Time for Aggressive Interest Rate Cuts

Into whom should I bump last week but my old friend, the economics professor, Roy Roundabout.

‘A lot of water has passed under the bridge since our meeting six weeks ago with Dr Swings,’ I ventured.

‘Indeed,’ replied the Professor, ‘a torrent. Verily, a flood.’

‘We should get together again,’ I said, ‘I’ll ring Dr Swings at her office’ – which you will recall is the office of the US investment bank, Floggit Burnem.

‘If she still has a job, that is,’ said the Professor with a smile. ‘Or indeed if Floggit Burnem still exists at all.’

Well it turned out that Floggit Burnem did still exist and rather than getting the ‘Dr Swings no longer works here’ coded message, I was greeted by a siren’s voice.

Grappling with the credit crunch

‘I’m grappling with the credit crunch,’ it said, in a tone so fierce that the odds against an economic meltdown immediately went out a notch or two. ‘I’m really very, very busy. But I suppose I can spare half an hour.’

So the three of us managed to get together again and Dr Swings was in a typically uncompromising mood. ‘It’s a disaster,’ she began. ‘The world is heading for a recession, and the only question is whether it is short and severe or long and agonising. Our debts have finally caught up with us and,’ she concluded, summoning up the pithy title of her latest economic report, ‘Pay-Back Time will be a Pain-Full Time.’

I smiled politely at this unexpected show of wit, but it was the Professor who spoke next.

‘Your trouble,’ he said boldly,’ is that you see everything from the perspective of the City and as we all know the City’s view is an exceedingly short-term view.’ He leaned back in his chair, put the tips of his fingers together and looked thoughtfully at the ceiling. ‘Every economic upswing breeds the seed of its own destruction. But equally every downswing breeds the seed of revival. I see this crisis as a cleansing process, as a healing, as,’ he said trying to hit the wavelength of Dr Swings, ‘a detox of the financial system.’

‘Detox, my foot,’ snorted Dr Swings. ‘It’s all very well for you academics in your ivory towers, with your jobs for life and your guaranteed pension, but down here in the City people are hurting. They are firing their nannies, cancelling their winter holidays – why I even heard a colleague cancelling a reservation at the Ivy, after spending three years on the waiting list! Good heavens, the whole of the London economy depends upon the City, and all the wealth that it creates’.

‘Creates?’ interrupted the Professor, ‘or do you mean appropriates? It is high time that the notion that financiers create wealth was knocked on the head. Could it be any clearer than it is today that City bonuses have been based upon paper profits recorded during a huge asset bubble? I for one look forward to seeing more graduates from my own University of Oakethorpe heading not for the City, but to the pursuit of more useful occupations – architecture, medicine and engineering for instance.’

Time for aggressive rate cuts

‘And academia, I suppose,’ sneered Dr Swings. ‘But you are too complacent. This crisis is not only hitting the City. Jobs are now being lost in manufacturing as well. Your engineers and your architects are suffering too. The only question that matters now is how we are going to get through the next few months. We need central banks and governments to get ahead of the curve. To provide guarantees to depositors, to pump money into the system and to cut interest rates aggressively.’

‘Now there I do agree with you.’ said the Professor, ‘For the Bank of England to be afraid of inflation at this time is absurd. Metal prices, food prices and of course the oil price are all now falling. By next summer inflation will be 2%, if that. It is time for the Bank to anticipate – which brings me the subject of politics.’

‘Go on,’ I said, not that the Professor was showing any signs of pausing.

‘The Bank of England is bound to place too much emphasis upon today’s inflation rate, because otherwise the Governor must write a letter…

‘How old-fashioned is that!’ observed Dr Swings.

‘…to the Chancellor. Why the formality? It is time to be bold, to forget inflation which is going to tumble next year anyway, and to cut interest rates.’

‘Yes,’ agreed Dr Swings. ‘At a time like this interest rates are too important to be left to the Bank of England. And yet the devolvement of interest rate policy to the Bank is still considered to be one of Gordon Brown’s successes. So now I see that the Conservatives are proposing to hand the job of reducing the horrendous level of public sector debt to a new department. But why on earth should this be necessary? This is the job of the Chancellor! He should not need a whole new department full of bureaucrats to do it for him.’

No one is making any sense

‘And another thing,’ added Dr Swings, now well into her formidable stride, ‘The Tories have made another mistake. By agreeing to support the Government at this time of crisis they have strengthened the very impression that Gordon Brown is trying to create.’

‘Which is what?’ I asked.

‘That this crisis,’ she paused to give me her ‘isn’t it obvious?’ look, ‘is not of Brown’s own making but rather was generated overseas and has crashed upon our helpless and undeserving shores.’

‘Yes,‘ interrupted Roundabout. ’And the Tories have another tricky problem. Some of their best friends are bankers. They are flopping around trying to pander to the popular mood, but they are struggling to make sense. Mind you, so is the Government. It is all very well talking about retribution for bankers, but we can never retrieve the bonuses that they have already salted away and as for their prospects – well a credit crunch and recession will take care of that. In the City,’ he concluded, with a sly glance in the direction of Dr Swings, ‘there will be carnage.’

The thrust struck home, and I spotted a hint of alarm in Dr Swings’ ice-grey eyes. Did she have a fleeting image of her boss strolling past her empty desk and wondering whether such an arrangement should be made permanent? I don’t know. But certainly at this point she hurried off, leaving me to pay the bill and the Professor to go for a leisurely stroll.

‘I need time to contemplate,’ he explained as he parted. ‘And the autumn air is so very stimulating.’

Tom Bulford
for The Penny Sleuth

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Time for Aggressive Interest Rate Cuts

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