May 25, 2007

Apres Ahmadinejad, le deluge

So, according to this, Iranian interest rates were set in two tiers. State banks were offering interest at 14% while private lenders were offering money at anything between 17% to 28%. Officially, inflation is at 15% in Iran, but is believed to actually be much higher. Based on the higher private rates, it's probably bouncing around the 20-23% range with a 5-8% risk premium. Rates under the actual inflation rate were for the well connected who wanted their bribes couched as sure ways to make money.

But now Ahmadinejad has taken Iranian interest rates and lowered them, King Canute style, to a 12% fixed rate for both state and private institutions. The result is predictable. Lending will collapse, capital will flee, the economy will tank. So why do such an ill conceived, desperate maneuver, straight out of the Nixon economic playbook? Unlike Nixon, Ahmadinejad already knows that this is a bad idea. He bucked his domestic economic experts to issue this decree who no doubt explained to him how painful this is going to be for the economy. There is no rational reason to do this unless you're at the end of your rope and you want to stave off the revolution for a few months longer.

Of course, that isn't what the mainstream media is talking about. It isn't even what the alternate press is talking about. No doubt I'm off my head and there is some cunning plan for creating large negative interest rates by political decree. I'd love to hear it. It's a pity that nobody's supplying any sane reason.

HT: Instapundit

Posted by TMLutas at May 25, 2007 11:16 PM