Curphy Comment
If you had hired a professional to do a job and they mucked it up, you might ask them to come and put it right for you. What you wouldn’t do, however, is hand them a blank check and give them permission to spend a huge and unlimited amount of your money to sort things out. And then another cheque… and another….
Yet this is how it increasingly feels with the government’s plans to solve the problem of the “credit crunch”. Pouring money into rescuing banks that are on the brink of collapse, pumping tens of billions of pounds of newly created money into the economy, and slashing interest rates with alarming speed all smacks of desperation. There is no clear evidence yet that any of the measures are working, or that this bunch of politicians, bankers, economists and regulators who helped to create the conditions for a bubble is able to clear up the mess. The MPC has not set any targets for the impact of its latest measures on money supply and credit – a further worrying element to the rescue plan.
News that the Bank of England has cut interest rates by half a point to another record low will weigh heavy on the hearts of prudent savers, and will do little to help first time buyers who still need a huge deposit to convince banks to start lending to them again. With rates now at 0.5 per cent, the lowest since the central bank was founded in 1694, it is impossible to find a decent rate of return from cash deposits.
There is little sign that liquidity is returning to the markets, and although the fall in rates will help borrowers on variable rate mortgages, lenders are unlikely to pass the full cut onto customers. Many of them are still to announce cuts in rates from the last Bank of England rate reduction. And even if borrowing is cheaper, rising unemployment means that the housing market is unlikely to bounce back any time soon. In fact, latest reports show further falls in the values of homes.
What the rate cuts will do is penalize those who actually bothered to amass some savings in the midst of mass irresponsibility, and benefit those with existing loans. But it will not do much to ease the tough lending criteria employed by banks and building societies in fear of mass defaults and arrears.
Normally, falling interest rates would push investors back into the stockmarket in search of better return on capital. Yet with some shocking large daily falls in the Dow and the FTSE indecies, the bottom of the market still feels a long way away. Confidence isn’t helped by comparisons with the 1930s, nor does the relentless flow of bad news help.
Markets had been pinning their hopes on a stimulus package from China this week (March 5), which didn’t quite meet expectations. So the ISA season looks set to be subdued, and only the boldest or most sanguine of clients are likely to consider being fully invested in equities again. Nevertheless, some good news coming out of the UK retail stock broking companies this week suggested that purchases among active traders were beginning to outnumber sales, so perhaps the bravest or most experienced of investors are starting to look for opportunities again. Perhaps in five year’s time we will all wonder why we didn’t snap up bargain-priced shares right now, but with even big names struggling to renegotiate debt with their banks, nothing feels like a sure bet.
Article last updated: Jun 16, 2009
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