Let’s start fighting recession

My theme for many weeks has been simple – the authorities should fight deflation, not inflation. recession is the new enemy, just as inflaiton and excess credit was the enemy two years ago. Every word and aciton of government and regulators should be examined with this in view. So how are they doing?

In order to fight recession you need to have low interest rates, provide plenty of liquidity to the banking system, ensure all statements are positive and confidence building, and use what public spending you can afford to maximise the beneficial impact on people’s employment and incomes.

The UK authorities are giving a very mixed performance judged by these simple standards.

They have kept interest rates far too high for too long. They should cut them to 2% today, which would still leave scope for further cuts if the economy does not respond well. Market rates are well above the indicated rate and will remain so. That’s all the more reason to cut the indicated rate, to relieve some of the pressure. If interest rates remain too high more people and companies will default on their payments, leaving banks in a weaker position and savers worried about the security of their funds.

They are now supplying large amounts of liquidity, which is good. Previous attempts to withdraw liquidity from markets have been disruptive. They need to supply as much as it takes for as long as it takes, ensuring the taxpayer is protected by taking proper security for the loans.

The authorities have made too many statements and allowed too many stories to escape that undermine confidence. If they think any bank needs more capital, they should sort that out in private with the bank concerned. We should know nothing about it until the bank announces to the market how it is raising the money, when the problem is largely solved.


  1. nick
    October 16, 2008

    ensure all statements are positive and confidence building

    So, I take it you are going to be applying for the spin masters job in NuLabour?

    Tell the truth, not spin things.


    reply: Of course you must tell the truth. I was talking about regulators , who should not be leaking details of their discussions to shore the system up. They should take action to make sure it is sound and then tell us how sound it is.

  2. John Moss
    October 16, 2008


    Is there not a possibility that by cutting Bank Rate as you suggest, the 30% of the mortgages which track this will be reduced, thus intolerably stretching the banks who fund these loans in the market, where, as you state, the rates are much higher?

    I am instinctively in favour of reducing the cost of living for the ordinary citizen to liberate the economy and would welcome the reduction of over 1/3rd in my own monthly mortgage costs, but could the lenders survive it?

    Perhaps it is time to throw agricultural tariffs and subsidies on the table? Scrap these world wide from next year and give farmers some of the bail-out bung to see them through the adjustment.

    This would see real investment opportunities open up in Africa and other places. The banks can then fund these real investments rather than trying to squeeze the last ounce of return out of loans and derivatives which got us into this mess in the first place. It also has the happy upside of doing more to end poverty in the third world than all the aid packages put together!

    Reply: The idea would be that market rates would fall as the base rate fell. Yes, we need to reform agricultural policy. The CAP is bad news for consumers and the Third world.

    1. John Moss
      October 17, 2008

      Interestingly, Swap Rates are back about where they were in 03/04. I re-financed £7.0m on a property investment then at 4.73% + margin and the base swap rates are back under 5% all the way from 1 year to 30 years.

  3. Lola
    October 16, 2008

    Mr Redwood said:-

    "In order to fight recession you need to have low interest rates, provide plenty of liquidity to the banking system, ensure all statements are positive and confidence building, and use what public spending you can afford to maximise the beneficial impact on people’s employment and incomes."

    …and cut taxes and cut government spending on cash flow but try and keep genuine infrastructure and other capital projects with a provable investment or national security case going. Would that a better paragraph?

  4. Alan Douglas
    October 16, 2008


    "they should sort that out in private with the bank concerned"

    You are right of course, but what is the point of Brown saving the world if he can't boast about it afterwards. He is a compulsive grandstander. Every move he makes has that as his main motive.

    Alan Douglas

  5. Paulie
    October 16, 2008


    I hope that you monitor the comments on your blog because this one is very important.


    Thankfully, it doesn't go as far as taking your arguments to their logical conclusion and calling for higher taxation to fund public projects and a safety net for the poorest that can half-way match the one that ZaNuLieBore have given to your former colleagues in the city over the past couple of weeks.

    Your blog is usually a sensible haven from this Keynesian nonsense, and it's probably the only place in the world that we STILL can go to read about how the current crisis is down to excessive banking regulation.

    The post here is also calls for everyone to be PUBLICLY POSITIVE ABOUT THE CURRENT SITUATION – a call that is thankfully being ignored by your former leader, Mr Hague who made some very reasonable rational points yesterday about how all of this is Labour's fault and nothing to do with any irrelevant global problems that Broon has dreamed up to deflect attention from how crap he is.

