Sunday, August 19, 2012

European Central Bank Considers Interest Rate Caps; Can Such a Scheme Possibly Work?

From Mish's Global Economic Trend Analysis:
Economic Times reports European Central Bank mulls caps on borrowing costs
The European Central Bank is considering buying the bonds of crisis-wracked eurozone countries to ensure borrowing costs do not rise beyond a pre-determined level, German newsweekly Der Spiegel said Sunday.

The bank will define an upper limit for borrowing costs in countries such as Spain and Italy and intervene in the markets to ensure it is not breached, Spiegel said, without citing its sources.
Can This Work?

...It depends on the definition of "work". In general, if central planners (and it is important to understand that is what we are talking about here) set prices too high there will be unlimited supply.

Likewise, if central planners set prices too low, there will be shortages....