I put out this video this morning suggesting that the Bank of England is trying to force up interest rates so that they can keep them as high as possible. That's deeply threatening to our well-being by redistributing wealth upwards, reducing the amount of investment in the country and demanding austerity of government. Interest rates need to be as low as possible.
The transcript is:
Interest rates should be as low as possible in the UK.
I say that for very good reason. There is no natural reason why anybody should pay interest. You don't buy anything when you settle the interest liability on any loan that you have. You just hand over your money to somebody else for having been lent money that they, if they're a bank - in the vast majority of cases they will be - created out of thin air.
All banks create money out of thin air. You promise to repay them. They promise to pay, whoever you ask them to. And in that exchange of promises, money is created. It's as simple and straightforward as that. And yet, they charge you for the privilege of them making their promise and give you no credit for the value of your promise.
Instead, you have to pay interest. But what are you paying for?
Now, economists will say you're paying for the time value of money. The assumption is that somebody, a depositor with a bank, gave up their money so that you could borrow it from the bank and spend it now when that person didn't want to.
Therefore, they say you're compensating them for the fact that they can't consume now and paying for the fact that you do want to spend now. But that argument is utterly ridiculous and totally untrue because banks never lend you other people's money. They create the money that they lend to you every time you get a loan. And there are no exceptions to that in all the major loan creating banks in the UK.
So why do we pay interest? Well, simply so that the banks can compensate themselves in two ways. One is so that they can actually cover their costs of making the loan. I accept that's a real thing that they should be paid for.
Secondly, the risk is that you won't repay them. I accept that's a risk that they should be compensated for.
And thirdly, there isn't a third thing. It used to be that they would say you've got to compensate their savers. But you haven't because they don't need to have any savings in their bank to be able to make you the loan in the first place and they never lend you other people's money.
So, that third argument disappears.
Therefore there is no reason why we should have high interest rates because you are not compensating anybody for the fact that you want to consume now. What we actually need are the lowest possible interest rates that we can get.
And, historically, interest rates are at the lowest possible rate they've ever been, and there's good reason for that. It's because risk is lower than it's ever been, because we have better information systems about the costs and risks of lending to anyone now, better than we've ever had in history, because, of course, we all have credit records.
So, as a consequence, interest rates could be very low, and they should be very low. And why is that the case? Because when interest rates are very low businesses can afford to borrow to invest. We do get optimal outcomes in society as a consequence because we have investment in the things we need. And we don't impose burdens on people for the excessive costs of borrowing for things like owning their own homes.
If we have high interest rates, all we're doing is moving wealth from those who have to borrow to live to those who have an excess to live on because they are able to save. But, their money is never used to create your loan, so this is a completely bogus claim that we've got to compensate them by paying them interest.
Low interest rates are good for the economy, good for households, good for young people, good for the delivery of social benefit and investment, and bad for all those who like to claim that they are lending people money when they aren't. Please, don't believe the arguments that we need high interest rates.
High interest rates exploit the borrower, and we shouldn't tolerate that.
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High interest rates not only make it difficult to repay a mortgage, but variable interest rates makes it impossible to manage the risk. 50 years ago, you could get a 25-year fixed-rate mortgage at just 3.5% (and on only one salary). What is worse, is that banks do not lose any money if they fix mortgage rates, so increasing mortgage rates is merely a business decision to exploit those in greatest need. Profits before people.
Sources
“Mortgage defaults expected to surge 22% over next year”, Financial Times, Apr 4 2024
https://www.ftadviser.com/mortgages/2024/04/04/mortgage-defaults-expected-to-surge-22-over-next-year/
Thank you
All very reasonable arguments. What is left is a multiplicity of “whys?”
Why does the BoE insist that interest rates stay high (given falling inflation)?
Why are the politicos not making more of a fuss – Starmer/Reeves talk about “growing the economy” ….one factor will be the availability of lowish-cost money – no prospect of that given current rates. Is the “growing the economy” a lie/smokescreen? Designed to make UK serfs comfy with a Starmer/Reeves admin? (& thus vote for LINO?)
Why, apart from this august organ, is the MSM not saying anything? (love fest with LINO?)
Why is the BoE run like a private fife – & not as a state owned money tool? (cos to do otherwise would invaldiate the neo-liberal lies that underpin the UK political economy?)
All very good questions
We had around 12 years of really low interest rates from 2010 to 2022.
Is there anybody seriously claiming that that was a golden period for good investments?
I’m aware that there was a lot of investment by local governments at low rates, but that’s not the question which is whether low interest rates lead to good investments.
You neoliberal trolls really are stupid. You can only think about one issue at a time, and so always come to the wrong conclusion. In this case you ignore the massive austerity by the gvernment of the day. Of course there was no investment – the government of that time set out to destrroy the reasons to invest. But you didn’t notice that, did you?
