Europe must keep hacking rates

Yes!!
What a sensible idea. Thank you A. Virlaid, Toronto.
I fully agree that the savers have been ‘used’ and should be getting a fair return for their money.
If credit was costly and savings honoured we might once again see a flourishing population.

I think that Sybil and David and Dan and Mike are on to something.

And I agree with them that cheaper credit is not the answer. It only seems that it might be, because for the last 40 years, that approach has always ‘worked’ — I put that in quotes, because it was just that practice of returning to the same well to dring the same poisoned water, that got us into our current mess.

We need to consider systemic controls that stop us from going to that well in the future.

Europe would be better off letting its people start saving with some hope of getting a real return from their saving (after inflation). So, no, don’t lower rates — if anything, raise them so that savers get 3% AFTER inflation as a return on lending their money to the banks.

And, yes, I know that saving will lead to hardship for a while. But there is no other way to getting back to Sustainability Drive.

And yet this is the perennial response from most pundits. Loosen credit. Get more people into debt. Let’s spend, spend, and then spend some more. It won’t work, this one last time, in some heroic effort, that somehow MUST succeed.

The problems are far from being properly analyzed. This will lead to wasted time, effort, and useless ’solutions’.

Is this a shortage of capital?
Is this a lack of governance?

I’ve seen every explanation imaginable under the sun — except Global Warming. That is probably next.

Do the FED and Treasury “have all the tools at their disposal that they need to ’solve’ the problems” like we’ve been told?

What if they don’t even know what the problems are?

Another analysis that seems to be off the mark is that the biggest underlying problem is the subprime mess. That simply is not true. It is just the most obvious manifestation of a bigger problem IMO.

You can read one take on this at
http://money.canoe.ca/News/Economy/2008/11/03/pf-7289841.html
and at
http://economictimes.indiatimes.com/News/Economy/Indicators/Oil_prices_more_to_blame_for_global_slowdown_than_sub-prime_mess/rssarticleshow/3672285.cms

The Daily Reckoning’s newsletter today made a good observation IMO.
Namely, that “This is no ordinary cyclical downturn”. And that this is a ‘balance sheet recession’. Until the debts are under control, nothing is much going to move. We cannot just create more debt thinking that this will get “things moving”.

It is likely that one part of what happened in the 1930-s will happen again. That is, that our governments will become both the “lender of last resort” AND the “borrower of last resort” — BOTH at the SAME time. Few others will do much of either activity until they are comfortable with their own credit position and that of the borrower.

We forget that it is not just the lender who worries about the creditworthiness of the borrower — there are times when the prospective borrower does the initial ’self-censoring’ themselves. The prospective borrower can act as their own evaluator of when a loan should be accepted.

So it will end up that the government will BOTH borrow (or print the ‘money’) AND spend that money in make-work initiatives. Why? Because there are fewer identifiable profitable opportunities in the private sector. And, yes, because private money is harder to obtain.

I saw Lou Dobbs and his team of experts a week or two ago blaming the banks for not re-extending the credit — given to the banks by the FEDs — to borrowers. As if that was the main problem. This is a lot easier said than done. Otherwise we really could drop money from helicopters. Or just give everyone a million dollars.

Japan did the same thing in the early 1990-s. They had bank representatives going from client to client BEGGING the clients to take loans. Result was that there were very few takers. The ones that did take the offered cash were the ‘Zombie Companies’ — that is, those from whom repayment was very unlikely. They were the walking financial dead.

The way that we in the West are approaching this may very well lead to hyperinflation at some point in the future. Or at least very serious stagflation.

We need a little more creativity from our financial leaders. Please.

As with everything else, the inflation rate is manipulated by governments.
Why can’t there be a constant, fair borrowing rate for everyone so we all know where we stand?
It is the manipulation that causes all the uncertainty as everyone jockeys for the best position.
There should be a standard home loan rate, a standard business rate and a standard rate for savings.
The way it is at the moment, no-one can plan for the future and many are getting a very raw deal.

Sybil, youb are hit and miss. Bonds are sold at a fixed rate of return. You buy a bond and get your money plus the stated interest. For example, you buy a $10,000 bond paying 5% interest. The yield can be only 3.7% because the bonds can be sold at a premium. The rate remains 5%, but you actually pay more than $10,000 for a $10,000 bond. A similar action happens when bonds are sold at a discount and the yield is higher than the stated interest. Taxpayers never make up the difference, that is done on the bond markets when they are traded.
That 1% rate is what banks pay to borrow from the reserve under certain circumstances. AIG is paying far more than 1% for what they borrowed. The fed rate is used to combat inflaton and deflation and keep the economy moving forward.

You are so preoccupied with what Europe does. To think that Europe can act like the US is naive and downright unintelligent.

First you fail to realize or willingly forget that this is a US problem basically. The whole mess started here but the panic spread to the rest of the world. When the panic subsides rest of the world will be better cause they haven’t collectively declared bankruptcy like we did.

Either you don’t know or willingly ignore the fact that the euro is not a world reserve currency (yet) like the US dollar. The US can stuff the world with truckloads of US dollars and extend deficits knowing that it can get away with it. Europe plainly can not. They go to low with interest rates and Euro quickly becomes a zimbabwe type currency. Moreover they seem to care more for low fixed income parts of society that do not have easy access to financing in order to take advantage of the lower rates. These people only feel the inflation that ensues from low rates. But who cares about them right? When the financiers and wall street villains can just borrow, spend and declare bankruptcy afterwards.

I find that you don’t provide support for many of your arguments. You just state them. Well that doesn’t make them true.

‘Still, interest rates in Europe remain substantially higher than the federal funds rate of 1%. The disparity implies that the British, Swiss and the rest of continental Europe shouldn’t put down the interest rate ax just yet.’

