Low rates are now endangering the economy

Graham_Devon

Dr Altmann said: “Ultra low interest rates are distorting the economy now, driving borrowers and savers to take on too much risk. This is what caused the crisis in the first place, when financial markets misunderstood or mis-priced risk and encouraged irresponsible borrowing or lending.

“Until 2008, house prices were boosted by irresponsible lending in the form of 'Self-cert', interest-only and 125pc mortgages, which helped borrowers pretend they could afford large loans. Everyone believed these loans were not too risky because house prices were rising sharply, the same seems to be happening again.

“This time, borrowers are being lured in with record low mortgage rates instead, but the principle of rising house prices validating the borrowing once again underpins policy. Low rates are unhealthy for the economy as they mislead borrowers by subsidising loans.

“Rather than providing cash savings for banks to recycle to riskier lending - as would be the normal function of the banking system - savers are being forced to turn to riskier activities themselves in order to stop the value of their savings eroding.”

Dr Altmann said rates the Bank of England should increase rates slowly now, to avoid sharper rises later. Savings and mortgage rates are closely linked to the Bank of England Bank Rate, which has sat at 0.5pc since March 2009.

“House prices are already booming in many areas, and will be further boosted by the Help To Buy scheme that will expose taxpayers to large losses if mortgage holders default on their loans in the next few years.

"I strongly believe the Monetary Policy Committee (MPC) should start gently easing interest rates up now, giving people a better idea of what they can really afford, rather than the illusion of affordability created by current artificially low rates.”

Just an alternative viewpoint to the viewpoint shared amongst most on this forum.

Though apparently "economists" are penciling in another statement from the bank today reinforcing their forward guidance for a third time, as the bank battles with the market and faces losing credibility in the wake of the upbeat data.

The policy of financial repression is forcing everyone to become speculators in order to make a return.

http://www.telegraph.co.uk/finance/personalfinance/interest-rates/10286506/Millions-forced-into-gambles-by-low-rates.html

chucky

I don't think low rates are good for the economy but it's necessary to help fix the fundamental issues that have to be addressed in the economy.

Raising rates will cause more damage than good. If people want to damage the economy then you have to question their intelligence.

dryhat

Any recovery is impossible with artificially low rates and every sector of the economy rigged.

michaels

Or perhaps low rates reflect the underlying fundementals of the economy - that risk free investment will not yield a return above the RPI?

CLAPTON

what are normal rates?

interest rates 'ought' to be related to the supply and demand for money; i.e. they are the price of money
however the supply is controlled by government via QE and capital controls, FfL, HtB etc so the the supply side is totally artificial

whether is helps or hinders the real economy is difficult to determine.

chucky

CLAPTON wrote: »

what are normal rates?

Normal rates for someone with an agenda is different for normal rates for the person on the street.

Ros Altmann agenda is protecting Saga members and she is defending her corner. Nothing wrong with that but she's gong only going to say what's good for them.

She was appointed as Director General of The Saga Group in October 2010

http://en.wikipedia.org/wiki/Ros_Altmann

I wonder why the article didn't mention this... Hmmmm...

wotsthat

Ros Altmann seems to want a return to the pre-crash 'normal' deposit rates whilst taking post-crash risk.

CLAPTON

I suppose we only have to wait no longer than this time next year to see whether we have a house price bubble or not.

I'm hoping to be right in retrospect.

Graham_Devon

wotsthat wrote: »

Ros Altmann seems to want a return to the pre-crash 'normal' deposit rates whilst taking post-crash risk.

What she wants is to start raising rates now in order to reduce the problems in the future that have been built up today.

She makes her point pretty well IMO.

If, as she suggests, house prices are rising and people are taking on debt because they can afford the low rates, then we are storing up problems for the future.

I can't comment on normal transactions, but help to buy is certainly a "buy today, pay tommorow" scheme in that you can't afford the deposit, so you pay it later on.

Considering in 5 years time those taking help to buy today will likely face higher rates when they come to remortgage or stay on the same mortgage (due to interest rates rising) and then have to start paying the deposit loan back at the same time, there is potential for issues there.

We can stem these issues simply by making changes today. We should all be concerned, it's OUR money help to buy customers are borrowing. Especially considering they are borrowing against a house that will lose up to 10% of it's value straight away due to th new build premium.

There could be some serious increases in their housing costs 5 years down the line when interest rates have gone up and loan repayments kick in.

It might all just be fine. But we can see the potential problems and they are not exactly small. Maybe Ros Altman is correct and we should be thinking just a little further ahead?

chucky

wotsthat wrote: »

Ros Altmann seems to want a return to the pre-crash 'normal' deposit rates whilst taking post-crash risk.

Which helps pensioners and savers, which is the target group she is responsible for as Director General of Saga. There's nothing wrong with protecting her members.

John1993_2

dryhat wrote: »

Any recovery is impossible with artificially low rates and every sector of the economy rigged.

And yet, it's happening, which suggests that your analysis is something short of correct.