The World Apparently Revolves Around Mortgage Holders
Members of the Sky News Money Panel have called on Bank of England rate-setters to act aggressively and give Britain its lowest interest rate in history…
…Entrepreneur James Caan was among the members advocating the aggressive 1% reduction.
“This will stimulate consumer spending, easing labour market pressure and enabling companies to avoid drastic measures such as large scale redundancies,” he said.
“The higher the cut the more difficult it is for banks not to pass it on.”…
Wait a second. Back in the autumn, the banks needed emergency re-capitalization (we were told) because, owing to the credit crunch, they had no money to lend and the economic gears needed “lubricating.” Now, having been “bailed out” (recapitalized), and trying to prod them to lend, every interest rate cut is supposed to be passed on to customers — meaning mortgage holders? But how exactly does that permit the banks to build up any “reserve” fund to lend subsequently? That messes up the aim of the “lubrication?”
Moreover, all the rate cutting to date hasn’t stimulated consumer spending. But now, with this next (likely) cut, that action is telling us that the recessionary situation is worse than it has been in 300 years. Which is rubbish, but with the public seeing that said all over the place, does Sonny Corleone Mr Caan think they will want to spend the rate cut even if they benefit from it? Nonsense: seeing headlines like “lowest interest rates in 300 years,” consumers are going to keep their heads down and hide their money under the mattress.
Essentially, Mr Caan is calling for a “storm drain” approach interest rate policy. It is supposed to be rainwater sliding through a grate: interest rate cut, cut then passed on entirely with banks acting as little more than “middlemen.” But what, pray tell, can the Bank of England do after they have shot their entire load, and interest rates are eventually reduced to zero? Leave horses heads in the beds of those who refuse to “spend”?
However given that the Bank seems to think like him, it may well soon be the worst situation in 300 years. For Mr Caan and the Bank’s “solution” is apparently to take yet more money out of the pockets of savers. Savers who, remember, vastly outnumber the mortgage holders who are among the main beneficiaries of the lower interest rates.
And the interest rates those savers receive on their savings is sometimes much, or even most, of their income. Yet another deep rate cut will only slash their incomes still further. Yet Mr Caan and others seem to believe that those savers (who, it bears repeating, vastly outnumber mortgage holders), now suddenly with less money to spend each month, will go out and spend more?
How Mr Caan ever became such a successful “entrepeneur” with those savvy “supply and demand” skills is anyone’s guess.
Interestingly, though, banks never fail immediately to “pass on” interest rate cuts to savers. They certainly need no prodding in that direction: yours truly suspects our savings rate cut letter will be in the mail by lunchtime, if that late in the day. Spend more money owing to this interest rate cut? Mr Caan: this household sure as heck won’t because it cannot, and it knows it is hardly the only one in this situation.
But it sure hopes those mortgage holders suddenly run wild buying up everything in sight and then some. And it fervently wishes people stampede the banks first thing Friday morning seeking new mortgages owing to this latest cut. Because between them they’ll have to balance out and make up for the far larger number of people whose savings interest incomes have suddenly dropped (yet again), in some cases pretty dramatically.
And that’s to say nothing of what even lower interest rates will mean for the Zimbabwean dollar the pound.
