Douglas Carswell's Blog

Cheap credit to the rescue! Again

Apparently the Bank of England could soon “cut interest rates to just 0.25 percent in a desperate bid to revive Britain’s ailing economy”. Desperate is the word.  I can think of less polite ways to describe such a move. 

The idea behind low interest rates is that with credit so cheap, consumers will go out and spend money. Businesses will borrow to invest. And – hey, presto! – there will be growth.

The only trouble with this approach is that it is nonsense. The government is testing to destruction the idea that monetary stimulus can engineer growth.

Decades of low, low interest rates have not revived the Japanese economy. Nor have they led to recovery here.

Low interest rates are not some kind of magic elixir that produces prosperity. Central bankers belief that they were helped get us into this mess.

Whenever the economy seemed to be on the verge of contraction (post-1987 stock market crash, the failure of LTCM, dot com bubble, 9/11 etc), central bankers cut rates. It perked things up for a while. But low rates also caused asset prices (think house prices, think share prices) to rise.  Low rates encouraged over consumption and under investment in the West.

Worst of all, low rates led to chronic malinvestment, which we mistook for growth.

What happened in 2007 is that this enormous credit bubble began to contract – as it inevitably must.

Rather than recognise the credit crunch for what it was, Treasury officials and central bankers have behaved as if it was just another cyclical downturn. If only we could stimulate a bit of demand and lower rates, they thought, growth would resume.

The tragedy is that a centre right administration still does not seem to grasp this.

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