The MPC and the BBC

I try to give credit where credit is due. The BBC this morning allowed me with Roger Bootle to give a good airing to differing approaches to the Credit Crunch. It was refreshing to be part of a discussion and interview where we were not subjected to the idiocies of spin and interruption at all stages, or prevented from developing an argument. I hope it worked for the audience, who could hear for themselves the range of arguments over how to mend banks, stimulate demand and balance savers against borrowers.

I see and hear in today’s media that “quantitative easing” is back on the agenda as a possibility “if all else fails”. I would urge all those about to broadcast or write on this subject to take the precaution of first reading the latest Bank of England Weekly statements. These show that quantitative easing is well underway. The Bank’s balance sheet has ballooned from well under £100 billion last September, to nearly £240 billion by the year end. Just picking up tittle tattle from “sources” can be very misleading.

Actual printing of bank notes has been more limited, but these are up over the year by more than 10%, well ahead of the fall in economic activity and price increases.

The fact that none of this is working as people hoped, and the big cut in interest rates has not yet worked, means one of two things. It means that the usual time lags have been forgotten. Because the authorities left it too late, they are now in panic mode because the response is predictably going to be later rather than sooner. Or it means the banks are so broken by the current regulatory system and their own bad lending in the past that they cannot respond in the usual way to a very strong monetary stimulus.

I return to the image of the person in the shower. They have now turned the shower up to hotter than it has ever run at before, by both very low interest rates and quantitative easing. If the shower is still working, after a delay we will get scalded. Alternatively it is possible the shower is broken, in which case twiddling the controls will make no difference. We need to mend the shower.

So please, government, call the banks, the FSA and the Bank of England in, and sit down to discuss what kind of banking package will get banks lending a bit more at sensible rates related to the current low base rate, whilst trying to ensure the taxpayer can afford it. At the moment the capital and liquidity requirements on the banks are pulling in the opposite direction to the monetary policy, creating a very bleak economic prospect for non banks without access to state funds. We need a resumption of sensible lending levels at reasonable rates. We also need to keep a strong bank deposit base, which means allowing a decent return to savers.

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57 Comments

  1. David Madsen
    Posted January 8, 2009 at 9:09 am | Permalink

    Dear Mr. Redwood,

    I heard your interview on Radio 4 this morning. I agree with all you say, but as a company owner and employer, I fear you are still just a little out of touch with grass roots activity.

    My staff, and me included, are still coping with excessive credit card over expenditure. We are all intelligent and responsible people and yet were still drawn into the trap. We are are not feckless youth who have run up debt irrespective of the implications. Much of my debt has been to keep the company running through these tough times, and my staff to provide for their families and fuel and basic prices accelerated.

    Whilst I understand your comments re the Banks, I would also urge for further rate cuts, as for us here on the ground floor, our mortgages will become easier, our card debt can then be serviced, we can then start to consider looking above the parapet again and consider consumer spending. This will drive the economy forward.

    But, this will take up to a year to have the postive impact we all wish for, at least for us all here and I imagine we are fairly typical. To hope for a “bounce” immediately is incredibly nieve, but you make this point anyway.

    I wish you well and always look forward to your opinions. Even in my own small corner of the world, I can assure you of the massive resentment felt against the banks and their apparent arrogance over us all. I would advise all politico’s to look harder at the grass roots, we’re not all as dumb as some might think.

    Kind regards,

    David.

  2. Posted January 8, 2009 at 9:09 am | Permalink

    JR – “quantitative easing is well underway”.

    BBC – “The government has denied newspaper reports that it is considering printing more money as a tactic to tackle Britain’s credit crunch. It had been reported that such a step was being considered once interest rates drop close to zero. Treasury sources said that while the move has not been ruled out, it is not currently on the agenda”. – ( Perhaps you could let Alistair Darling know where to look for it Mr Redwood or will someone please ask the government to stop spinning and instead to tell the truth for once ) ?

    Someone made a comment yesterday which is in line with what I’ve been saying about unknown debts still to fall on banks. Clearly toxic debts are not yet realised so it stands to reason that all our taxpayer money is doing is permitting banks to cover their losses. I can’t see it is morally right for the taxpayers to bail out banks to put them into a position of safety whilst the taxpayers themselves are being hoodwinked and stripped of their own means to live and work.

