Try reading instead of listening to spin and leaks

Yesterday the media discovered “quantitative easing” – a polite way of saying the Bank of England can inject lots of money directly into banks, and can go on to order more to be printed, to try to get things moving.

We were told that after a further round of interest rate cuts, if things were still not working, the authorities would consider this drastic step. Clearly the spinners were worried that the latest plunge in interest rates would not do the job, and they intended to head off any suggestion that the authorities were “running out of options” or had “used up all their firepower”. They all seem to forget that monetary action takes about a year to have a decent impact. That was why I wanted interest rate cuts a year ago, as about now we would be feeling the benefit, with far less of a downturn.

Let me hasten to say I don’t have a mole in the Bank of England, and I don’t receive brown envelopes with interesting papers. Instead I do try to read some of the published information even this government has to put out. That’s why yesterday when others were writing about how the Bank of England could inject more cash into the system after rate cuts, I wrote about how this is exactly what they have been doing on a grand scale for several weeks.

When the authorities foolishly stood by in the prelude to the run on Northern Rock, they triggered the need as they saw it to nationalise that institution. The Bank required the Treasury to take some of the strain of taking it over as the Bank of England was then far smaller than Northern Rock with a balance sheet (from memory) then around 40% of the Rock’s. Today the Bank of England’s balance sheet is two and half times the size of the Rock, so in other words the Bank of England’s balance sheet has expanded sixfold or so.

The actions of the monetary authorities are still like the driver of the car trying to steer by continuously looking in the rear view mirror. All the time the road looked clear behind, they kept speeding the vehicle up. When the heavy traffic of inflation started to appear in the rear mirror they slammed on the brakes. Now they have crashed into the brick wall of recession, they have seen the problem in the rear view mirror, as others pile into the crash. Their first reaction was to clam on the regulatory brakes after the crash, requiring huge increases in banking capital and less lending. Now they see the resulting pile up behind them, them are pressing the accelerator to the floor, but the car is not going anywhere as it has bricks stuck in the wheels. One of two outcomes is possible. The first is the bricks do shake free and we will then be accelerating at breakneck speed, still watching in the rear view mirror. The second possibility is the bricks do not shake free and we just damage the engine, until someone gets the bricks out.

How do we get the bricks out? The bricks are the broken banks. The government sometime soon needs to call them in for proper talks, not for the ritual lecture about lending more money. It needs to discuss how £450 billion of loans and guarantees it has said are available can best be used and help free the banks. The Regulator needs to revisit his capital demands, and come to a transitional compromise over how much capital is needed and on what conditions, so the regulations are not pulling in the opposite direction to the monetary policy. The government needs to protect taxpayers by taking proper security, and start to curb its own appetite for too much borrowing. Instead the authorities seem happy for bank capital to buy its government debt, and may soon be buying up government bonds itself to try to create a “bond bubble”. This would be a triumph of the short over the long term yet again.

For those who like metaphors, a City commentator (I think it was Lombard) compared the actions of the MPC and the Bank to the person in the shower who can never get the temperature right. Tiring of the cold start to the shower, they turn the thermostat to very hot. After a pause they are surpised to be scalded. They wrench the thermostat back to cold. Sometime later they are shivering from jets of cold water. They lurch the control back to very hot…

Please can our authorities learn to get the temperature right soon?

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8 Comments

  1. Posted December 6, 2008 at 10:37 am | Permalink

    Presumably there will be scope to ask questions in Parliament, whether spoken or written, with a view to obtaining the information about how much quantitative easing is going on (in other words, how much the Bank of England’s printing presses are being speeded up), and in turn to publicising this information on a far wider basis than is the case at present. That would be a symbolic unintended consequence of the hidden repeal of the duty to publish this information that has already been picked up in the blogosphere.

  2. Posted December 6, 2008 at 10:39 am | Permalink

    The hot/cold shower metaphor is exactly right, and I respectfully suggest that you use it more.

    It illustrates both clumsiness and lack of foresight.

  3. Posted December 6, 2008 at 11:15 am | Permalink

    Whilst I’m on here I’d like to put some of that “spin” straight in relation to Northern Rock too if I may.

    Anyone who knows anything about mortgages, knows that Northern Rock’s lending criteria was the highest of any lender, it’s maximum loan to value was no greater than any other at 95%, and the “unsecured amount” was made available through the Co-operative Bank not through Northern Rock and did not pose lending risk to Northern Rock. Furthermore, those types of mortgages were at higher rates of interest which provided more profit to Northern Rock and gave a lot more flexibility to borrowers than any other mortgage product on the market. Borrowers incidentally which posed NO REAL RISK.

    The model for passing on those loans into the market was at fault and not necessarily Northern Rock or its former MD Adam Applegarth. Yet he took a tumble, NR was nationalised, the FSA’s hands were cleaned and the government took control of an otherwise profitable and productive business and made a right arse of running it by failing to allow it to ‘compete’ with other lenders which have been on the other hand been supported in precisely the same way by taxpayers yet have NOT similarly been nationalised or restricted in the way they operate as has Northern Rock.

    The blame for this crisis doesn’t lie with Northern Rock, it’s policies, its management or its staff, it rests with the clown who took away the Bank of England’s ability to watch what it and other banks ( which have also failed ), were doing in the markets, and instead put an unqualified non-experienced, blind tick boxing regulator in charge which knew nothing about markets beyond what it read in the papers.

