LQD - A missed opportunity? | 22 comments (22 topical, editorial, 0 hidden)

Re: Interest rates are so last century.... (none / 0)

The ability to set the foundation interest rate is unaffected.

There are essentially two tools Central Banks can use: interest rates, and reserve requirements.

The Fed, BoE etc now find that interest rates have become entirely irrelevant, and this tool has therefore been lost.

Unlike the Chinese, the Fed, BoE etc choose not to use reserve requirements as a policy instrument, and that tool was therefore given up.

"The future is already here -- it's just not very evenly distributed" William Gibson

by ChrisCook (cojockathotmaildotcom) on Tue May 6th, 2008 at 12:30:33 PM EST
[ Parent ]

Re: Interest rates are so last century.... (none / 0)

In what sense has interest rates become irrelevant?

Of course, if interest rates have become irrelevant, then so have reserve requirements, so that would be a two-fer.

I've been accused of being a Marxist, yet while Harpo's my favourite, it's Groucho I'm always quoting. Odd, that.

by BruceMcF (agila61 at netscape dot net) on Tue May 6th, 2008 at 12:36:50 PM EST
[ Parent ]

Re: Interest rates are so last century.... (none / 0)

BruceMcF:

In what sense has interest rates become irrelevant?

The rates at which Banks are lending are increasingly parting company from the Central Bank rates. That's because the premium they charge for their implicit guarantee has gone up with the perceived likelihood of default.

Why do you say that if interest rates are irrelevant so are reserve requirements?

"The future is already here -- it's just not very evenly distributed" William Gibson

by ChrisCook (cojockathotmaildotcom) on Tue May 6th, 2008 at 04:44:09 PM EST
[ Parent ]

Re: Interest rates are so last century.... (none / 1)

In what sense has interest rates become irrelevant?
The rates at which Banks are lending are increasingly parting company from the Central Bank rates. That's because the premium they charge for their implicit guarantee has gone up with the perceived likelihood of default.

Yes, the mark-up over the cash rate has gone up.

How does that make the cash rate irrelevant? The mark-ups of bank lending over banks cost of funds have not been locked in place since direct regulation of bank lending rates was dropped.

Why do you say that if interest rates are irrelevant so are reserve requirements?

What do reserve requirements do? They establish the underlying leverage of central bank operations to inject and withdraw reserves, to manipulate the cash rate.

What else could they be doing? They are not contingency reserves for capital adequacy, because they are not free to be used to meet capital losses. They are not a tool to manipulate the quantity of money in the system, because the central bank cannot manipulate the quantity of credit-money in the system and already has the power to manipulate the quantity of fiat currency in the system.

I've been accused of being a Marxist, yet while Harpo's my favourite, it's Groucho I'm always quoting. Odd, that.

by BruceMcF (agila61 at netscape dot net) on Tue May 6th, 2008 at 05:05:33 PM EST
[ Parent ]

Re: Interest rates are so last century.... (none / 0)

BruceMcF:

How does that make the cash rate irrelevant?

If falls in the cash rate have no effect whatever on the rate Joe Public pays on his mortgage or any other loans he takes out, I would say that makes the cash rate "irrelevant", but I guess that's just my opinion.

"The future is already here -- it's just not very evenly distributed" William Gibson

by ChrisCook (cojockathotmaildotcom) on Tue May 6th, 2008 at 05:55:21 PM EST
[ Parent ]

Re: Interest rates are so last century.... (none / 1)

The central banks appear to be unable to lower the general level of interest rates by lowering the "cash rate", but if they raised the cash rate presumably that would result in a raise of the general level of interest rates.

This is reminiscent of the way Peak Oil means that OPEC can no longer lower prices by raising production, but they can still raise prices by withdrawing production.

Peak Credit?

When the capital development of a country becomes a by-product of the activities of a casino, the job is likely to be ill-done. — John M. Keynes

by Migeru (migeru at eurotrib dot com) on Tue May 6th, 2008 at 05:59:55 PM EST
[ Parent ]

Re: Interest rates are so last century.... (none / 1)

Its a floor. If the cash rate is pushed up, tomorrow, the mark-ups will remain about where they are, and the interest rates charged will increase.

On that logic, you are effectively dividing into two possible alternatives:

a direct, mechanical, 1-1 relationship
no effect

Since the reality is that the level of the floor affects the rates faced by bank customers, but is not the sole determinant, then what you've done is to leave reality in the excluded middle.

I've been accused of being a Marxist, yet while Harpo's my favourite, it's Groucho I'm always quoting. Odd, that.

by BruceMcF (agila61 at netscape dot net) on Tue May 6th, 2008 at 06:25:55 PM EST
[ Parent ]

LQD - A missed opportunity? | 22 comments (22 topical, 0 editorial, 0 hidden)

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