The ECB won't cut rates? A central bank doing exactly what it should.

fed bailout for american banksThe Fed is still trying to bail out the US economy, there must be a fundamental belief there that a recession is the worst thing in the world. Personally I would feel that the 1,000,000 lives lost in Iraq outweigh the damage a recession might do but for some reason the efforts to end the war pale in comparison to what politicians and policy makers are willing to do to avoid an economic downturn.

Bear Stearns was bought for $2 a share by JP Morgan Chase, their stock price was about $38 recently, and the money to do the bailout was Fed backed. In fact the Fed is evoking laws designed during the great depression to lend direct to banks.

The USA has recession aversion, it’s almost like the economy there is one giant dog dry heaving to Pavlov’s recession bell. The issue is that the budget still has to be met, these bailouts cost money and the money is not in the coffers, that’s a recipe for inflation, cutting rates even more is also a recipe for inflation, the dollar will fall further, gold and oil will rise more because of it and the USA is going to put a plaster over a gaping shot-gun wound as a solution. Frankly I’m disappointed in Bernanke, he’s an incredibly intelligent and able-bodied man, why he is making the decisions he is making are beyond me, perhaps its governmental pressure? After all, it is an election year, maybe its because he doesn’t want to be another Volker?

Greenspan left such a good legacy that filling those shoes would be difficult for anybody. Greenspan is currently out on the sidelines talking of recessions and the guys in the Fed are answering that call by pushing the economy further into inflationary territory so that when it hits the fan (and it will eventually, in my opinion it already has) it will do so with nuclear force rather than with firecracker force.

I think its time that we congratulate our own ECB, business interests currently don’t favour Trichet or his cohorts but the ECB’s job isn’t to rescue the private/corporate sector, its to control inflation, that’s its tenet and it should stick to the job it’s meant to do so the European Central Bank base rate remains at 4%.

Think about it, business by nature should be able to change and survive, call it capitalist Darwinism if you like. The fact of the matter is that if a business can’t survive a recession then it has no place, no right, to exist in an economy that enters a recession. Just because a business started up there is not an implied responsibility on the state to get involved, economists the world around are mainly in support of non-governmental intervention. In the UK I believe the taxpayer was not done justice when Northern Rock was nationalised, granted there was an industrial risk in letting them go under but it simply isn’t good enough for the tax payer to have to carry the burden of irresponsible businesses. The credit crunch might not have been Norther Rocks fault, the result rather than the doing are what hurt them but companies come and companies go, we don’t need to rescue them. If that was the case then why was Irish Bottlers allowed to go under? Or the Ambulance makers in Longford? The simple truth is that Governments and Central Banks have no place in meddling with the Private Sector.

Jean Claude Trichet ECB PresidentIf you subscribe to a socialist policy that has to do with the individual, and things like the provision of health care etc. not with corporations and certainly not with providing bailouts to all and sundry. I am pleased that the ECB is taking such a responsible and staunch path, its the exact kind of leadership that is required during uncertain times, if they buckle to the short term whims of business community then the greater social community will suffer because rate reductions are inflationary and we are already in an inflationary environment. Issues simply don’t need to be compounded in an effort to sooth corporations.

Your author has a vested interest in rates, as a Mortgage Broker a drop in rates would be good for our firm because it would cause an increase in lending activity, but even though that is the case, and even though I would personally benefit from it I still agree with the ECB holding off, in fact I hope that in June that unless inflation has dropped that they still don’t cut rates. I have had it up to the teeth with companies saying on one hand that they don’t want government intervention (especially when it’s things like regulation, laws regarding practice and taxation) one one hand but then crying out for it when things don’t work out as planned. Companies don’t seem to pay for that protective umbrella except for during the brief spells when its actually raining.

The ECB has a hard path to walk in some respects, the US Fed has a much greater scope than the ECB, in fact the ECB exist only to control inflation and they have three options at any given time. Raise rates, drop rates, or don’t change. In a way imagine you are in a car that can’t reverse, your only choices are turn left, turn right, or go straight ahead. I use that analogy to explain interest rates and the resulting mortgage interest rates to clients from time to time.

Dermot O’Leary of Goodbody Stockbrokers said that the ‘headwinds against Europe are growing stronger’, to be fair those headwinds are coming from the flurry of ludicrous Fed activity across the Atlantic. The stock market generally lifts on news of interest rate cuts so understandably Stock Brokers are calling out for cuts, they are not in the business of being content during bad times. At the end of todays market outlook the Goodbody Daily Report says ‘the Fed will not be bullied into making the decision the market is looking for any longer’, that’s because there is nothing left to give, bending any further will snap any hope of a rational recovery, but its exactly what the Wall Street ‘Bail-out’ culture are looking for.

Tom Parlon of the CIF (construction industry federation) also made a call to the ECB to ‘cut its interest rates immediately to kick-start economic activity and protect the competitiveness of Europe’s economies’. To be fair Tom, Dermot, and anybody else, the ECB are not there to listen to you, quite the opposite, they do their job best by not listening and by sticking to the job at hand, if they reacted to private industry then they would be called the Fed and not the ECB.

Abraham Lincoln, President, Liberator, HeroAccording to IBEC we might see job losses, and that’s a reality, I might lose my job too, in fact mortgages are one of the areas most under threat in the credit crisis but I won’t change my stance and start looking for a bailout from the ECB because that would undermine the who point of being Europe and that greater issue stands taller than my individual concern. I hope the ECB has the fibre to stay the course, it is only by doing this that the deadwood is rooted out and the platform for the next period of economic growth becomes possible.

Lastly I think a quote from one of the Great Presidents of U.S. History, Abraham Lincoln : ‘America will never be destroyed from the outside. If we falter, and lose our freedoms, it will be because we destroyed ourselves.’ it is certainly food for thought.

Leave a Comment

Awesome! You've decided to leave a comment. Please keep in mind that comments are moderated.