June 04, 2012

Fooled by the nominal interest rates, Mr. Summers asks the government to fall for another type of teaser rates

Sir, Lawrence Summers is just another economist fooled by looking only at the nominal low interest rates for government debt of some “infallible” sovereigns, “Look beyond the interest rates to get out of the gloom”. Those interest rates do not reflect real free market rates, but the rates after the subsidies given to much government borrowing implicit in requiring the banks to have much less capital for that than for other type of lending. 

If the capital requirements for banks when lending to a small business or an entrepreneurs was the same as when lending to the government… then we could talk about market rates. As is, to the cost of government debt, we need to add all the opportunity cost of all bank lending that does not occur because of the subsidy… and those could be immense. 

Mr. Summers even suggests that governments should issue debt to buy government buildings it currently rents… and to me that sounds like tempting the government to fall for another type of teaser rates. 

PS. It is amazing that the Financial Times has not made an issue yet of the current interest rates not being what the market rates they are supposed to be.