and not one we’re going to likely agree on — ever.
As for the specific matter, I still disagree that we don’t have time to consider the options. What’s the d-day for GM’s collapse? Can a far smaller loan keep them afloat while we debate courses of action? Instead of propping up a failed company, is there ways to manage the collapse so it doesn’t snowball into a larger economic disaster? Why isn’t Chapter 11 an acceptable course of action? If it’s just the frozen credit markets that are preventing GM from getting more cash, isn’t there already $750 billion out there for banks to lend — can we not get a single bank to agree to loan to GM using the government bailout money? If we can’t, is that a fault of frozen credit or evidence that loaning to GM is a really bad bet? If it is a bad bet, then why would the government make a loan, knowing full well the money won’t be repaid and we’ll be here again in a year or two?
Lots of questions. And I don’t think we can afford to bailout first and ask said questions later. If necessary, there’s ways to stopgap this before we make any large decisions.
November 13th, 2008 at 11:43 pm
@ Alan,
Actually, we would probably agree on pretty much every single time except THIS case, which could have catastrophic consequences if we don’t act and give them part of this bailout money.
Also, I think there are still a lot of free marketers who put way too much faith in the markets and reflexively paint the government as doing more harm than good. I mean, technically, market forces are what delivered this situation, right? Because all the government did was allow for the market to be more self regulated, nor less so.
However, this isn’t 1980 and the Reagan revolution is over, so let’s revisit the idea of government intervention as possibly being a positive, not doomed for failure. It has worked before and it can work again.
Also, this isn’t just about GM. It’s about all 3 of our manufacturers. And while I agree that Chapter 11 would be one course of action, you do know what that would do to consumer confidence for those manufacturers’ brands, right? Part of a car company’s appeal is that they’ll be there for the consumer with the appropriate parts when their car breaks down. Go into Chapter 11 and people will automatically start buying a lot fewer cars than they already had before. And it’ll take forever for them to get that confidence back.
One last note, the big 3 ARE going after part of that $750 billion because the banks are still in a bind and they figured they may as well just go to the government and try to get the money instead of go through the banks which have bigger fish to fry right now. I thought that was clear in this discussion.
November 14th, 2008 at 12:03 am
Confirmed. Dems are asking that the rescue package for the auto industry would come from the $700B already approved…
Still, it looks like it won’t pass. What a shame.
Link here.