Thank you and well said, Richard.
Around 2013, I went to a City event addressed by Andy Haldane. He mentioned how much of that cheap money had gone overseas. Bankster bonuses, too. Commodities and property were often favoured. A US bankster and I agreed. Haldane was surprised when the American and I suggested cracking down on that and having productive investment, especially to address climate change, be prioritised. Haldane agreed, but said it was the politicians who blocked such initiatives.
According to ONS NPEN, since 2016 UK has fallen Investment fallen. See the nice pretty chart “UK Investment — Below 2016 Levels”.
From 2010, low interest rates were doing just fine for investments until Brexit. Recent high interest rates have made matters worse.
https://www.economicshelp.org/blog/6380/economics/investment-in-uk-business-and-public-sector/
This makes sense, high interest rates are just a massive tax on people that funnels money to the wealthy.
Thank you
You have made the wrong connections CJ.
It is not the headline interest rate that matters.
Real interest rate calculations balance inflation against interest rates, but even that is of little help in providing incentives for investment in the productive economy.
Incidentally, the size of manufacturing in the UK has long been under-estimated, and has been revised at about 22% +…… but such is the GIGO approach in ONS data..
The general scale of returns to rentiers on property etc., is higher than those available for industrial investment, and has been for a considerable time.
For example, the “real” returns in 3 years of investment in a single malt whisky cask are reckoned at over 10%pa. That is certainly a capital notion, but eat yer heart out Adam Smith.
The continuing bias to the rentier sector and its relative power, is a result of increasing financialisation; notwithstanding poorly targeted and timed QE; the one club approach of BoE decision making; and the wider political mismanagement of austerity.
As a result investment in the UK productive economy has been relatively low for much longer than 15 years, which goes some way to explain why French productivity is about 20% higher than in the UK.
The result is a continuing disincentive to invest in anything other than property and rent seeking, as returns are higher than that for comparable investment in productive enterprise.
As for today… well, plus ca change, as we have private sector rent increases at 9% average in 2023, and continuing higher base rates also an unnecessary push to overall inflation, as well as being a deterrent to SME investment.
It is the mismanagement of interest rates which continues to incentivise rentier revenues.
It is worth comparing the UK situation with Japan where the BoJ have held interest rates at lower levels, with none of the adverse macroeconomic effects the UK has experienced.
Reeves can whistle all she likes to the business community, but she will not be able to improve investment growth in productive sectors unless the rentier segment is curtailed and, ideally, directly controlled.
It’s the old adage: “When the only tool you have is a hammer, every problem starts to look like a nail.” Since the only thing that the BoE can do is to tinker with Interest Rates, they end up believing it can solve all sorts of problems.
The real problem is the make-believe “independence” of Central Banks, such that entirely unelected bodies have the power to screw over the population without worrying about being held to account (no pun intended, but I’ll take it!). The Government can control them, they just choose not to.
Richard, recently you have written some excellent pieces about how governments create money. Are you planning any piece(s) on the (further?) creation of money by banks – how they do it, the constraints on it and the extent to which this adds (or not) to government money creation. This would be great. Best regards, Peter from down under.
I have already done so – see the videos
Richard,
What do you think happens at 4.30pm each day when the bank hasn’t been able to acquire deposits to match the loans it has made?
Inter bank arrangemnts kick in
They do so irrespective of the interest rate
Next silly question?
Richard,
Whilst I get that the retail banks just create a couple of line items in their ledger for the promises to pay and don’t necessarily need matching deposits and loans, can you explain how runs on banks can happen if they don’t have to balance loans with deposits? What do the banks do with the deposits?
As a matter of fact banks have never matched loans with deposits: that’s the reality of banking
Runs happen when:
A) Banks make long term, illiquid loans, loans
B) These go bad
C) Depositors realise that and want whatever they have saved back.
What’s the risk? Once in the UK in 175 years
Interest can serve as a “lighthouse gatekeeper” effect: filter out less-performing activities and lay down the minimum return expected of new investments, to guide the agents in an economy towards a desired productivity.
Low IR stimulate economic _activity_; but not all activity is good. Zero is more than -8. Doing nothing is better than wasting resources on an underwater basket-weaver. Even if one wants every person to cover their basic needs, paying a basic income to do nothing seems better than letting them be employed in an activity that destroys wealth. In this sense, IR act as a benchmark on productivity. Just as an inter-professional minimum salary rules that “one must pay workers at least £15 per hour or not hire them at all”, IR can put a floor on profitability: “you must yield at least 5% to qualify for a loan and carry out this activity in this economy”. The mere existence of a benchmark acts as a signal to everyone as to what is or is not acceptable, what meets or not expectations and economy needs. IRs are an economic policy.
