Friday 18 February 2005

Pic of the day: When the housing bubble bursts ... (Actually, it's a screenshot from the anime Mamotte Shugogetten, but it seemed to fit.)

Interest rates

It's not all fun and games. At least not games. This week the central bank of Norway had some kind of official party for Very Important Persons, and the boss there (Gjedrem is his name) spoke about their plans for the future. He seemed convinced that Norway was in a self- sustained economic expansion now, and in such a situation it is a really bad idea to keep interest rates really low. This isn't what he is supposed to say, because his job is mainly to keep the inflation stable, and the inflation has been much lower than his target for quite some time now. So he is supposed to say that interest rates have to stay low for a long time, and certainly until other central banks have raised their rates.

Mr Gjedrem spoke the truth, of course. There is already too much pressure in the Norwegian economy. And regulating a national economy – even when the nation has less than 5 million inhabitants – is not like driving a car. You have to start speeding or slowing at least half a year before the change needs to take effect. When the wages explode because no one can find qualified labor anymore, it is a bit late. That's how the man did when he was new in the job. He reacted, and raised the interest rates sky high just as the economy passed the top and started tumbling down toward loss and unemployment. Only when it was bottomed out did he think about lowering interest rates again. This time it seems he intends to do it right. Well, good luck with that. A central banker's job is to forestall the disasters. When the disasters don't happen, nobody thanks the central bank. It is rare indeed that anyone ever thanks anyone for bad things that don't happen, for things that just work the way they were supposed to.

***

In the USA, of course, interest rates are scheduled to rise gradually for a long time. The central bank there, the Federal Reserve under the hand of Alan Greenspan, is far more predictable than ours. Greenspan, one of the greatest economists since Adam Smith in my opinion, can see years ahead into the future (barring sudden events such as asteroid collisions, I'd bet). The rock solid confidence that this gives is probably a major reason why the dollar has not yet fallen to its natural level. People know that the interest rates will go up over the next couple years, which makes it more attractive to put money in American banks. How long those banks will continue to finance a growth in consumption without growth in production, that's another matter.

Higher interest rates are bound to slow down the growth in property prices. Now in all fairness, interest rates are not the only thing that influence housing costs. The local governments have recently been very eager to exercise their power to "zone" the land so building new houses becomes hard. Often there are certain fees to be paid – not as in corruption, the money goes to the government alright – and those fees add to the building costs. Or there is simply the fact that you have only so much land and people are stepping on each other to find a place to live, so of course prices go up. But without affordable credit, people will have to think twice about a lot of thing. They may have to say no to jobs that require them to move, for instance, if there is no place to live nearby.

To deflate the housing bubble without crashing the entire economy will require little less than a miracle. Luckily, it is in very competent hands right now. Being able to see what's coming years into the future will make it possible for people to plan ahead instead of panicking when things suddenly change out of the dark.

The Norwegian central bank may have something to learn from its US counterpart. But the Norwegian populace hardly has anything to learn from its US counterpart. The years of reckless spending that have sunk the entire nation down in a pit of debt is no badge of honor, no matter how you look at it. And don't give me that "it's all because of Bush!" line. The government has been acting like an idiot starting with Bush, yes, but common people acted like idiots already under Clinton. Borrowing and spending, borrowing and spending. Sorry to offend people, but only an idiot don't know the difference between borrowing money and getting money for free. Payback is a [female canine], you know. Good luck, people, you're going to need it. You are living in, as the famous Chinese curse puts it, "interesting times" indeed.