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TooLateForAName

Original Poster:

2,570 posts

69 months

[news] 
Thursday 4th October 2012 quote quote all
As a relative numpty at economics I'm struggling to understand why interest rates are so low.

Economy doing badly, hence higher risk of default, surely interest rates should be higher?

What am I not understanding?

ringram

14,125 posts

133 months

[news] 
Thursday 4th October 2012 quote quote all
QE

Sarnie

2,860 posts

94 months

[news] 
Thursday 4th October 2012 quote quote all
TooLateForAName said:
Economy doing badly, hence higher risk of default, surely interest rates should be higher?
If rates were higher do you think the risk of default would go up or down?

Bluequay

1,579 posts

103 months

[news] 
Thursday 4th October 2012 quote quote all
It's being used to keep mortgage payments artifically low. This should in theory release more money for people to spend and stimulate the economy, it should also help to prevent people defaulting on their mortgages during the financial downturn. Sensible people however are saving this extra money and paying down their mortgages and other debts so it's not having much of an effect.

louiebaby

5,600 posts

76 months

[news] 
Thursday 4th October 2012 quote quote all
Bluequay said:
It's being used to keep mortgage payments artifically low. This should in theory release more money for people to spend and stimulate the economy, it should also help to prevent people defaulting on their mortgages during the financial downturn. Sensible people however are using this saving this extra money and to paying down their mortgages and other debts so it's not having much of an effect.
Slightly changed for clarity, but this is one of the best answers you're likely to see.
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R11ysf

1,489 posts

67 months

[news] 
Thursday 4th October 2012 quote quote all
Government saving the asses of the feckless who overstretched themselves. TAt the same time penalising those who didn't overstretch themselves (savers).

The theory is that if money in the bank is returning less then the cost of investment in capital is less and so companies will expand and invest in bigger premises, more staff create new products etc. Also borrowing to produce these same results is cheaper.

If interest rates are 10% then the return on cash you have is higher and the cost of borrowing is higher and so investment for those same things costs a lot more.

However, the opposite of that is that when an economy is booming along you should raise rates to stop it over heating and getting too far ahead of itself. Which then begs the question why did rates not get above 5% from the end of 2001 all the way to the end of 2006 during a massive bull run. The same can be asked of Greenspan in the states, if you artificially create a bull run and let it run too long, then the following crash will be artificially long too, as cutting rates doesn't have the same effect when they aren't coming form very high up. This is why they've now had to head for QE as there isn't the room to cut any more.

If rates were at 8% in 2007 to try and cool things off then house prices wouldn't have bubbled and the rate cutting cycle would still have some room to have an effect without turning the printing presses on.

ringram

14,125 posts

133 months

[news] 
Thursday 4th October 2012 quote quote all
R11ysf said:
Government saving the asses of the feckless who overstretched themselves. TAt the same time penalising those who didn't overstretch themselves (savers).
Probably true for those holding cash, but what about bonds? Capital gains for them... They are in the money.
A good advertisement for a diversified portfolio of course..

TooLateForAName

Original Poster:

2,570 posts

69 months

[news] 
Thursday 4th October 2012 quote quote all
Sarnie said:
TooLateForAName said:
Economy doing badly, hence higher risk of default, surely interest rates should be higher?
If rates were higher do you think the risk of default would go up or down?
Does that really drive interest rate levels? That's a consequence rather than a driver isn't it?

Are the banks that frightened? Are we in an even worse state than I thought?

Is there a quick guide to how interest rates are set? How much control does the government/boe actually have vs the banks/finance institutions/traders?

BoRED S2upid

10,640 posts

125 months

[news] 
Thursday 4th October 2012 quote quote all
Interests rates high more people can't afford the debt they have and everyone goes bankrupt and the world ends. If they keep them low we may pay off our debts a bit.

TooLateForAName

Original Poster:

2,570 posts

69 months

[news] 
Thursday 4th October 2012 quote quote all
My interest arises more from the not having debt and being hacked off with low returns vs inflation. In real terms interest rates on savings are negative.

