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Manipulating the Interest Rate: a Recipe for Disaster

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Tags Capital and Interest TheoryMoney and Banking

The turmoil in the US subprime mortgage market has developed into an international credit crisis. It is eroding investor confidence in credit and credit-related products and, most important, raising concerns about the solidity of the banking sector, as evidenced by banks' elevated funding terms and diminished stock prices. As a direct response to the credit crisis, the US Federal Reserve Bank first paired the Federal Funds Target Rate twice — by 50bp on September 18, another 25bp on October 31, and another 25bp on December 11 — bringing the official rate to 4.25%. The lowering of borrowing costs came despite the fact that the FOMC had been stressing "inflation risks" since early 2006. The cause of the international credit crisis has a name: the government-controlled paper-money regime.The turmoil in the US subprime mortgage market has developed into an international credit crisis. It is eroding investor confidence in credit and credit-related products and, most important, raising concerns about the solidity of the banking sector, as evidenced by banks' elevated funding terms and diminished stock prices. As a direct response to the credit crisis, the US Federal Reserve Bank first paired the Federal Funds Target Rate twice — by 50bp on September 18 and another 25bp on October 31 — bringing the official rate to 4.5%. The lowering of borrowing costs came despite the fact that the FOMC had been stressing "inflation risks" since early 2006. Then it dropped rates again in December. The cause of the international credit crisis has a name: the government-controlled paper-money regime. This is the diagnosis when taking on board the theoretical insights provided by the monetary theory of the trade cycle (MTTC) as developed by Ludwig von Mises, one of the leading scholars of the Austrian School of economics. FULL ARTICLE

Dr. Thorsten Polleit, Chief Economist of Degussa and macro-economic advisor to the P&R REAL VALUE fund. He is Honorary Professor at the University of Bayreuth.

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