Not because the money in itself is valuable or granting the loan is costly, as it takes no effort to write numbers on a ledger. But money gives the power to purchase resources or hire workers, which must be granted judiciously because it is a burden to society. Every loan draws purchasing power (PP) away from those who had money before, so it is in the interest of society that loans are only granted to produce more future goods, services, or leisure time, than those we lose the ability to purchase today.
Now, if expected profitability was all that mattered, one would not need interests and rely on the promise of capital returns; but expectations are not guarantees, promises are fickle, and there is a moral hazard in an unconstrained supply of credit. Interests serve as a periodic consideration on lending: those who create money (by borrowing it), and thus take away PP from the rest of us, must regularly show that they can and want to honour that commitment.
But if society is the one that loses PP by the loan, should society (by the state) be the one to recover its PP via interest? The benefit of private enterprises in Lending is that they can apply their diverse specialised criteria into what is or is not likely to be profitable, which they would find by seeking profits.
With respect, you clearly know nothing about decision making
Theory says required rates of return must be made, so projections are alters until the criterion is met
Please don’t pretend that this is in any way useful and that society must be a very high price to support this ridiculous game playing
All of which reminds me; fiat currency’s a great idea but, given we know their principal function is wealth extraction, as a society we need somewhere to get it from which isn’t the privately-owned banks.
Unless you want the state to take all credit risk there is no alternative
I used to tell my students “interest is the rent you pay for money”. Partly because it’s true, and partly because it was endlessly amusing seeing some of them trying to get their indoctrinated heads around it. Then I would elaborate:
“You pay Hertz a hire fee for using one of their cars, you pay your college a rent for using one of their rooms, so why shouldn’t you pay the bank interest for using some of their money? After all they pay you a rent for money you deposit with them.”
Even the ones who were grumpy about interest used to see the point of “comparative advantage” right away. Or supply and demand curves. Or economies of scale. Or division of labour. The “Learning Curve” was quickly accepted (and not misinterpreted à la football managers: “it’s a steep learning curve for the boy, Clive.”)
Given how elementary these ideas are it takes a near genius of folly to bugger them up routinely.
But you aren’t renting money.
How do you rent a debt?
And why do you pay a babnk for something it produces costlessly? Your eexample makes no sense, at all. Do you gave any idea what money is?
While the last fifty years has proven that it is a very stupid and horrendously unsuccessful idea to try and run as a business every organisation needed by Britain, it would be useful if our parliament contained a small number of men and women who starting from scratch had set-up and run a productive business.
Are there any currently sitting on the Green benches?
And obviously I don’t mean rentiers.
Nor people who borrowed £250 million from an old school friend in the City to takeover somebody else’s business.
Nor people who inherited wealth.
Just people who through skill and hard work built an ethical business from scratch.
I have to admit I have been a bit puzzled as to why the BoE raising its base rate necessarily needs to have any effect on the rates charged by banks for loans. As you quite rightly point out in the video, the “interest” charged by banks is largely intended to cover its costs in actually running a bank, together with the risk of some loans not being repaid. Even in the unlikely event that the bank needs to borrow reserves from other banks, or worse from the Central Bank, the cost of that borrowing is very minimal, and would mostly only be overnight. Indeed, since QE the banks are awash with reserves on which they actually receive interest, and therefore the cost of running a bank is in fact reduced by raising the base rate.
I’ve probably missed something somewhere.
You haven’t
But your answer is quote a good one for the trolls who are asking stupid questions here today
But there is a problem with very low interest rates leading to people to invest in property thereby pushing up house prices. See the work by Mulheirn, Bank Underground and Mainly macro.
Hang on – that was the result of £100 billion of direct funding to do this from Osborne. Everyone seems to forget that
@Richard
Peter Wills is right.
The world has had unusually low interest rates for almost all of the time since 2009.
The consequence has been a sharp rise in the price of existing assets – not just houses but other property, land, shares, art etc.
The outcome has been a sharp increase in wealth inequality: the already-rich have got richer.
Is this what you want? If not, why would your policy of very low interest rates work differently in the future than it has done to date?
So, we need to tax gains more.
We could tax income form wealth more.
We should, perhaps, have higher stamp duties.
We could stop demanding the BoE supply fast, direct, funding for mortgages as Osborne did
We should tax gains on domestic homes on some way.
Someone should write a report about that.
Nick Carroll
I bought a house in the NE of England in 1999, for £24,000
Within 4 years or so it was valued at over £100,000. I cannot remember the intrst rates in those years, but they were not 1-2%. Inflation of housing values has been arounf=d even without low interest rates.
Very good..
A flat I bought in 1983 doubled in price by 1987
https://www.cato.org/working-paper/banks-are-intermediaries-loanable-funds
Recent paper by George Selgin. Recently criticised by Steve Keen.
I only post it to demonstrate the arguments about how banks lend far from over for those on the Right.
Steve has rubbished this, appropriately