Composite Guru

519 posts

88 months

[news] 
Thursday 4th October 2012 quote quote all
R11ysf said:
Government saving the asses of the feckless who overstretched themselves. TAt the same time penalising those who didn't overstretch themselves (savers).

The theory is that if money in the bank is returning less then the cost of investment in capital is less and so companies will expand and invest in bigger premises, more staff create new products etc. Also borrowing to produce these same results is cheaper.

If interest rates are 10% then the return on cash you have is higher and the cost of borrowing is higher and so investment for those same things costs a lot more.

However, the opposite of that is that when an economy is booming along you should raise rates to stop it over heating and getting too far ahead of itself. Which then begs the question why did rates not get above 5% from the end of 2001 all the way to the end of 2006 during a massive bull run. The same can be asked of Greenspan in the states, if you artificially create a bull run and let it run too long, then the following crash will be artificially long too, as cutting rates doesn't have the same effect when they aren't coming form very high up. This is why they've now had to head for QE as there isn't the room to cut any more.

If rates were at 8% in 2007 to try and cool things off then house prices wouldn't have bubbled and the rate cutting cycle would still have some room to have an effect without turning the printing presses on.
Composite Guru said:
There are lots of mugs out there borrowing too much money at the moment and its going it bite them all in the a*se eventually. It all about not being able to wait for them to save money to buy something, it seems that a lot of people want it "now".

I know a few people that are like that and TBH when they are pleading poverty all you can say is "you made your own bed, now lie in it"

Stay poor mate, don't get involved, its the easiest way. :wink:
I wrote this on the Civic Type R forum back in 2005 when we were in the boom and spoke the truth on what was going to happen. The topic was on various people on this guys estate buting expensive cars.

I'm still debt free (apart from the mortgage) and don't have any money problems at the mo, so i benefit from the cheap mortgage rates.

Gazzas86

1,093 posts

56 months

[news] 
Thursday 4th October 2012 quote quote all
With interest rates being low, it has allowed me and the OH to get a mortgage last year, we're paying 3.59% which at the moment we can afford to overpay on our mortgage, but.... won't be able to when they go back up again. hopefully they will stay low for a while smile

R11ysf

1,489 posts

67 months

[news] 
Thursday 4th October 2012 quote quote all
Composite Guru said:
I wrote this on the Civic Type R forum back in 2005 when we were in the boom and spoke the truth on what was going to happen. The topic was on various people on this guys estate buting expensive cars.

I'm still debt free (apart from the mortgage) and don't have any money problems at the mo, so i benefit from the cheap mortgage rates.
And as long as you live outside London then that's been the right thing to do. The only problem is central London houseprices took a tiny dip and then continued to push to all time highs. So in fact over-borrowing was a very good thing to do.

Reward the feckless - it's the London way!

groak

3,254 posts

64 months

[news] 
Thursday 4th October 2012 quote quote all
Composite Guru said:
Composite Guru said:
There are lots of mugs out there borrowing too much money at the moment and its going it bite them all in the a*se eventually. It all about not being able to wait for them to save money to buy something, it seems that a lot of people want it "now".

I know a few people that are like that and TBH when they are pleading poverty all you can say is "you made your own bed, now lie in it"

Stay poor mate, don't get involved, its the easiest way. :wink:
I wrote this on the Civic Type R forum back in 2005 when we were in the boom and spoke the truth on what was going to happen. The topic was on various people on this guys estate buting expensive cars.

I'm still debt free (apart from the mortgage) and don't have any money problems at the mo, so i benefit from the cheap mortgage rates.
Well, yeah, 'mugs' usually come a cropper WHATEVER they do, but how do you know you're advising a mug?

Jimboka

3,657 posts

89 months

[news] 
Thursday 4th October 2012 quote quote all
Composite Guru said:
I wrote this on the Civic Type R forum back in 2005 when we were in the boom and spoke the truth on what was going to happen. The topic was on various people on this guys estate buting expensive cars.