    There are two possibilities. You've either been hacked by a RED or you've given your passwords to a trusted friend who has – annoyingly – STARTED READING NEWSPAPERS.

    Either way, I'd change your passwords if I were you?

    Reply: Try reading what I am saying. Careless talk by Regulators and governments can undermine what confidence is left in the financial system.
    Now would be a good time to commission new power stations, water works and the other facilities we need , preferably using private money.

  6. Tony Makara
    October 16, 2008

    The way out of this recession has to be through the development of an internal market. Once that is established we will no longer be forced to adopt the higher interest rates needed to prevent us importing inflation and the lower rates that an internal market produces will be a boon to our exporters as the Pound returns to a natural value that reflects our economy. We can only think about cutting rates now if it is part of a co-ordinated global action by the worlds central banks, otherwise if we act alone we will add to the inflation that is already eating into people's living-standards.

  7. paul hill
    October 16, 2008

    Agree that you correctly diagnose deflation as the enemy but disappointed that you do not differentiate asset price inflation(especially housing).It's a necessary condition for any soundly based recovery that this bubble should deflate as rapidly as possible.

    Very heartened by Sir Peter Viggers speech in the Supplementary Estimate debate yesterday.At least somebody on the Tory side "gets it" with regard to CDO's

  8. Kit
    October 16, 2008

    Your two stories today are linked:

    decreasing liquidity = increasing bank capital

  9. Adrian Peirson
    October 16, 2008

    Inflation devalues our money, this is caused in large part by Govt Borrowing, Immediately this money is Borrowed into existance it is devalued by virtue of the fact that we must pay this loan back PLUS INTEREST.
    This is why our money buys less and less each year. For every Pound the Govt Borrows we must pay back that pound plus the Interest.
    It's a Ponzi Scheme, Govt and Big banks ( from which Govt borrows the money through the issuance of Gilts) are both in on this scam.
    This is why both parents must now work in order to look after their families.

    We are being farmed.

    As for lowering Interest rates, this will only encourage more Borrowing.
    Banks lend out money that they simply do not have, using Fractional Reserve Banking, they lend out TEN times as much as they hold on deposit, IE Bank loans are thin air, that we must pay interest on.
    When we default (because they have deliberetaly raised rates again, they trawl in our assets, all conjured up using nothing but thin air.
    This is Fraud.
    The Credit Bubble is caused by enticing people to borrow more and more thin air, and you are suggesting we should make this thin air easier to borrow by lowering rates.
    This is pouring petrol onto the fire.
    We need a return to sound monetary principles, money should have real value, today £10 is only worth £10 because Alister Darling says it is, in fact it is a worthless piece of paper.
    Putin knows this, this is why he is going to Destroy the Dollar and the Pound by Issuing Gold backed Currency.
    Once this happens we will not be able to buy anything from abroad, they willl want Gold.
    Unfortunatly we will not be able to follow suit because someone sold off a large part of our Gold.
    When I say Sold, I mean of course he swapped it for a pile of worthless Paper to his Big Banking Bilderberg Buddies.
    We should cut the £100 billion wasted on Quangos, Tear up the £20 billion net EU Membership treaties. Withdraw from two illegal wars.
    Abolish all tax on anything except purchases, this way only vendors need put in tax returns, saving millions on civil servants.
    Stop Govt Borrowing from Big Banks by Printing Gilts which we must Honour with our Labour through Taxes, IE we are farmed by the global banking system.

    Return to a Gold standard, this will prevent Govt excess, and the thin air credit Bubble which has got us into this mess.
    Do (FAMOUS BANKERS AND RICH PEOPLE -ED) work down the mines, fish, farm, Build ships or cars, no, they create Ponzi schemes.
    Lower rates to entice Borrowing of their thin air, then raise them again to trawl in the very real assets of the General Public.
    When a house is reposesses, who has put more labour/money into it.
    The Bank which loaned out thin air or the homeowner who has put in tens of thousands of pounds of their labour keeping up payments on this thin air.
    the Bank lost nothing but thin air.
    Who will pay for the NHS, it will pay for itself because people will have much much more of their money, they will go private, market forces will regulate the medical system as opposed to Govt.
    And we should teach our Kids about our constitution and about how money works so they can't be stitched up like we have in the past decades.

  10. Stephen Southworth
    October 16, 2008

    Low interest rates are indeed very important. HM Government says all lenders should pass on the recent BofE rate cut, and what does the state owned Northern Rock choose to do? It passes on 0.15% on what was already one of the highest SVR on the market. Good start that! It simply ensures that all of their 100%+ mortgage brigade end up with their houses repossessed and the value of OUR property continues to drop.

