Broad Oak: your emotional support animal

Sunday, January 18, 2009

Monetary policy: chameleon on a tartan

Our government has contradictory objectives, and something will have to give.

1. It has ordered banks to rebuild their cash reserves, because they loaned out far too high a multiple of what they kept in their vaults. Normally, the way to do this would be to widen the margin between the interest they pay and the interest they charge, making bigger profits that could be salted away; or to become far more cautious in their future lending, increasing the ratio of good loans to bad ones. In a recessionary economy, where many businesses are more likely to fail, this would also imply calling in business loans and trimming their overdraft limits

2. It has called for banks to pass on the full benefit of recent cuts in interest rates, and to maintain lending, especially to businesses.

If (1) is not done, the crisis continues. And if (2) is done, it counteracts (1).

Besides, unless the government nationalises the banks, it's not in a position to force them to do (2). It must know this. Maybe (2) is merely for us punters and voters to hear, not for real action.

As Aeschylus said 2,500 years ago: "In war, truth is the first casualty. "

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