    The arrears for NR borrowers only became as high as they are now, AFTER the government took over and forced NR’s rates up higher than other lenders to prevent it competing.

    NR’s mortgage book once contained some of the LOWEST risk ratio’s and default lines of any lender until the government made it impossible for it to compete and demanded that it clawed back it’s books.

    That led to Northern Rock ( the government ), telling ( advising ), existing borrowers to ‘take their mortgages elsewhere’ without a blind bit of thought as to the personal liabilities of borrowers, many of which have / had early redemption charges, and in my opinion broke every golden rule of what any person could call ‘good advice’.

    Not only that, but it created a perception that Northern Rock was itself actually failing to a greater extent than other lenders when that is patently a lie.

    NR if you recall was to that point ‘repaying its loan’ EARLY.

    As for the model of fast selling, Northern Rock was no better positioned than any other lender ( which was not under the Bank of England’s scrutiny due to Brown’s incompetence and lack of knowledge ), to know about toxic assets given they were rated triple A, and despite this which is a proven fact simply by evidence of all banks ailing due to the same set of circumstances, Northern Rock has been made scapegoat by government.

    i.e. Their model was not really any different to others, and where others were bailed out but not nationalised or restricted in their lending practices, Northern Rock was forbidden to compete.

    Labour’s daft policies and a blind regulator helped to crash Northern Rock and yet its actions with it have been totally different than with any other lender.

    People should look at who is REALLY responsible for this state of financial crisis and clearly see it was Gordon Brown in a ludicrous decision to remove the regulators which knew what they were doing, and putting in their place a bureaucratic tick box idiot who doesn’t, and which didn’t see ( because it wasn’t looking because it was and still is incapable ), at the actual practices of lenders shipping vast sums of money out in exchange for financial instruments which contained American poison which was wrongly labelled ‘tonic’.

    That’s the real problem and it was not Northern Rock.

    As for clearing the ice, the government needs to cut taxes to restore confidence and to directly inject that money into the economy and into banking through savings which will enhance their ability to lend again.

    Couple that with loan guarantee’s and possibly some support in the way of a fuel voucher to those less well off, and I think people may regain confidence again just enough to get our economy out of the freezer.

    But above all, the FSA should have been clipped by now and replaced with competent self-regulators who understand the markets and know how to work a thermostat.

    • Posted December 7, 2008 at 7:16 pm | Permalink

      Christopher Booker in the Telegraph today tore the Head of the FSA’s report on global warming to pieces. One of the best reads I have had – since last week!

  4. Posted December 6, 2008 at 11:47 am | Permalink

    Why not let average house prices fall until they come within the banks' capacity to lend prudently?.Then slap on LVT to stop them going up again. This would mean the end of the decades long scam of diverting Keynesian low interest credit into the value of the land under people's houses. The banks are n't going to play any more: their fingers have been burnt.And world capitalism has been wrecked by factors more like those recognised by Henry George than Karl Marx.
    I was in favour of bank nationalisation because there is big money to be made from the creation of credit, but if all they want to do is shore up house prices or start a housing bubble in time for the next election, forget it.

  5. Posted December 6, 2008 at 12:40 pm | Permalink

    Does a hidden clause in the new Banking Bill rrobably explain why the official portrait is being kept under wraps then?

  6. Posted October 17, 2010 at 12:45 am | Permalink

    "Please can our authorities learn to get the temperature right soon?"

    No. The world is too complex. Central planning never has worked and never will work. But like some hopeless gambler politicians keep trying. “Quantitative easing” is just their next throw of the dice and 70s style inflation is on its way.

    • Posted December 7, 2008 at 10:33 am | Permalink

      Kit, you may well be correct. This has happened before. But let us spare a thought for our poor media pundits in this Winterval season, “Quantitative Easing” and “Monetising Debt”; where will it all end? How will they explain that to a Daily Star reader? What affect will it have on the result of “Strictly” and “X Factor”.

      I just can’t think how they are going to cope when they, soon, have to get their little brains around such concepts as, “debt funded, government foreign currency reserves”. (The latter can be shortened to “Japan”).

      No Redwoodians, it is better that we trust our government. It is not their job to tell us the truth and frighten us. They should not expose our commentators to ridicule; just because they can’t explain how the BoE will soon, try to stop the markets pricing inflation into long bonds prices. These are matters best left to our glorious leaders!!!!

      Who wins Strictly and X Factor is far more important to us.

      [[[Mrs Acorn adds. Acorn was committed to an institution this morning. To cut a long story short. He started out doing a bit of Redwood at the weekends, but he said it was no big deal, he could handle it. Eventually he was doing Redwood three or four times a day, his life was falling apart. The ironing wasn’t getting done, there were several days at a stretch when he didn’t fill up the bird feeders.
      I sent him to “RA”, (Redwoods Anonymous). The therapy was to sit in a circle and read The Guardian for three hours. I withdrew him when it became obvious that he was going to do serious harm to someone called Polly. I am sure you send your best to him.]]]

      See http://www.financialsense.com/editorials/cliffkule/2008/1205.html

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    John Redwood won a free place at Kent College, Canterbury, and graduated from Magdalen College Oxford. He is a Distinguished fellow of All Souls, Oxford. A businessman by background, he has set up an investment management business, was both executive and non executive chairman of a quoted industrial PLC, and chaired a manufacturing company with factories in Birmingham, Chicago, India and China. He is the MP for Wokingham, first elected in 1987.

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