Via Another “Operation Twist” will cause more damage to the economy » The Cobden Centre, Frank Shostak explains the damage that will be done by further credit market interventions:
Last week the US central bank has announced that it will expand its “Operation Twist” program to extend the maturities of assets on its balance sheet and also said it stands ready to take further action to put unemployed Americans back to work. The US central bank will prolong the program through the end of the year, selling $267 billion of shorter-term securities and buying the same amount of longer-term debt. The action should put downward pressure on longer-term interest rates and help make broader financial conditions more accommodative, so it is held.
He goes on to explain how this policy cannot lead to sustainable growth.
The impact of low rates, especially combined with inflation, on new pensioners is well known but at a meeting in the City today, it emerged that low rates may be the cause of what appears to be a mis-selling scandal in relation to interest rate swaps which hedge the risks of significant lending to small businesses. The unforeseen consequences of ultra-low rates are multiplying.
Every borrower wants low rates. Every saver wants them higher. Just the same negotiation is required as for any other exchange transaction. Unfortunately, governments and central banks are determined to intervene in that price-setting process. Just as under full socialism, it’s proving to be badly counterproductive.
In re ‘low rates precipitate ‘mis-selling’ ( and in my – non Newspeak lexicon, there is no such thing as ‘mis-selling’) in swaps’, of course they bloody well do. Every single ‘mis-selling’ scandal has been precipitated by regulatory failure, not market agents. It applies to pension transfers, endowments (anyway not at all mis-sold – separate story too long to post here), self-cert mortgages, credit explosion, PPI, etc etc. You name it the Failed FSA precipitated it. (Have you been listening to Niall Ferguson’s Reith Lectures?)