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Libertariansim Central Banks Interest Rates Mortgages

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Today the Israeli newspaper Yediot Aharonot reported on the new-and-improved stupidity that the Bank of Israel (a central bank) will impose on unsuspected people, presumably  to protect borrowers risks and maintain the stability of banks.

Or more specifically, they are concerned about the continuing rise in housing prices, increase in mortgages and low interest.

Seriously? This is not a joke right? This is real, actual news, right? This guys at the Bank of Israel are serious people, right?

Oh… well… on with the show.

Let’s first clarify one point: the Bank of Israel controls interest rates. Artificially lowering interest rates creates a problem for banks because it lowers their profits. If banks cannot maintain their profits from a small number of loans, then they will maintain their profitability by making a large number of loans. The most succulent loans are, of course, mortgages. However, in order to increase the number of suckers… scratch that… customers taking on mortgages, they need to lower the borrowing standards. You see, prudent banks don’t loan to just anyone. They want to make sure they get their money back, with interest. But, when the bottom line is at risk… banks will lower the standards to increase the number of loans. The result? If you can fog a mirror, you are approved! No income, no collateral? No problem! Just come to your friendly bank and you can get a mortgage that Onassis could not afford! And why would a bank take such a risk? Because, yes!!! if you run intro troubles and your customers default like a tsunami, the friendly Bank of Israel is there to bail you out! For free!... almost (after all, business is business). So, let the good times roll!

Summarizing: central banks lowered interest rates down to zero, creating a flood of dirt cheap money which started the whole problem. And now, they impose artificial limits to try to manage the mess they created in the first place!

Good luck with that. Let me know how it goes. I’ll keep my gold bars in the basement for when the inevitable collapse comes marching on.

Now, to task:

First question: how exactly are borrower’s risks protected by limiting the debt they take on? Actually, what is the meaning of protecting borrower’s risks? Is the Bank of Israel saying that they want to make sure a mortgage holder maintains a risk level? And we thought that risks were bad. Guess not in Israel, where risks seem to be so good in fact that they need government protection. Maybe risks in Israel are an endangered species, who knows.

Second question: if the Bank of Israel is concerned about low interests, why don’t they simply increase them? It’s in their mandate to control them. They have the tools. So, why not simply increase them? Ahhh… you see… if we increase them, then our economy stops and that would be bad… they say. OK, so the economy cannot tolerate higher interest rates because it needs these low interest rates to survive. Go it. But now… let us see if we understand this. The Bank of Israel addicted companies to low interest rates in the first place and now that these low rates are backfiring the bank makes a shameless public relations about-face and denounce them? We see. Silly us. And we thought that central banking was there to manage the economy and make things smoother and without ups and downs. Guess not. Silly us.

Third question: because of low interest rates, banks lowered borrowing standards hence increasing the mortgages, hence rising housing prices. Why is then the Bank of Israel concerned about the continuing rise in housing prices, increase in mortgages and low interest if they are all one and the same? We guess they must pay a fortune to public relation consultants. The KGB (yes, the evil, evil, Soviet Union’s state security committee) had a name for this: disinformatzya. Or disinformation. The goal: to confuse your enemy with false information. We guess the Bank of Israel considers Israeli people their enemies. That's the only logical conclusion.

Of course, this is all nonsense. In an Absolute Austro-Libertarian system there are no central banks and therefore interest rates remain stable naturally and without any intervention.  Because of this, there are no systemic and unsustainable economic ups and downs (booms and collapses). In an Absolute Austro-Libertarian system banks know who is a good borrowing risk and who is not. There is no need for all this circus, and risk taking, and bailing out, and debt piling on top of bad debt.

In an Absolute Austro-Libertarian system mortgages can be taken to any length of time the bank is happy with, since risks are low. House prices remain more or less stable. Long term economic forecast is quite possible and reliable. This also benefits mortgage takers since they can plan effectively and live happily with lower mortgage payments.

The inevitable conclusion?

Central Banking: screwing you today like you have been screwed before!

Now you know. Take it or not, it's your choice.

Note: please see the Glossary if you are unfamiliar with certain words.