This comment was made at Macrobusiness  (link may be locked – but there is a free trial available)

“….But what’s the alternative to rate cuts?..”

Simple

1. Reduce the unproductive capital inflows that permit low interest rates for mortgages in a CAD country.

2. Mortgage rates will rise – even if the RBA does not change the target rate.

3. Government runs a deficit (by cutting taxes but at the same time also cutting pork and middle class welfare) to support the economy as the increased rates drive deleveraging.

4. The government deficit is not funded by bond sales but instead giving the RBA a non transferrable zero interest bond.

5. If the deficit printing starts to put pressure on inflation – starting increasing bank reserve ratios and don’t stop until they get to 100%.

Sure the above is radical and not likely to happen but cutting interest rates is no real solution either.

It is just extend and pretend.

It is NOT extend and pretend to cuts rates if you control credit with MP, which is VERY EASY TO DO IF A FEW FOLKS JUST GOT BEHIND THE IDEA INSTEAD OF DREAMING OF PERFECT SOLUTIONS THAT ARE NEVER GOING TO COME.

and then my response

I fully support macro-prudential as it is a form of capital inflow regulation – albeit mild.

After all if macro-prudential actually has an impact it means that the demand for credit by investors will be lower which will mean that there be less demand to be met by banks borrowing off shore – as the demand for credit by non-investors is unlikely to increase with houses already well beyond fully priced.

So if macro-prudential works it will be a mild form of the wacky and ‘radical’ capital inflow regulation I am talking about.

My concern about cutting interest rates AND doing macro-prudential is because they work at cross purposes.

Cutting rates is about driving demand for credit while macro-prudential is an attempt to reduce it selectively.

The RBA and APRA have clearly asked themselves the question.

“If we have a choice between demand for credit from speculators and falling or negative demand for credit what do we choose?”

And the answer is clearly “We will take credit demand where we can get it” as is why they are not serious about macro-prudential.

They don’t believe that if they cut the speculator demand for credit they will be left with much demand for credit at all.

Bearing in mind that the whole debate about demand for credit only arises because neo-liberalism is violently opposed to government management of the money supply, we would not be having this debate at all if we started talking seriously about government management of the money supply and ending the outsourcing of that management to the debt creation processes of the private banks.

But then that is wacky and radical.

Clearly, if it is not yet time for wacky and radical it soon will be. What seems now to be wacky and radical is really just a mild form of capital regulation to moderate the excesses of too much deregulation.

Moderate capital regulation of unproductive capital inflows (mortgage related borrowing and govt debt) will inevitably produce a decline in the exchange rate closer to what our trade performance warrants.

A response 

Concur with controlling credit, tho’ that leaves the employment question, Employer of Last Resort (ELR) seems necessary to square the problem.

and then my response

I have no problem with the idea of ELR or Job Guarantee but I think it likely that those approaches may only be needed at the margins.

Without the impediments and artificial constraints on economic activity of the current model there is likely to be a shortage of labour in most areas – even if robots are making all the gadgets and taking care of the mundane stuff.

The world is full of things that are worth doing and taking the time to do well.