    When will politicians tackle this diabolical lie to the people and put right the country by making cuts to direct taxes to protect the means of people, and come clean about the real losses made by banks now as opposed to letting them drag our economy down over a longer period just to be able to say the remained in private ownership because no one had the balls to actually say we must make a National Bank available until the banks themselves are able to underwrite their own losses ?

    Banking losses should be taken out of our economy altogether and they should merge or fall if they are unable to cover the losses which THEY made. Meanwhile, the new National Bank should carry on as normal lending to businesses and individuals but with prudent banking rules as they should have always been if not for Brown having changed them.

    Needs must, our banks are bust !

    The real job of a politician is to protect the people who elected them best they can, and Brown is doing the exact opposite.

    • Alan Wheatley
      Posted January 8, 2009 at 8:15 pm | Permalink

      If there was to be a National Bank, to where would you look to man it?

      To the private sector, who are seen to be inadequate such that there is a need for a National Bank?

      To the public sector, who failed to regulate the private sector so as to protect them from their own follies?

      • Posted January 9, 2009 at 7:17 am | Permalink

        I presume there are some who are capable of running a bank properly but you’re right to see this as a problem. However it isn’t unsolvable given that some banks haven’t been imprudent as they haven’t all been bailed out. It would also require a policy committee akin to the MPC which seemingly carries confidence from both sides of the commons. Call it the ‘National Commission for Banking’ for instance ?

        The “NCB” could make a comeback after all these years. lol

        • Alan Wheatley
          Posted January 9, 2009 at 11:17 am | Permalink

          I sympathise with your hope that there are some who are capable of running a bank. But rather than create another institution would it not be better for the most capable to be within the regulatory authority where they could define the parameters within which the less capable would be able to operate as private banks and other financial institutions? They would also have to ensure those being regulated do not stray beyond the parameters, neither by accident nor by fraudulent intent.

          Of course, the regulatory authority does not determine policy, they implement it. So if the prediction of some of our fellow correspondents are correct concerning the true direction of GB’ s mission, then no matter how brilliant the implementation of regulatory control we are heading in an very unappealing direction.

          This is hardly a sound basis upon which confidence can grow.

  3. Posted January 8, 2009 at 9:29 am | Permalink

    My A-level Economics teacher used to tell me that interest rate changes took about two years to fully work their way through the economy.

    You’re absolutely right than panic buttons are being pressed left right and centre, as if everything we had learned about the flow of money from the past several decades never even happened.

    http://www.lettersfromatory.com

  4. Rob N
    Posted January 8, 2009 at 9:47 am | Permalink

    This is how I see it..

    Assets were created that represented debt CDO’s that was rated by “bought out” ratings agencies. These assets were sold and then sold and sold. Each time they were sold a sum of profit was made and this capital could be used as leverage to create more debt and more CDO’s. Then we reached a tipping point in the system where the number of debts defaulting started to erode the pyramid until eventual it became top heavy and collapsed under it’s own weight. This has exposed all of the debt in the system and because it was leveraged against capital created from debt it is folding in on itself. The banks have giant black holes of debt that are much bigger than balance sheets can support and even with government money things are so grim that they are using all available money to try to fill the black holes.

    The solution is going to be messy, what Gordon is doing at the moment is punishing the savers of this country and helping people in debt, this is truly unacceptable. Johns suggestion above is only marginally better because we would continue to feed the system that has failed us, lending is not the answer, paying down our debts and managing our money better is. The other option for our government is to let the free market sort itself out and stop bailing things out, unfortunately this is political suicide, it would create suffering and our country would be on the brink of disaster. However I put it to John that the only way humans really learn is by experience, so to avoid it by saddling future generations with an even greater debt will not allow us to learn our mistakes.

  5. DBC Reed
    Posted January 8, 2009 at 9:54 am | Permalink

    It might help the banks considerably if average house prices got down to a level where banks could offer mortgages comfortably without setting off another manic episode in the housing-market, which has done for free-market capitalism (lets not mince words) what a very similar over-investment by non-expert investors did in American stocks pre-1929.
    The banks should indicate what the optimum price levels are for house that they are prepared to finance with mortgages, to bring prices down quickly instead of this slow 1.5% per month decline which is diminishing the muscles of the economy as well as the fat.Then the Gov should put a tax on houses such as the old Schedule A on imputed rent or better the land value tax to bring hoarded land onto the market, to stop house prices going up again, so any increases in lending can go to the production of goods and services rather than property( really land value) inflation.