I'm still debt free (apart from the mortgage) and don't have any money problems at the mo, so i benefit from the cheap mortgage rates.
I hear 'debt free apart from the mortgage' a lot, but its pretty meaningless. Person A may have a 200k mortgage on a 250k house. Person B has a 50K mortgage on a 250K house + a 10k car loan. B obviously has far less debt...

isleofthorns

147 posts

55 months

[news] 
Friday 5th October 2012 quote quote all
The Bank of England determines interest rates according to their mandate and monetary objectives. To a large extent this has been to maintain a constant inflation target. The simple mechanics being that by lowering rates you generally stimulate borrowing, which in turn stimulates money supply (money creation through debt), which in turn is inflationary (more money chasing goods & services. Higher rates have the opposite effect and promote saving, reducing money supply, and lowering inflation (or creating deflation).

With hindsight the period post-2001 to 2007 should have had higher rates to dampen the debt bubble, which would have certainly lessened the current problems. My view is that it was an unfortunate cocktail of politics and greed, with post-911 America doing everything possible to keep things on the up, Brown and his 'no more boom and bust' and, not forgetting, the greedy bankers!

Post 2007/8 we have a new paradigm and set of problems. With personal, corporate and sovereign debt at such high levels, it is inconceivable that the economy is able to accommodate higher rates - indeed, money supply is struggling as rational people see that taking more debt, even at record low rates, is the wrong thing to do. As there is no room left to lower rates, there next option has been to stimulate the economy with QE. This has boosted asset prices, helped banks restore their balance sheets and kept uk bond yields low.

What is has not done is deal with the ongoing wealth transfer between savers and borrowers, as inflation is being allowed to run rampant, eroding holders of debt and impoverishing savers. The real enemy seems to be deflation and those in charge seem hellbent on avoiding this outcome (which might have been otherwise a likely outcome of a severe credit contraction).

The irony seems to be that by helping restore the banks to health, current policy is doing little to stimulate the banks and their willingness to lend or lower rates to do so. I still marvel that finance companies and banks have largely maintained their high rates, despite the B of E rate and QE! Some people seem to be having a huge laugh at our collective expense!!

isleofthorns

147 posts

55 months

[news] 
Friday 5th October 2012 quote quote all
The Bank of England determines interest rates according to their mandate and monetary objectives. To a large extent this has been to maintain a constant inflation target. The simple mechanics being that by lowering rates you generally stimulate borrowing, which in turn stimulates money supply (money creation through debt), which in turn is inflationary (more money chasing goods & services. Higher rates have the opposite effect and promote saving, reducing money supply, and lowering inflation (or creating deflation).

With hindsight the period post-2001 to 2007 should have had higher rates to dampen the debt bubble, which would have certainly lessened the current problems. My view is that it was an unfortunate cocktail of politics and greed, with post-911 America doing everything possible to keep things on the up, Brown and his 'no more boom and bust' and, not forgetting, the greedy bankers!

Post 2007/8 we have a new paradigm and set of problems. With personal, corporate and sovereign debt at such high levels, it is inconceivable that the economy is able to accommodate higher rates - indeed, money supply is struggling as rational people see that taking more debt, even at record low rates, is the wrong thing to do. As there is no room left to lower rates, there next option has been to stimulate the economy with QE. This has boosted asset prices, helped banks restore their balance sheets and kept uk bond yields low.

What is has not done is deal with the ongoing wealth transfer between savers and borrowers, as inflation is being allowed to run rampant, eroding holders of debt and impoverishing savers. The real enemy seems to be deflation and those in charge seem hellbent on avoiding this outcome (which might have been otherwise a likely outcome of a severe credit contraction).

The irony seems to be that by helping restore the banks to health, current policy is doing little to stimulate the banks and their willingness to lend or lower rates to do so. I still marvel that finance companies and banks have largely maintained their high rates, despite the B of E rate and QE! Some people seem to be having a huge laugh at our collective expense!!

tank slapper

7,927 posts

168 months

[news] 
Friday 5th October 2012 quote quote all
Douglas Carswell has plenty to say about this situation. His blog is usually worth a read, and he makes quite a lot of sense. From earlier this year:

Douglas Carswell said:
And on it goes. Another £50 Billion of money is to be printed and shuffled between central banks and investment banks. This latest round of QE – or Quantitative Easing - is, they tell us, needed to rescue the economy and make us prosperous once again.

