Sep 08 2007
US unemployment should have been expected
The market sell off following weaker employment figures shows that many investors did not believe the banking problems would have an impact on the real world. This is surprising,given the obvious distress in the housing sector.
As the banks rein back on their lending activity slows. As people in the financial sector make less money or lose their job, the economy slows.
At some point the central banks will realise they are behind the curve on the way down, just as they were too slow to raise rates on the way up. This crisis has made in central banks stamped all over it, yet the governing authorities are keen to blame the hedge funds or the private equity people or the commercial banks. They just did what the Central banks encouraged - they lent a lot more becuase interest rates were so low. At the low rates all was affordable. If the central banks were worried by this they should have controlled it earlier by raising rates. Now they have to be careful they do not turn a slow down into a recession by keeping rates too high for too long,and failing to ease the obvious shortage of funds in the system by anything more than temporary or day to day measures.
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John Redwood has been the Member of Parliament for Wokingham since 1987. First attending Kent College, Canterbury, he graduated from Magdalen College...
Whilst agreeing with the broad thrust of your argument, is it not the case that, in the UK, the Bank of England sets interest rates based on its responsibility to keep inflation at a target set by a certain G. Brown? During the past ten years Brown has manipulated the basis and content of this target so much that few people can recognise its current significance to their own experience. It can be further argued that if a lower inflation target had been set then interest rates in the UKwould not have dropped to the previously low levels. Criticise the banks by all means but don’t let Brown off the hook.
Reply: Very good point. I usually do point out that Gordon Brown changed from the RPI target to the CPI target, which meant lower interest rates beforte the last election. The CPI does not relate to most people’s experience of the cost of living, and has been as much as 1.5% below the rise in the RPI.
Let us hope that the sub-prime crisis will serve as a ‘Case-Study’ for future students of finance. Ben Bernanke has been overwhelmed by events to a large extent. He gave signals to the market that a rate cut was on the way but then it didn’t come creating all manner of uncertainty. The entire cashflow question needs to be studied and understood by all political leaders. I recently saw John McCain being interviewed and saying that he didn’t fully understand all aspects of the sub-prime crisis and that he had financial experts to advise him. While Mr McCains honesty was certainly refreshing it goes to show that political leaders needs to try to understand market mechanisms beyond the macro level.
Reply: Indeed they do.. The current centre of the crisis is in the three month borrowing market. Banks are having to make room for lending that the market is no longer willing to roll over.