Who says they shouldn’t be substantially higher? US and EU economies are substantially different. I suspect it has to do with the fact that they have to attract T-bill funding by higher rates since world won’t buy euro t-bills by default.

“I don’t understand the economic rationale for why Europe’s interest rates shouldn’t be in rough parity with the Fed. It’s important that all the central banks get real”

I guess he should apply for the ECB head position. Still no support just some snappy talk. This article’s quality is extraordinary.

‘One fund manager said it is critical for central banks around the world to continue working together to lower rates since it is still unclear if the cuts already announced will be enough to restore a sense of normalcy to the credit markets’

I believe the opposite. We borrow too much, we need to stop it. And what is this ‘One fund manager…’. Do you just reiterate what everyone (real or imaginary) says? Don’t you have an opinion yourself?

‘”The ECB, BOE and the Fed have to be in the business of pumping liquidity into the market to replace what was lost in the credit crisis. They may overshoot but let them.”‘

Who cares about the 1 billion of people officially starving and pushed out of the food market by the inflationary policies. As long as we can borrow some more and buy our Jaguar and then declare bankruptcy.

‘”Many of the bankers at the ECB and Bank of England were sitting there, diddling around and worrying about inflation. But wiser minds have taken over. They were just so far behind the curve,”‘

Lack of support again.

‘Still, Alpert said it was encouraging that Europe has seemingly abandoned its single-minded focus on inflation.’

Damn, he is so smart.

‘Thursday’s rate cuts helped to further strengthen the dollar against the euro, which should lead to even more declines in the price of oil and other commodities which are pegged to the dollar. The greenback has now gained 20% against the euro since mid-July.’

Commodities fall because you kick people on the verge of starvation out of the market by handing out dollars to the same culprits that led us to this situation.

‘Nonetheless, Gerasimowicz expressed confidence that the United States should be able to emerge from this global downturn more quickly than Europe since it is clear that Europe is still playing catch up’

Who is going to pay for all the foreclosures and the rest of the credit debacle?

‘”All this taken together is a good sign and continues to show almost what is like the FIFO system in accounting. The U.S. was the first one into economic trouble and probably will be the first one out since we have already cut rates dramatically,”‘

Are all economists such simplistic minds?

La Monica. Please spare us of your unsubstantiated arguments/articles or take a course in critical analysis and try again. It must be a good addition to psycho mumbo jumbo.

To Mariusz,

I hope someone will correct me if what I tell you is wrong. Since I am no expert and this is only my understanding of what happens.

There is a difference between the Feds increasing the actual money supply (“printing” more money, which I believe was increased recently by about 40 billion), and their borrowing money.

The way the fed borrows money is they sell treasuries. Treasuries are a promise of future payment. For instance, I would sell you a 30 year “bond” that says in the year 2038, I will pay you 100$. I have not created money, per ce, I am just committing to having enough money to pay you 100$ in 2038. You would pay what ever price you feel is fair for that bond (promise). Today, for instance, a 10 year treasury bond has a yield of 3.7%. That means the Fed is paying 3.7% to borrow the money represented by the sale of that bond.

Then, as I understand it, the fed lends that money out to banks at a rate of 1%.

So they borrow money at (today’s rate) 3.7%, and lend it at 1%. And we tax payers pay the difference.

someone correct me if this isn’t what is happening.

To sybill – I do not get Your point. Fed is the one who has a power to create money – so I do not think that they do borrow it, they simply create $ via virtual printing press. That is why they can do what ever they want with the rates – in REAL economy no one would invest in USD denominated saving accounts as long as inflation is at highier rate than interest rate You can get from Your saving. Now we have economy when people are buying T-bonds that in fact have negative interest rate – funny isn’t it?

also – i do not get Your connection between treasuries rate and reserve lending rate? Could You explain what You mean?

No, they should not because it wont help. It’s just like here, none of it will reach the consumer. I think for at least the past 8 years most of any rate drops did little but allowed the banks to make hugh profits! It’s called GREED enjoy!

Another solution is a world currency that could come after a complete forgive of debt. Almost unthinkable, agreed. Even more that such a world currency were a Marx currency. Nevertheless Marx was first of all a brilliant economist and he was the first to decribe the important difference of capital and money. Marx currency has no credit and hence no stock market but it could work.

Europe should not blindly follow the US, in case it turns out that we are blind.

In any case, the central bank lending rates should not be reduced below each country’s core inflation rate, as this will cause bubbles and other problems.

Well said, David! I maintain that we have a debt crisis in America, NOT a credit crisis. When the Federal Government is bleeding hundreds of billions of dollars a year in interest payments we have a BIG problem. Interest is simply a black hole of lost opportunities. The ONLY thing that will help the world is if debt begins to be paid and interest rates rise so that it makes sense to save money once again.

The European Banks should not drop their rates any more. The U.S.A should raise rates to match Europe to at least the 3% region.

Has anyone mentioned to the people pleading and begging for more super cheap money that excess credit got us into this mess?

No. Europe should not drop rates further. The US should pick them up AT LEAST to inflation, for crissake.

But the real reality is going to hit soon. The US is going to suck up all available money to lend in the next year and the cost of borrowing money will really go up. There is only so long that the feds can borrow it at 3+% and then turn around and lend it at 1%.

Or perhaps I don’t understand how that works. Selling treasuries at a higher rate then the reserve lending rate?

Interest rates below the rate of inflation are what cause bubbles as well as distorted economic decision making. Further, the ECB has a mission of price stability while the Federal Reserve Bank has a mission of helping their buddies on Wall Street. Europe has experienced hyperinflation in Germany in the 1920s and knows that it is destructive. The US will need to experience it first hand to understand that and get over the deficits and inflation don’t matter attitudes.