Low interest rates don’t spur growth

In times of recession, central banks have always cut interest rates. But this outdated strategy won't work nowadays, says Simon Caufield. Here's what the Bank of England needs to do now.

In recessions, the Bank of England cuts base rates to spur growth. It believes lower interest rates will boost bank lending, as do most economists. The theory goes that banks become more willing to lend because their costs are lower. And because prices are lower, loan demand rises. So everybody's happy.

But professors Joseph Stiglitz and Bruce Greenwald of New York's Columbia University say most economists are wrong. Why? Because interest rates aren't the only costs that banks have to consider. If a borrower defaults, the bank must write off some, or all, of that loan. So write-offs are costs too. These are ignored by central bankers, yet Greenwald and Stiglitz say default risk is more important than interest rates for four reasons.

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Simon Caufield started out as an engineer and has an MA in engineering from Cambridge. This was followed by an MBA from the London Business School.

 

After graduating, Simon worked his way up to become a Management Consultant for banks and insurance companies. This gave him the chance to see the city from the inside.

 

In 2001, Simon started his own company to develop software designed to price banking services, such as loans and deposits. After growing the company to 100 employees, he went on to sell this in 2007, looking for his next challenge. 

 

Also during 2007, Simon ‘sacked’ his fund managers and took complete control over his investments.  Now he devotes all his time to investing and is an angel investor to help start-up companies. He has built up a reputable 20 years in the industry.

 

Simon writes his own investment newsletter – True Value. This follows the strategy he established in 2007 and is based on assets that are priced way below their true value.  He scours the worldwide markets for equities, bonds and alternative investments to find opportunities that fit his conservative and contrarian approach.