    • Posted January 8, 2009 at 8:38 pm | Permalink

      DBC Reed. It would be worth reading and understanding Mr Redwood’s previous bllogs on the subject of the credit crunch, or looking up the comments of the current Prime Minister when Chancellor. It is not free market capitalism that has failed, but a failure of the MPC to adjust interest rates at the proper time and in an appropriate manner, and the government for helping the boom by massively increasing public expenditure after 2001.
      Also in the 1920s the Federal Reserve (created 1913) boosted the money supply considerably in the late 1920s prolonging and extending the boom. After 1929 it over-reacted, along with governments who put up massive trade barriers. The cause of the crash similar in 1929 as now – the authourities (backed by popular opinion) over-extended a boom.

  6. Brian Tomkinson
    Posted January 8, 2009 at 9:55 am | Permalink

    Good to hear you getting uninterrupted air time on the BBC. One of the major problems is that their appears to be a sense of panic about what to do and it has become something of a “lucky dip”- try this, try that, try the other. We must be seen to be doing something – anything – regardless of its effectiveness, such as a further reduction in bank rate. This is the result of political interference for purely party political advantage. The long term deleterious consequences of these actions seem to be conveniently ignored by the decision makers but they are adding to the lack of confidence in the country. This lack of confidence is turning to outright fear because most people’s instincts tell them that whatever is being proposed worse is to come.

  7. ken from glos
    Posted January 8, 2009 at 9:58 am | Permalink

    Excellent article and full of that most over quoted of sayings, bags of common sense.

    Labour always leave office with more unemployed than when they took power.They have reached their target already.

    • mikestallard
      Posted January 8, 2009 at 4:53 pm | Permalink

      I want to underline your excellent comment. Once again, I can understand our host’s remarks, even when he gives reasons for believing that “quantitative easing” is already here and has been for a few months. I am very shocked by this myself because I had no idea that the government were that stupid. No wonder the pound is crashing!
      Actually we OAPs are doing pretty well, thank you. Down at the gym, John and his wife have just got back from a Christmas Mediterranean Cruise; Anne and Tom have just got back from visiting their daughter in Ghana (Anne got food poisoning and fever!) Les has been to North Norfolk and we are going to the Far East to see family in just under a month.
      Prices in the shops are falling nicely for us all now. Chinese suits are still only £40 in Matalan. Shoes are mainly under £20. Food is quite bearable (not wine: I have to forego that). Free buses and low petrol prices help, too. We can afford our power bills – just.
      Taxes often go over our heads. Apparently for normal people they now stand at about 47.5% of income. (Letter to the Telegraph).

      • ken from glos
        Posted January 8, 2009 at 8:05 pm | Permalink

        Thanks Mike, best of luck for the future I now longer fear for myself but for my children and grand children.A life time of thrift and it worked.Live within your means.

  8. backofanenvelope
    Posted January 8, 2009 at 10:48 am | Permalink

    Nice to hear a quiet reasonable discussion this morning on radio 4.

    Wouldn’t it be nice if everyone stopped meddling (especially The Great Helmsman) and waited to see what happens?

    None of the measures taken have had time to take effect.

  9. Rare Breed
    Posted January 8, 2009 at 10:53 am | Permalink

    Would this £140 billion been better spent by depositing it in the banks (£25 billion each and not asking too much interest) thus suring up their balance sheets and helping them meet the new reserve requirements ?

    I know they have some pretty frightening exposure but surely this would help their re-captalisation. Also if the Government are willing to deposit wouldn’t that imporve confidence in interbank lending and other depositors??? – Or am I in cloud cukoo land ?

  10. Acorn
    Posted January 8, 2009 at 11:14 am | Permalink

    JR, I don’t know how much longer we will be able to see this data, there appears to be moves in the Banking Bill to keep it secret.

    On the quantitative easing (printing cash notes and coins) front, I assume that the amount of sterling cash held outside of the BoE, and in circulation still appears on the weekly BoE Bank Return for the “Issue Department”. Tell me if I am wrong but as I understand it, the only liabilities of the Issue Department are the notes and coins. For the 31/12/08 this was £46.9 billion but it does go up and down for the Christmas period for instance.

