Political interference with central banks can only delay
For example, anyone who bet their life savings on this
blog’s prediction that the Dow Jones will rise on Wednesday may be a victim of
such government manipulation.
What actually happened is that the markets rose to an
artificially high level the day before, so that they were doomed to fall on the
A comment by reader Georges T B Hua – yes, we always read
your comments, so keep them coming – may provide an explanation.
George’s suggests that the Dow was supported by the Fed on
the Tuesday so that a particular candidate would not be penalised on Election Day.
We have no conclusive evidence for or against this
suggestion. That does not matter. What matters is that people are thinking in
those terms, and it is what people think, not whether they are right or wrong,
that determines the market.
There is a similar suspicion that British Prime Minister
Gordon Brown – who gained great political credit for giving the Bank of England
independence – is pressuring the Bank to cut interest rates.
So the markets were not impressed by yesterday’s sudden
1½ % rate cut – conveniently coming while the people of Glenrothes were
voting in a by-election.
Lower interest rates are helpful, but such a large cut
undermines confidence. It evokes memories of John Major’s dramatic rate
increases on “Black
Wednesday”, 1992. The markets saw at once that such high rates were
unsustainable and so the pressure on the pound was increased by them, rather
than easing as was the intention.
Yesterday’s sharp reduction has the same smell of panic
about it. Shrewd players will wait and see where the rates bottom out before
they start borrowing and lending again.