Author Alasdair White
This story suggests that there is a significant lack of understanding of how to get out of the mess we’re in – which is, on the one hand, very surprising given the amount of verbiage expended on the subject and the hours spent arguing about it among those who claim to be experts (remember: an ex is a has been and a ‘pert is a drip under pressure!), while on the other hand, it is a typical politically-driven response as it allows the politicians to claim they are ‘doing what is necessary for the public’. (When, if ever, have politicians been interested in what is best for the public?) …
Since the credit crisis now means that banks simply are not lending money (and thus starving the entire world economy of capital and cash), cutting the interest rate is a short-term knee-jerk reaction and a rather pointless gesture. It will have severe, unwelcome but entirely predictable results – with interest rates this low there is no incentive for the American public (or anyone else) to start saving and yet generating cash savings and building deposits in banks is the acknowledged and required solution. The US saving rate (and the world’s) needs to rise by between 6-15% per annum to avoid a repeat of the current catastrophic failure in the financial system. If the public saved more and spent less the result would be a short-term down turn in the economy followed by a longer, slower but sustainable recovery, with a solid improvement in the financial structure – this action by the FED – if the rate cut is passed on to the consumers – has exactly the opposite effect. It beggars belief! Something equally inane is bound to happen in the UK and Europe since the governments there are out of ideas, out of credibility, and out of time.
Now is the time for the world to adjust their perspective and accept that the ‘spend, spend, spend’ philosophy is the root cause of the current situation and must be stopped – we simply cannot spend more than we earn (or generate).
Banks must offer higher rates of interest (much higher – probably around 8-10% p.a.) to attract cash deposits because unless there is a significant increase in the cash flow INTO banks, no amount of cheap lending rates at the interbank level will restore the credibility and stability of the financial system. Instead of tinkering around the edges, the ‘powers that be’ need to start devising a better financial system. And the public needs to act more responsibly!
Posted in Crisis! What crisis?