    The old weekly Bank Return was simpler and on one page, see the return for 29/12/1999 for instance. My old text book says, in Aug 1983 the notes in issue was £11.4 billion and the other bit of the BoE, the “Banking Department” was worth £2.6 billion. It has got beyond my amateur understanding now, with the creation of the Debt Management Office and the (supposed ???)demise of Ways and Means advances to HM Government.

    http://www.bankofengland.co.uk/publications/bankreturn/2008/index.htm

    Did QE work for Japan? I think the jury is still out.

    http://www.frbsf.org/publications/economics/letter/2006/el2006-28.html

  11. Lola
    Posted January 8, 2009 at 11:43 am | Permalink

    Working on the street, as it were, as I do, right up against the public, it is patently obvious that execessive personal taxation, at what I consider to be a confiscatory level, is constraining people more than any easing of credit. I have clients with money who cannot spend because they are so highly taxed on savings, investments and income such that they have nothing left over after paying the bills. They want to buy cars, get their hair cut, employ a decorator and similar stuff and they really don’t need massive extra credit, which in any event they could not afford to service. What they need is their own money back.

    Surely to God cutting tax on personal and company income would work to re-invigorate the economy.

    In my case the money I would save would go to employ someone – I desparately need to invest in my business and I would not need to borrow any money if I could just keep more of what my business earns. Employing someone means resourcing them with space, desking and IT, all of which investment would be money spent with suppliers. The return on this investment by me with my money in people and equipment would create wealth.

    As for the government creating jobs, that’s just laughable. Look at the Yellow Pages directory for your area. There are 1057 pages in the one that covers my town. Of this the NHS is one page, local government another two or three, education another few and so on. So there must be thousands upon thousands of all sorts of business doing all sorts of stuff, doing business, providing services,creating wealth. Easing the tax burden on them would clearly have a stunning effect on wealth and job creation.

    Why, just tell me why (Mr Brown-ed)that sits in No10 doesn’t get this?

    • APL
      Posted January 8, 2009 at 8:21 pm | Permalink

      Lola: “As for the government creating jobs, that’s just laughable.”

      Governments destroy jobs. As we are about to find out!

  12. Rose
    Posted January 8, 2009 at 12:06 pm | Permalink

    It was good to hear the civilized debate between the two of you this morning but I was left feeling intensely irritated and wondered why you have to write in the pink paper before they take any notice. The programme should be called “Yesterday” or even “Last Year”. After all, we have been discussing the printing of money and the question of saving etc on this blog for a very long time now, but dear Evan, it seems, is only just getting round to thinking about it!

  13. Andrew Lilico
    Posted January 8, 2009 at 12:18 pm | Permalink

    Quantitative easing will eventually have a significant effect, but past experience suggests that this will come only after either or both of the following: balance sheets are rebuilt (in which case conventional interest rate cuts would have an effect, also); inflationary expectations become properly anchored at a positive, zero, or low deflationary level of inflation. If people both need to rebuild their balance sheets (need to cut their debts) and expect deflation – the current situation in the UK – quantitative easing will have little impact until the exit path, when it will drive significant deflation.

    This is, of course, why the US is now considering the introduction of an average inflation target (a price-level path target). This is intended to manage inflationary expectations (in the way I described in Lilico (2002), which Fed governors have read) so as to try to re-establish the link between the amount of money printed and the amount of lending that goes on in the economy. In the UK, with the collapse of the inflation target, we will find it very difficult to create positive inflation expectations until so much money is printed that it would have the effect, in equilibrium, of inflating away private debts (so that people would no longer need to de-lever). That would imply a significant rise in inflation on the exit path.

    Much better would be for us to introduce a price-level target now (price-level targeting also has a number of other good properties, not the least of which is that it is not subject to the asset price bubble creation flaw of inflation targeting) and use that to determine the optimal level of money printing. This would allow much lower inflation rises on the exit path.

  14. Andrew Lilico
    Posted January 8, 2009 at 12:19 pm | Permalink

    Apologies – at the end of the first paragraph I meant “when it will drive significant inflation”.