    Nationaisation of Northern Rock is and continues to be a disaster for this nation.

  11. Paulie
    October 16, 2008

    Funny comments policy you have here.

    Still: "Now would be a good time to commission new power stations, water works and the other facilities we need , preferably using private money."

    We're awash with that at the moment, aren't we? Anyway, what's wrong with using public money, and raising it by taxing high-earners? It's not as if they are some kind of precious talent that need retaining at the moment, is it?

    Are you worried that we might suffer from some sort of brain-drain and they will go and steal Chinese taxpayers money and bankrupt Chinese banks instead?

    It turns out that democratically elected governments are better at running the finance industry than your hidden-hands-of-the-market. Highly regulated Spanish outfits are picking up our leavings as a result. Surely, on your logic – "…careless talk by Regulators and governments" – should apply to political oppositions as well?

    I'm amazed that there hasn't yet been a hint of self-doubt from any of the Reaganite / Thatcherites that set this whole nasty ball in motion – not even a suggestion that you may have made a tiny miscalculation.

    You've always known that democratically elected governments will bail out businesses that pose a systemic risk, yet you've persisted in promoting a policy-framework that has rewarded a tiny minority of the population for taking ridiculous risks with other peoples (taxpayers!) money.

    Reply: The main failings here are regulatory. Banks did not need taxpayer bailouts under Thatcher, because we made them keep enough capital.

    1. Stuart Fairney
      October 16, 2008

      In fact, if the private cash is available, now would be an excellent time to commission power stations because (a) there is an urgent need and (b) buildings costs will fall significantly in the next few years as demand drops away. Hence Mr Redwood's point is wholly valid.

  12. Paulie
    October 16, 2008

    So it's a dastardly combination of UK Labour / US Republican folly then?

    1. mikestallard
      October 16, 2008

      I do not know if you ever read the Spectator?
      The problem is this: how did the US banks, previously a pillar of honesty, turn into people who (words left out-ED) passed round worthless bonds based on sub prime mortgages?
      In last week's edition, there was a superb article about how the Clinton administration (Democrat) insisted, through their housing department and using the law courts whenever necessary, on the banks giving mortgages to everyone, regardless of creed or colour or their employment status or even their ability and willingness to repay.
      Once these sub prime mortgages were in the system, it was comparatively easy to deal out further debts on the back of the "mortgages" which were already dealt out.

      If you have been following this blog, you will see how New Labour has got us into a lot of debt before the crash came and refused, consistently, to make any cuts in public expenditure. It was often warned that we were entering a downturn with nothing in the bank. This, of course, is now obvious.

      As usual, Labour politics has left the country bankrupt for years to come. We reckon, on this blog especially, that the total national debt, counting everything, is now around £2,000,000,000,000. We shall be paying this off for generations to come unless the whole country goes under, which seems a real possibility to me anyway.

      I do hope that this helps.

      1. Ivan Pope
        October 19, 2008

        "Clinton administration (Democrat) insisted, through their housing department and using the law courts whenever necessary, on the banks giving mortgages to everyone, regardless of creed or colour or their employment status or even their ability and willingness to repay."

        Do you think that banks should have had heed to creed or colour then? Don't you think banks should give mortgages to everyone without heed to creed or colour? Do creed or colour have anything to do with ability or willingness to pay? Do they? Eh?

        also – if the whole country goes under, where does it go? Come on man, get a grip!

        1. mikestallard
          October 19, 2008

          Yup. Sorry, but in the States they just do. The US housing department was certainly suing banks on racist, sexist and so on grounds if they refused mortgages to ethnic groups. Why, even the words "Master Bedroom" were banned! (Spectator). The lawyers were making a lot of capital out of banks who did not toe the line.
          So, yes, creed and colour had a lot to do with the ability to pay – in the USA, in the time of the Clinton administration.
          Pseudo-Liberal ideas, under the Clinton government, were the trigger that caused the derivatives and therefore the crash.
          And, remember, you do not know me. You do not know my background. You do not know my family. You do not even know what colour I myself am, do you. So, please, do not even think that I am a racist.
          Where the country goes, if it goes under, is where, perhaps Iceland is going. The money will become valueless. This will mean, of course, no oil, no imported food, no savings, no incomes from the government.
          Zimbabwe is perhaps the most well reported example of a country which is going under at the moment. See the queues for food!
          I do not know if you are old enough to remember Edward Heath and Jim Callahan's time? The three day week? It was not that funny.
          Believe me, I have got a grip!
          I just hope I am completely wrong and all the government's plans for spending their way out of the crisis will come true!

