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The BBC's economics correspondent, Stephanie Flanders, has noticed that the bond market is treating UK gilts as if they were AA-rated rather than AAA-rated. Which begs the question, if they were officially AA rather than AAA, how would the markets treat them?
I suppose the whole question is about the effect of credit ratings on the bond market. Quite clearly here, the credit rating is wrong, or the agencies know more than the market (which probably isn't true). And once again, the many individual agents have done a better job than an agency.
Which brings me to interest rates. Just like a credit rating, the interest rate acts as a price signal (though more so in the latter case) - and if it's wrong, naturally, a bubble is created. 2002-2007? Possibly, since it's widely believed that interest rates were too low and therefore money was underpriced - excess demand to delve into economic theory. I digress.
So it's a distortion of the market. At least with credit ratings, bond markets can act pretty much independently; there's no agency with a central price like the Bank of England with its interest rates. But this is quite interesting.
Additionally, there was upward pressure from housing, mainly from mortgage interest payments which rose this year but fell a year ago.
I'm probably jumping to conclusions, but the market sees a rise in the demand for credit, and so is pushing up the cost of lending? So it does have some influence after all?
So I tend to agree with this piece I saw in the Times back in July. Prices should be set by demand and supply, demand and supply are best set by the voluntary actions of individuals, the money market has demand and supply (even if it is a means of exchange, rather than a good/service), so interest rates should also be set by the voluntary actions of individuals - no central agency or committee can ever know the details of every single transaction.
Labour's recovery policies are really working, aren't they?
This is the longest and worst recession since records began in the 1950s - and the reasons we aren't coming out of it are quite simple.
1. No business confidence. The growing budget deficit is seen as deferred taxation. They also don't like the look of the 50% rate, or the possible EU hedge funds directive. Therefore, businesses don't want to expand supply again.
2. Banks cannot lend. The interest rates are low yes, and the money supply has been expanded through QE, but that extra money is just being stored up in banks' reserves. The problem here is that the regulator is trying to look like it's doing something, and has implemented a measure that should have come at the top of the boom, not in the recession - higher capital ratios. Banks don't actually have enough money to lend (and no one wants to save because of the ultra-low interest rates), so regulation is one reason that we aren't getting out of the slump. Then we have crazy suggestions like the windfall tax on banks' profits, which would surely stop the financial sector's recovery for a bit longer.
Keynesianism has been tried again. Just like in the 1930s, it's failed again. Regulation has been tried again. Just as its hopelessness helped the crash occur, its hopelessness will prevent recovery.
First of all, I apologise for not posting in a while - although exams are over, life has been hectic.
David Cameron hits the right notes with the briefing for his speech on regulatory reform. Having already been told by Osborne that the FSA would be scrapped, we have an idea of how banks would be regulated.
It makes sense for the central bank to regulate - it knows how much banks are borrowing, knows what the economy is doing, and so on - after all it has to set interest rates every month. Not only this, but we are told that the Bank of England warned the FSA about the risks taken, but the FSA took no action - incompetence.
Breaking up RBS/HBOS is a welcome step too - no bank should become too big to fail, and no bank should be bailed out by the government - the economy is better off without bad banks.
However the MPC especially has to look at the prime cause of the financial crash - keeping interest rates too low for too long and encouraging over-borrowing. The only viable solution would be to allow the market to set interest rates, since it is more efficient than nine central bankers. That way, as demand for borrowing increases, interest rates are raised by banks to get a greater return and to encourage saving to build up a capital base; in the same way interest rates will fall if banks want to encourage borrowing. I know it isn't a perfect theory, but should be more efficient than the current macroeconomic consensus we have today.
The Bank of England has reduced interest rates to 1% - so chances are savers will get no interest on their money, pensioners will struggle and the pound will depreciate even further.
And I have no doubt that banks will not pass the rate cut on to homeowners, mortgages will still cost the same amount, and loans will have the same amount of interest.
Their decisions have made it even harder to be responsible and save money, as I've said before meaning that there is a potential that they will not have to go on the dole. I've said it before and will say it again - encourage people to save from a young age, get them to build up their deposits and private savings can replace welfare benefits.
So the Bank of England has decided to cut interest rates to its lowest level since it was set up in 1694 - 1.5%. While cutting them from October's 5% to "encourage lending" has done nothing to ease the ability to lend, cutting them again is hardly going to help.
Has the BoE fallen into the government's trap of borrowing and debt? Banks are unwilling to lend because of the likelihood of defaulting (as has caused the crisis in the first place) and instead needs to encourage saving.
If more money is invested in banks in saver's accounts, banks will now have more money to lend out - so more financial security. They will be more willing to lend, and will be more confident that borrowers will have savings to fall back on. As well as this, with savings, when times get hard people will have more money to spend, and will be less likely to go straight to the dole office for help.
This is exactly why saving should be encouraged - it is a long-term solution for financial security and to reduce welfare payments. That is why I am pleased that David Cameron has promised provisions for cutting income tax on savings, and although I'd hope for them to go further, it's a good start for stopping the country's spending binge and could also produce greater economic stability.
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