  15. Posted January 8, 2009 at 12:24 pm | Permalink

    I’m sure, to maintain balance, the BBC will, yet again, soon report in some more prominent programme how Vince Cable was ahead of the curve in calling for interest rate cuts in October (while ommiting to mention he said the opposite in September & that you had been saying it for nearly a year).

    • adam
      Posted January 8, 2009 at 7:26 pm | Permalink

      while possibly true, dont underestimate the Today programme as its one of the most influential and prominent in the country.

  16. oldtimer
    Posted January 8, 2009 at 12:34 pm | Permalink

    Brown`s 1997 pension tax condemned traditional company pension schemes to a long term death – at the great cost of £80 billion + to those schemes and the companies that continued to fund them.

    The latest wheezes, so clearly described by you, of more stringent FSA liquidity rules, ultra low interest rates and the requirement of the banks to hold more government bonds will together combine to destroy personal savings as well.

    The reasons for these measures are the same (1) to finance the over mighty state and (2) to destroy privately held savings and wealth. They are also quite deliberate. Brown and co try, of course, to obfuscate by blaming the bankers. They got away with the pension tax wheeze because it was too remote and too obscure an issue for most people. Personal savings are another matter. Maybe this time people will see through the government`s smoke and mirrors and wake up to the reality of what is being done to them and their savings.

  17. Andrew Lilico
    Posted January 8, 2009 at 12:57 pm | Permalink

    Incidentally, I believe you are quite correct about the perverse capital requirements. In my view, all formulaic regulatory capital requirements should be suspended (i.e. we should suspect Basel II/the CRD), prudential supervision should become entirely a Bank of England responsibility, and prudential supervision should become fully integrated with the lender of last resort function of the Bank of England (i.e. prudential requirements should become simply those that the Bank of England advises commercial banks are the minimum conditions necessary for the Bank of England to be prepared to lend the commercial bank funds at a pinch).

  18. adam
    Posted January 8, 2009 at 1:12 pm | Permalink

    Well done for being on the BBC

    • APL
      Posted January 8, 2009 at 8:22 pm | Permalink

      adam: “Well done for being on the BBC”

      Now abolish it.

  19. Ian Jones
    Posted January 8, 2009 at 1:25 pm | Permalink

    Sensible lending at reasonable rates. Sounds simple but I have a couple of questions!

    1. Is lending to a company who’s customers are no longer buying its products included in sensible lending?

    2. What is a reasonable rate? The banks would say they are being asked to lend in a falling market where capital is scarce and need a return to match the risk!

    Thanks

    Reply A rate based on the 2% base rate plus a risk margin. Lending to a company with a temporary sales shortfall may be sensible; lending to a company wioth long term problem it cannot solve is not.

  20. Richard Lilley
    Posted January 8, 2009 at 2:14 pm | Permalink

    I have followed the Today Programme from my fathers knee when it was presented by the pricelessly reactionary Jack de Manio who obviously didnt believe women or servants listened to the Radio Receiver – as much a representative of the establishment climate of his age as the right on Eddie Maier is of these. However the current (adjectives left out) “presenters” and so-obvious-its-insulting editorial opinions make it all but unlistenable these days.

    I did catch your interview (Vince Cable must have been on some other BBC outlet) and I thought it was a model of how it could be: a rational discussion (ie diverse opinions given equal weight and the listener left to make up their own mind) sensibly and above all modestly chaired by someone who doesnt actually believe that having a BBC sinecure makes you a “national treasure” and competent to sit in sneering judgement on mere public servants or political representatives (unless they are Tony Benn).

    I hope it marks a phase of regime change at the BBC and more open minded coverage of conservative opinion, but I’m not optimistic.

    • David Madsen
      Posted January 8, 2009 at 4:55 pm | Permalink

      Dear Richard,

      Massive agreement to your sentiment. I thought it was just me who thought Mr. Humphries was somewhat overrated…

  21. WheresMyVote
    Posted January 8, 2009 at 4:06 pm | Permalink

    An interesting and, as usual, insightful posting.

    The worrying thing is that the recent banking bill will prevent the future analysis of the weekly reports.

    See here:

    http://www.publications.parliament.uk/pa/ld200809/ldbills/013/09013.115-121.html#j007

    “235 Weekly return

    Section 6 of the Bank Charter Act 1844 (Bank to produce weekly account) shall cease to have effect.”

    The requirement to publish a weekly account is removed. The cynical amongst us might read something into this.

