Wednesday, 21 February 2018
You pay extra interest on your mortgage just to enable the central bank to adjust interest rates.
The reason you pay an unnecessarily large amount of interest on your mortgage comes at the end of this article. To explain the reasons, it is necessary to explain something about MMT and interest rates.
According to Simon Wren-Lewis in an article entitled “Do Trump’s deficits matter?”, MMTers do no approve of interest rate adjustments. As he says:
“…what MMT actually says is that inflation should determine what the deficit should be. If inflation looks like staying below target you can and should have a larger deficit, and vice versa. The reason they say that is that they think the central bank, in changing interest rates to control inflation, is wasting its time, because they believe rates do not have a predictable impact on demand and inflation.”
Well speaking as someone who reads and leaves more comments on MMT blogs than about 99.999% of the population, that’s not my impression. However, MMTers are a diverse lot, and it’s often not entirely clear what they think as a group.
My impression is that MMTers don’t think much of interest rate adjustments because they tend to believe in a permanent zero interest rate, or at least that a zero rate should always be the objective, with occasional interest rate rises being used only in emergencies. Milton Friedman advocated that policy in his 1948 American Economic Review paper. See para starting “Operation of the proposal…”.
Also, MMT’s founder, Warren Mosler advocated a permanent zero rate in this Huffington article (2nd last para), and here.
One reason for favoring a permanent zero rate is as follows. The private sector and the banking system in particular need a supply of base money. And that need is such that the private sector will willingly hold a stock of that money without being offered any reward for doing so. I.e. no interest needs to be paid.
But if the state issues too much of that money (i.e. runs too large a deficit for too long), then private sector entities will try to spend away the excess, and inflation will ensue, unless the state induces the private sector to hold onto that excess stock by offering interest on it.
But what’s the point of doing that? I.e. what’s the point, to put it figuratively, of inducing people to keep large wads of £10 notes under their mattresses, and inducing them not to spend that money by offering interest on it? This is a farce. It amounts to rewarding hoarders with money extracted from taxpayers.
It also results in everyone with a mortgage paying more interest than they need, just to enable central banks to adjust demand by adjusting interest rates. If monetary policy (i.e. interest rate adjustments) were VASTLY MORE EFFICIENT than fiscal policy when it comes to controlling demand, then there might be an argument for imposing that cost on mortgagers. But the evidence, far as I can see, is that interest rate adjustments do not work in a particularly quick, and predictable way, plus there are some who argue they don’t even have much effect.