        2. USMC
          March 5, 2009

          The reality is that the liberals(Democrats) wanted to buy the poor folks vote. They decided that everyone should live "The American Dream" own a home. They made up a group called ACORN to help the poor get housing (words left out) to quiet the Conservative(Republican) opposition. The Liberals put their cronies in charge of Fannie Mae and Freddie Mac to administer these (dubious-ed) loans, to as you have said, "People that couldn't, wouldn't and demand that it is their god given right to have a house that is paid for by the rich hard working, anti-socialist people such as us, that have jobs and pay our bills!" The liberals form the groups like ACORN to quiet the opposition (words left out)I hope you stumble across this reply !

        3. USMC
          March 5, 2009

          Do you think the Brownshirts (ACORN) would give them a chance? These groups are relentless and will drag the banks through the mud if they don't write these worthless loans. They will tell the world how bad these banks are, how they won't help poor foreigners and minorities.

  13. Old Holborn
    October 16, 2008

    When Vince Cable suggested cutting interest rates, a large movement of the press wanted to send him to the moon.

    Slash public spending, cut interest rates, lower taxes.

    The twelve remaining people in the UK who aren't on Incapacity Benefit, Job Seekers allowance or working in local government/quangos will thank you by restarting the economy.

  14. rugfish
    October 16, 2008

    I think the topic said "Lets start fighting recession", I didn't notice a recession when Margaret Thatcher was PM or a problem with bank capital, runs of a bank, near bankruptcy of the banking industry, nationalised banking, or a lack of liquidity, nor did I see it under Ronald Reagan.

    However, to the topic.
    I agree interest rates should be radically dropped to stem recession and to halt job losses and eventual depression which would take our economy into a spiral so severe it would take even more government intervention to keep our financial markets. along with the revenues they bring.

    In case people forget the basics here, we are losing businesses which cater for 40% of our revenue. We know there's a problem with the economy if 60% of it is held in place by finance which has a problem with itself and is creating an even bigger problem for the remaining 40% of our economy.

    Injecting money into the system is surely one way to keep businesses afloat but only if the banks are ready to release it and if businesses can get it, and at a price where it makes a real difference. i.e. It enables them to stay in business, make goods, sell them and not fill the country up with our of work people which ever diminishing taxpayers would have to otherwise pay for.

    Undoubtedly the plan for high speed rail would create jobs throughout the country. Same with the building of power stations. Frankly, I don't care where the money comes from I just care that it's done as soon as possible using British labour, so that in itself present an obstacle I guess.

    Cutting interest rates is not the only solution to the problem of people affording mortgages though either. For many people are trapped in fixed mortgage rates and wouldn't see a benefit so how would it be to their advantage unless lenders dropped the redemption penalties they applied ?

    Secondly, there's a problem with the Buy to Let sector with double the rate of repossessions occuring which will continue to deflate house values unless first time buyers can be placed into a position where they create demand.

    I advocate a return of MIRAS for first time buyers and a switch of stamp duty to the seller so first time buyers can afford homes in order to liquidate the assets of repossessed BTL's whilst heightening demand and thereby helping to maintain prices.

    Couple this with your plans to get Britain building again with your suggestions, I see it would be a good start to fighting recession and pulling us all out of the hole we're about to fall into with this government who's only plan it seems is to print money and throw it against the walls of banks and let the taxpayers take the risk when the banks fail to know what to do with it.

  15. Freeborn John
    October 16, 2008

    If interest rates were 2% (before tax) and inflation 5.2% why on Earth should i keep my money in UK banks? What you propose will just lead to further withdrawals of money from banks that have been trying to avoid a run.

    reply: Not so. Some interest is better than no interest

    1. Ivan Pope
      October 19, 2008

      No – put your money in Icelandic banks – they are offering a much better rate of return …

  16. Rob
    October 16, 2008

    I'm just a humble prole but, what i simply cannot understand is this.

    The main reason the financial system is in such a mess is because the western world has taken on TOO MUCH debt (UK & US in particular). The Greenspan 'put' (Eddie George 'put'?) has provided a bailout on numerous occasions by lowering interest rates to blow up yet another bubble. Therefore, it would seem

    a) Interest rates have been set too low, too long

    b) Saving has become 'old fashioned'. Why would you have wanted to save when interest rates are so low and you can borrow fortunes to invest in property and magnify your gains

    Question – How can a problem caused by low interest rates and high borrwoings be solved by low interest rates and high borrowings?

    reply: Old problem too much debt
    New problem no one will lend so economy tipping into recession.
    We need to tackle the new problem.

