For some time now the government has been banging on at the banks to pass interest rate cuts on to consumers.
This, it seems to me, would be perverse (as indeed are interest rate cuts in the first place). We arrived in the current economic mess as a direct result of interest rates that were too low over a sustained period because of a failure to take into account the boom in the housing market, both here and in the United States; had the banks not been busy shifting the risk onto others, perhaps money would not have been lent inappropriately even under those conditions, but the combination of the two has turned out to be a disaster for the world economy.
The fix for these problems is twofold. It was clear that the only way to solve the crisis in the banking sector was recapitalisation, whether through mergers, takeovers, outside investment or—preferably as a last ditch alternative—state investment in banks. The alternative would be to allow banks to go bust, taking peoples’ savings with them; this is political suicide and therefore unthinkable to the modern political class, not to mention terribly unpleasant for the people whose money would be lost.
But the underlying problem of the overheating housing markets on both sides of the Atlantic can only be tackled by taking real estate prices into consideration when setting interest rates. And, to date, the Bank of England has still not been instructed to include house prices in the measure of inflation it is supposed to be working to keep at a low rate.
We should not be making rate cuts at the moment, let alone forcing lenders to pass on those rate cuts to consumers. To make rate cuts when the problem is excessive debt and when housing is still significantly overpriced is simply madness.