Thursday, May 21, 2015

Economics: the interest rate does matter

Paul Krugman has written a soft takedown of James Montier's latest research note. Montier is a first rate writer on the markets, macroeconomics and investment psychology, and is always worth reading, but this time around he seems to have severely underestimated the impact of interest rates on housing. Montier says, "...but there isn’t  a strong relationship between house prices and interest rates, which limits the importance of this  channel of influence for monetary policy".  This just isn't the case and it's even less true over here in the UK where mortgages are on a much shorter tenor and the public are addicted to variable rate products.

Krugman's final sentence is one to think about when listening to critiques more broadly.

"The bottom line here is that there’s plenty of real stupidity in the world; we don’t need to add to the cloud of confusion with a critique of imaginary stupidity."

No comments: