Why interest rate is lower during recession? Shouldnā€™t it be higher?

I always thought that the interest rate and inflation goes up during the recession but this time itā€™s the opposite.

The reason we have this credit crunch is because banks lent out too much money.

Since Gordon Brown handed control of our economy to the unelected bankers of the Bank of England, naturally the bankers have done what would make them the most profit, i.e. lend out as much money, to as many people, as possible. Money was 'created out of nothing' by banks on an unprecedented scale. This was way out of proportion to the amount of deposits invested by savers. So the so-called New Labour boom period of the last ten years or so, was financed on borrowed money unsupported by genuine collateral.

Obviously, to correct the problem, the logical thing would have been to increase interest rates to reduce further borrowing and encourage saving. However, this Government knows that because of the horrendous, unprecedented scale of the problem, a cut in the spending of borrowed money would now cause unacceptable problems, such as mass unemployment, homelessness and bankruptcies. So because the consequences of their incompetent handling of the economy are so dire, they have to find a solution that will save them politically. The only thing they can do is to try to get the banks to lend out even more of the money they haven't got. Hence the Government is now forced to continue with another dose of the same policy, that caused the problem in the first place.

So instead of savers being rewarded and encouraged to save more with higher interest rates, they are now being punished with pathetically low rates (which cannot even keep up with inflation) and borrowers, who were part of the cause of the problem, are being rewarded with record, low, interest rates.
Encouraging saving would enable the banks to lend out more HONEST money which would be supported by real deposits and assets, rather than relying on money which the Government has had to borrow from international money lenders putting the nation in debt for decades.
So our whole banking system is being supported by IOU s.

The Government should have helped to encourage saving by removing the tax on savings up to a certain level, but instead they chose to do the opposite, to discourage saving by giving tax concessions on spending via VAT, rather than on saving.
So the problem is not being solved, but is merely being shelved, the Government is going for a short term fix,(live now. pay later) and the pain caused by the excessive lending of the banks is simply being dragged out over a much longer period.

The Government knows that the repercussions of this crisis will extend into the future long beyond their term of office with much higher taxes/spending cuts and erosion of the value of sterling for the forseeable future. But "what the hell" if it gets Gordon Brown off the hook for now, people may not even realise that it was him and his Government that were to blame for the whole thing in the first place.

Gordon Brown wants us all to think that this is a purely global problem which is nothing to do with his policies.
Of course, the problems in the USA were also caused by the government there permitting the (unelected) bankers of the Federal Reserve to have control of the US economy.
So the US is in the same boat as Britain through pursuing exactly the same crazy policy as Gordon Brown i.e. allowing unelected bankers to run the economy.

The Government are hoping to increase consumer confidence to encourage us all to spend more. Its a policy fraught with potential disaster though.

The idea is to make things easier for mortgage payers and borrowers so they have more money available to put back into the system so improving the economic climate. Every one seems to forget those who don't have mortgages, or borrow,, the people with a few bob invested , They lose out cause the dividends and interest are a lot lower and the capital value of the investment is much lower , Non borrowers want higher rates . Also lower bank rates are supposed to make itb easier for small firms to borrow at lower rates so as to prevent them going broke

The Federal Reserve tries to regulate the economy through manipulating the supply of money. When unemployment drops below 5%, they raise interest rates to cool down the economy. In times like this they lower interest rates to try to get it going again. But it's like pushing on a rope. People are afraid to invest money so they're not borrowing it.

You may be right!!
However the current thinking is that in order to stimulate the economy you need to make more credit available (like what got us in this mess). The worlds governments are also pumping money into the system to avoid deep recession, depression, stagflation etc.
Will it work??

A lower interest rate during recession encourages people to continue spend money while the economy is slow ! A high rate would just bring the economy to a complete halt.

The economy thrives on mortgage sales - and if the interest rate remained high when peoples finances were already stretched, it would stop all but the extremely rich from buying houses.

Supposedly the lower rate will enable the banks to lower the rate to borrowers so that they have more to spend in the open market of consumer goods. This in turn will get the factories and shops selling again and also bring back the buoyant housing market. Most banks are not as yet passing on these savings so the economy is still static.

different economic world now , service industry mentality , just move it around , perhaps that is why the money is leaving . offshore is just becoming widely available to you .

I can't believe you have actually asked this! The Conservatives were good at raising interest rates, which is awfully good for banks (banks were the pies they all had their fingers in, some of them up to the elbow) and the high interest rates meant that people struggled to pay bills after they had paid their mortgages... This led to little free money around, and when there is little free money about, then prices tend to rise - this is inflation.
The Bank of England, not the Government, have stepped in to try to stimulate the economy by cutting interest rates to a very low level - this is like a paramedic shocking a heart-patient on the pavement - it is a drastic step to try to keep the economy alive. Interest rates have been cut, but it is unlikely to make for a spending boom, as so many of us fear there will be no work for us after Christmas! Huge job losses are already happenning, and the rest of us will only spend when we are CONFIDENT that we can afford to.

Enter Your Message or Comment

User Name:
User Email:
Post a comment:

Archive: Forum -Forum -Finance - Links - 1 - 2 - RSS - All RSS Feeds
The Causes and the Results. 0.034
Copyright (c) 2011 Financial Crisis Monday, May 28, 2012 - Terms of use - Privacy Policy