Are low interest rates actually the cause of the moribund economic backdrop?

1 mins. to read

One of the main causes of the UK recession is, ironically, our attempt to prevent a depression. By lowering interest rates we have stopped the property bubble from being pricked. Thus people are paying the low interest rates on their mortgages and not selling their houses. Lack of supply means that pent-up demand coupled with low building rates is keeping prices high. Plus, new buyers now have to save more for deposits with 25% being typical of those who will actually lend. Also, the FSA imposed regulatory changes has made the barrier to entry even higher – the days of 125% mortgages seems like a lifetime ago…

The overall outsanding mortgage debt is falling too as people in the UK pay off mortgage debt – but this debt pile is still enormous and the price of paying it down is the current, long, recession. By not pricking the bubble, we are left instead with a slowly deflating economy – is it time to ask if this s indeed preferable to a crash and boom?

In the US, the ability to walk away from housing debt, in the form of jingle-mail, meant that the housing bust has been very bad, but the economy has recovered quickly. In the UK we have a Japanese style zombie economy, caused to a large extent by banks sitting on assets with impaired values that they won’t sell because the loans are still performing (i.e. payments are being made as the interest rates are low – the banks are still losing money though as these rates offered in the past are below the banks cost of funds today on many of the producs). 

It’s easy to say sack George Osborne but, as much as he has made many errors, often by trying to raise taxes, his basic mantra that you can’t borrow your way out of a financial crisis is sound. Spain is trying that, the USA is trying that too – their national debts are going up much faster than ours.

But is a bust the answer? I am not sure myself yet as it will be horrible. Chances are with the euro-crisis we will find out the answer in due course.


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