  17. rugfish
    October 16, 2008

    I am of the view that we have engaged in what I call rampant capitalism which has gifted power over our economy to speculators, rich elite and hawks who prey on the vulnerabilities of loosely controlled begging governments.

    Governments are that eager to please investors, they give grants to these people and compete only on the level of taxpayers money they stick in the back pockets of the rich elite.

    Those speculators up sticks and hold our economies to ransom at the threat of pulling out…..thus we have limited democracy and parliamentary powers because speculators went GLOBAL with our economies.

    It needs a change, only to a degree whereby power returns to government in order to exact change to remove competetion between countries so the trade area is even and with as little upset as possible to what we have now. We need LESS bureaucracy to free up business, less control at the front end of finance and MORE deliberate control of the back end where it counts. i.e. A government which can deliver what is needed in terms of the economy, backed up by external agreements of countries acting the same toward socially responsible ends.

    No investor is going to pull out of an enlarged economic area which promotes values which are focused on a social agenda first with the ability of business to trade freely within it but with no advantage to be gained as to location. In fact there should in all sensibility be some method by which government collectively decide the locations of industries to suit the business, the consumer and the labour.

    This isn't socialism by the way, it is simply governments acting in a cohesive manner to deliver the goods in the right place at the right time for the right people to fulfill the right needs of business and the people, under private industry but with social conscience.

    It's also called commonsense !!

    Why can this not be ?

    Now then, before anyone says this is what the EU is all about, it isn't.

    The EU is a bureaucratic mincing machine which can do none of these things, and only an ALLIANCE CAN.

    This alliance of free trading nations should also include Russia, America and any other country on the planet which has our own standards of democracy and social conscience !!!

    It doesn't need changes in our domestic laws whatesoever unless the people desire it.

  18. mikestallard
    October 16, 2008

    I listened to the discussion which you, John, were in this morning. What came over terribly strongly was that the interviewer was simply not listening to what either of you were saying.
    What else came over was the balance; the Labour spokesman spoke for a lot longer than you did (and made half the sense too).
    It would have been so nice if the interviewer had actually teased out what you both wanted to say instead of a cheapo "agreement" and a laugh.
    What a wasted opportunity!

  19. Matthew Reynolds
    October 16, 2008

    As there is going to be fiscal expansion & thus a rise in the PSBR why not cut out the New Labor client state via cuts in QUANGO's , procurement costs , civil service numbers and benefits to the economically inactive not to mention ending the insane New Deal ? The savings can fund a business rate holiday for small & medium sized companies and a big one off rebate for basic rate taxpayers . I think such a policy will get money to those who suffer the most from this economic disaster rather than borrowing money to fund wasteful big government and will therefore tackle the recession .

  20. Andrew Duffin
    October 16, 2008

    I am a nett saver.

    If interest rates are cut to 2% when inflation is 5% and likely to go higher, what is the point of saving?

    Is it not the case that my money represents at least some of the capital the banks need to operate?

    If it is likely to become worthless in a few years (do the sums!), I am likely to withdraw it and consume it.

    This might make the current situation look better (emphasis on "look"), but how would it help the underlying problem?

    I submit that it would not.

  21. Bazman
    October 16, 2008

    500 Billion? Trident cost about 10 billion? Less? To build. Fantastic! Any chance of helping anyone in normal society outside Wonderland? Maybe we could give some of this to poverty stricken millionaires?

  22. Richard Lawson
    October 17, 2008

    The real economy does need lower interest rates, but the unreal economy (i.e. the financial sector) wants higher interest rates in order to boost their profits. So lower interest rates will slow down the recovery of the banking sector. Never mind. The real economy makes food, while the unreal only makes money. And food will get you through times of no money better than money will get you through times of no food.

    Here endeth the lesson.

  23. freedom to prosper
    October 18, 2008

    We need to give real people real money to spend which in turn creates real jobs. I've said it a thousand times but I'll say it again mortgages, for most our biggest spend, 3x ONE income and a 10% deposit AND a history of saving. This will mean affordable housing and spending money.
    Re telling the banks to lend willy nilly why? Wasn't it daft lending that got us where we are now?
    PS I love Sarah Palin

    1. Ivan Pope
      October 19, 2008

      Do you love Sarah Palin willy nilly?

  24. freedom to prosper
    October 19, 2008

    Yes in fact the dream ticket would be Obama/Palin

    1. USMC
      March 5, 2009

      No, Romny/Palin. I have no stomach for a Liberal Socialist.

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