New controls on lending

Slightly odd this one.

The Bank and its Governor, Mervyn King, would be able to prevent banks from lending too much, or to over-extended customers, if they judge that this would destabilise the economy.

The precise details of the controls the Bank is to be given will be detailed fully at a later date.

As  a general (although not exclusive) rule rationing by price is better than any other form of rationing.

The housing boom was at least in part because they didn\’t ration by price: interest rates should have risen sooner in the face of an asset bubble.

So, having not used the known method of rationing by price they\’ve decided to bring in a known to be less effective method of rationing?

Ho hum.

3 thoughts on “New controls on lending”

  1. They should have rationed the house bubble by raising interest rates but I guess they didn’t because that would have hit other sectors of the economy that weren’t booming like manufacturing.

    As such a method that limits house price inflation but doesn’t push up borrowing costs for other sectors of the economy is useful.

    Perhaps as well as a theory of Optimal Currency Areas we also need Optimal Currency Sectors – eg different currencies for different parts of the economy.

  2. With this foolish announcment Boy George will have just terrified most of the City with those infamous words “I’m from the government. I’m here to help”

  3. raising interest rates at the margin acts as a tax on all existing mortgage payers through the destabilising system of having 30 year liabilities priced at 90 day money rates. Fix mortgage rates, make them refinaceable like the US and allow lenders to set the price.

    Preventing a “good” credit from borrowing a large sum at any price while allowing a lot of Bad” credit to access capital makets at the same price as a good credit is not good lending policy. A bit like limiting the amount, say, Tesco can borrow while allowing thousands of corner shops to borrow at the same price as Tesco. Sub prime lending was a political initiative to allow large amounts of bad credit to borrow at good credit prices and we know where that got us.

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