If it was so easy, why not print off £500 billion and make us even richer?

According to the Bank of England and Treasury “experts” who run our economic policy, all this extra funny money – along with low interest rates – will mean more credit. And more credit will produce economic growth.

Except this orthodox Whitehall view – which ministers have done nothing to challenge – is being proved wrong, just like Treasury thinking turned out to be in the early 1970s.

Those who believe that cheap credit is the economic cure-all have misdiagnosed the cause of our malaise. Seeing a shortage of credit, they believe that if only government was to ensure the supply of more credit, all would be well. It is the intellectual equivalent of using a prices and incomes policy to try to curb inflation.

The truth is that the “credit crunch” was caused by the credit boom that preceded it. During the boom years, bogus credit – conjured up as deliberate policy - caused chronic malinvestment, which the Treasury mistook for growth. I sometimes fear if there can be a return to growth without that malinvestment unwinding first.

Simply pumping artificial money into the system is not going to prevent the inevitable contraction that will now follow. Fixing the price of credit artificially low will do nothing to allow the build up of real credit. Thus do we end up with low interest rates, little real credit and economic stagnation.

In the 1970s, government policy produced a condition known as stagflation – stagnation and inflation. Today government policy is giving us stagnation + low rates – or stagrates.

Far from curing the patient, government’s macro economic policy is making the patient more ill.

In 1976, Jim Callaghan famously called time on the fiscal stimulus orthodoxy. Who, I wonder, will call time on the monetary stimulus approach and when? A new generation of Conservative thinkers are feeling their way towards a post monetary stimulus approach.

ringram

14,125 posts

133 months

[news] 
Friday 5th October 2012 quote quote all
Well thats another person's drivel I dont need to read.
QE is not money printing. If it was Japan would have already experienced the worst hyperinflation ever.

Where is this printed money going? The answer is its not going anywhere, its an asset swap, net result zero.
Reserves for Bonds. Not a penny gets into anyones pocket.

http://ftalphaville.ft.com/blog/2012/10/02/1187841...

Last week FT Alphaville drew attention to the fact that HSBC had joined the cohorts of the “don’t call QE money-printing” brigade. We thought this was a great positive for the mainstream analyst community.

Moreover, we thought their explanation was really good.

That didn’t, however, stop the money-printing cohorts from bombarding us (and some of the people we named in the post) with the following sorts of Tweets. (We don’t want to name and shame, so we’ve blanked the respective party.)

Guvernator

3,415 posts

50 months

[news] 
Friday 5th October 2012 quote quote all
I'm not a IFA or financial wizard by any means so all I can offer is a very simplistic view which may or may not be correct.

Interest rates are being kept low an an attempt to stimulate growth through credit borrowing, however there are several problems with this.

1. A lot of people and business are already in debt up to the eyeballs because no one thought the gravy train was going to stop so they just kept borrowing and borrowing. No matter how cheap the credit, who is going to want to add further debt onto an already insurmountable amount?

2. The future is still uncertain, no one can say for certain how things are going to pan out, not even those clever financial analysts so who in their right mind is going to risk borrowing money at this point in time no matter how cheap it is?

3. Central government have used QE to try to stimulate borrowing\growth but the banks just aren't playing ball. Any pushes or recommendations the Government make are just that, they have no power to force the banks to do anything and the banks are saying no thanks as their sole responsibility is to look after their shareholders. A few of the large banks collapsing and many near misses for others means they are in full-on clench up mode, it's better to hold on to what you have rather than risk it by lending it out again. Even people\business with good credit history are struggling to get credit because the banks just aren't releasing it.

The problem is the Government are also sh*t scared to increase rates as it will make the current situation even worse. What to do? Damned if I know but we are in a bit of a catch 22 situation and I don't see an end to it any time soon.
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