I was a little disappointed with the MPC yesterday. They only cut the bank rate by one percent. I was hoping for something a little more dramatic. If the MPC intends to push rates down to zero, then why wait. Do it now, and get over it.
Since the credit crunch first reared its wealth-destroying face, the MPC thought they could frighten it away with dramatic gestures; one percent rate cuts, massive liquidity injections, and bank nationalizations. Rather than scaring the credit crunch away, the beast has grown in strength. The UK economy is now deeply mired in recession, house prices are in free fall and the banking system remains frozen.
These theatrical measures have actually been the primary cause behind the remorseless deterioration of the UK economy. Huge rate cuts, and 8 percent fiscal deficits might please economists and journalists, but they spook consumers, savers and investors. Rather than restoring confidence, everyone begins to think that our economic difficulties are greater than originally thought. Rather than calming nerves, the MPC and the government have repeatedly provoked anxiety and on occasions, outright panic.
So, the sooner we get to zero, the better. Then the gesture economics would stop. Instead, we can collectively focus on resolving the real problems that confront the economy. We can begin to reduce our dependence on financial services, repair consumer balance sheets, and above all, pare back government intervention into the economy and give the private sector room to breath.