In response to an FT article by Martin Wolf on 18th October 2016, entitled ‘The unwise war against low interest rates’
“Many influential interests and opinion-formers detest today’s ultra-low interest rates. They are also clear who is to blame: central banks. Theresa May, UK prime minister, has joined the fray, arguing that “while monetary policy … provided the necessary emergency medicine after the financial crash, we have to acknowledge there have been some bad side effects. People with assets have got richer. People without them have suffered. People with mortgages have found their debts cheaper. People with savings have found themselves poorer. A change has got to come.”
So how might the government deliver such change? The answer is not obvious. As Ben Broadbent, deputy governor of the Bank of England, notes, real long-term interest rates have fallen to zero (or below) over the past quarter of a century. Furthermore, as the International Monetary Fund points out, core consumer price inflation has been persistently weak in high-income economies. Mr Broadbent argues: “With inflation relatively stable in all these countries, it’s hard to believe central banks were doing much else than … following a similar decline in the neutral rate of interest.”
At first glance, then, central banks are just following real economic forces while taking account, as they should, of recent demand weakness caused by the financial crisis and the excessive build-up of private debt that preceded it” – Martin Wolf
You are right Mr Wolf - we should not blame central bankers for low interest rates, or for the undesirable effects of them. After all central bankers are merely the people responsible for setting interest rates. Clearly we should find a group of people who have had nothing to do with it and blame them instead.
The politicians perhaps? No…they’re innocent too. They knew that they could not be trusted to tell the truth about interest rates, so they appointed people who were more ethical than themselves, or at least folks who could lie with more intellectual conviction. Granted, they appointed the central bankers whom they believed would give them the results they wanted, i.e. re-election, but none of us should blame a politician for following the dictates of their primary directive - 'Hold onto power'
We should also note that the Central Bankers delivered brilliantly, particularly in the US, where they kept interest rates at bubble friendly levels from 1987 onwards. During which time the politicians had the chance to remove the walls between casinos and deposits by dismantling Glass-Steagall, provide mortgages to anyone with a pulse, and securitise the toxic waste into 'Triple A' time bombs…all under the intellectual cover of geniuses like Goldman alumni Robert Rubin and Professor Larry Summers - two other people who shouldn’t be blamed in any way, shape, or form, for anything bad that has happened, ever…anywhere.
So…hands off the central bankers, hands off the politicians, hands off the court intellectuals…who is left…it must be the bankers. No hang on a moment…we have a rule of law with hundreds of years precedent on handling fraud, and yet none of the top bankers have ever gone to jail…so it can’t be anything to do with them. People like Jamie Dimon are responsible for profits and all the good stuff…but when a whale gets out of hand, or indeed any other large mammal working at JPM…don’t go blaming the Chairman and Chief Executive Officer – how’s it supposed to be anything to do with him?
The point is this – we didn’t just inherit low and negative interest rates, and there is absolutely nothing natural or neutral about them. Those concepts are abstractions that exist nowhere other than the delusional models of a bunch of very narrowly educated ‘economists’, who think the economy is an equilibrium machine – it is not – it is a complex natural system, which, under it’s own devices would never produce negative interest rates…not in a million years.
Low interest rates are the result of decades of economic mismanagement from people who have absolutely no idea about how the real world works, or about how people think and behave. Here’s an example of a recent pronouncement from one of the more distinguished members of the club, Mr Stanley Fischer, speaking at Howard University in Washington on the subject of low interest rates:
“It bothers me, it really bothers me…I don’t like it, but I don’t want to raise the interest rate too much. I think we should at some point. I don’t know when…the interest rate I believe is not at zero at a normal level and it should be [normal] at some point, not immediately…
…I think there’s also a problem in going to a zero interest rate in the sense that it says that capital isn’t very productive, there’s not much going on in the economy…we would be better off if there was a price for using money”
“We would be better off if there was a price for using money” – if that were irony he’d be a genius, if only at stand-up comedy.
So…on one level you are absolutely right Mr. Wolf – we can’t just blame central bankers for the state of the economy. But personally I do blame them for pretending to be in control, and for pretending to know what they are doing - clearly they do not. Behind closed doors I suspect they are terrified – as they should be.
The problems are systemic, but the diagnosis and the ‘solutions’ being provided are not. To move forward I believe the paradigm has to change: Mainstream economists don’t see economics as a social science - they see it as a physical science. They don’t understand money as a market commodity - they see it as a management tool provided by the state. They don’t understand interest rates as market prices - rather as intellectual abstractions.
Mainstream economics is not currently a search for knowledge, it is a tool to drive an agenda – in the west, an elitist, crony-capitalist, agenda. Policy-making needs contributions from people who can think for themselves rather than blindly accept a groupthink that says humanity can be controlled by a collection of equations. Economics is the stuff of life, not an equation to be balanced. Personally I am interested in hearing far more from students of markets & students of human behavior, and far less from the Teflon coated court intellectuals.