Vacation time is here. I will be away for the next two weeks, though ever vigilant on markets.
As a parting shot, a friendly note to the Fed and ECB.
The Web, July 4, 2009
To: Messrs. Bernanke and Trichet
From: A Friend, Dubiously
You have slashed rates to the bone and you are now signaling your commitment to keep them there "for as long as it takes". Assuming your aim is to revive credit markets, i.e. generate a "healthy" amount of credit demand and creation for the greater benefit of the economy, what you are doing is mostly wrong.
Oh, I do understand that your actions and statements are in line with academic monetary policy theories. But, they are misplaced when it comes to what happens in financial markets in practice and work against what we are hostage to: our "animal spirits". You know... fear, greed.. the usual day-to-day stuff.
Allow me to explain in more detail.
I assume that everyone in mainstream finance and government now wants to see credit markets back to normal, i.e. a resumption of borrowing and lending, a rebound in housing and retail sales, global trade. (You know, I am not crazy about this Permagrowth model, but the memo is not about me.) For "growth" to happen, credit demand is of paramount importance: people and businesses must want to borrow. It doesn't matter much if lenders are willing to lend, if there are no willing takers for their loans.
As you know, credit demand from the private sector is very low right now. Apart from the economic crisis which reduces demand, another important factor is pricing, i.e. current and future prospects for the direction of interest rates. If a potential borrower is sitting on the fence about taking out a loan, your statements about low rates as far as the eye can see are creating no sense of urgency at all.
There is plenty of time to think it over, you seem to say. Interest rates are low and will stay low, so no need to rush into a decision right away. Stick around, but you're not going to miss the boat, anyway...
How about this message, instead:
Current interest rates being near zero is an unprecedented event that will not last much longer. We are planning to raise rates in the very near future because such loose conditions are unhealthy for monetary stability and the economy in general. So, if you want to borrow, the best time is right now.
In other words, you should immediately start dispelling interest rate complacency.