  22. Robert
    Posted January 8, 2009 at 4:29 pm | Permalink

    Sensible comments

  23. Adam Collyer
    Posted January 8, 2009 at 6:56 pm | Permalink

    For once (this doesn’t often happen), I’m not sure I fully agree with you. Why should a cut in interest rates encourage banks to lend? That would only work if the problem in our economy was lack of demand for credit. Cutting rates reduces the profits the banks make by lending. Cutting rates also discourages people from saving in British banks, reducing the funds available for lending.

    Three aspects of (UK and US) government policy have made the credit shortage worse. Lower rates and higher liquidity requirements discourage bank lending. And higher government borrowing saoks up money that could otherwise be lent to invididuals and companies.

    Only quantitative easing makes any sense – and it pulls in the opposite direction to those other policies. After all, deflation is a monetary phenomenon just like inflation is.

  24. Matthew Reynolds
    Posted January 8, 2009 at 8:36 pm | Permalink

    The trouble is that on the one hand the authorities want greater liquidity & on the other hand they want greater capital levels within the banks. But no bank surely can have enough money at any one time to be able to pay all its debts etc ? My point is that by tying the banks to high levels of capital the government has made them reluctant to lend money owing to the conditions imposed by the banks getting public money as they are hoarding money to boost their balance sheets.

    I think that by loosening the capital requirements you could get lending rates up. My point is to say Northern Rock had longer to repay its loans from HM Treasury then it might have the balance sheets needed to sustain greater lending by virtue of having a better cash flow.

    By ending taxation on savings for all taxpayers you could encourage more people to save their money meaning there are the funds to lend thus boosting credit levels. Stamp duty being ended on shares & property would remove a major penalty on wealth creation by making it pay to buy houses and trade on the stock-market. That might boost those sectors. Ending income tax on dividends & shares and Capital Gains Tax would give enterprise a shot in the arm and would stimulate share prices & business investment. Reducing employers National Insurance would make job creation more cost effective and could help hold down the dole queues. A stronger stock market would undo the chaos wrought by Gordon Brown’s pension raid. The aim should be to slash employers National Insurance to get job growth going – once credit levels return this will spur the creation of better paid jobs via higher productivity. Lower employment costs in a recession will limit rising unemployment by making staff retention less expensive.

    As the Tax Payers Alliance has identified £100 billion in wastage I am sure that Ruth Lea could devise the reforms needed to fund the above tax cuts – moving money away from the Client State of Gordon Brown ( a major drag on growth ) to the private sector ( the engine of economic growth ) is a way to get the economy going again. A smaller state could be a way to get the budget deficit en-route to zero which is essential for confidence & stability. Reforming the Bank of England along the lines that I suggested on this post yesterday would be good for keeping inflation on an even keel and stopping either reckless debt funded bubbles or credit crunches causing problems.

    The VAT reduction has failed. It should go with the basic personal allowance rising by £2,000 p/a and income tax cut by 2p to 18p. Giving people more money in the bank will make it easier for them to service debts and spend more – fewer people going broke and higher retail sales might make more sense. Unlike the VAT cut these measures should be permanent and lower public spending plans ought to fund this & axing the potty Brown-Darling tax hikes that history teaches will do more harm than good ( just as George Osborne & Dominic Grieve ). The Chief of Next and Sir Stuart Rose are right on lower VAT not making a positive difference.

    The income tax changes should be adopted in 2009-10 and all other measures phased in by 2012-13. As Sir Stuart Rose is talking about a 15% cut back on Head Office budgets perhaps Mr Cameron might like a 15% cut in Whitehall budgets. Never mind sharing the proceeds of growth – it is high time to share the pain of recession. If we are all having to live within our means as the price of of this slump then so should the state sector. Just as the high taxes that the price of big government have made this crisis worse so should big cuts in public spending to fund lower taxes be the solution.

    As an M&S employee on £13,000 p/a I am grateful to my employers for a good pension plan, a share save scheme and 20% off much of my shopping as well as a working routine that is perfect. I am not grateful to HM Treasury for taking so much money from me – I cannot afford high taxes under Gordon Brown. Many people I work with would certainly gain from an extra £2,000 free from tax ( via a bigger basic personal allowance) and 10% off of basic rate income tax meaning it fell from 20p to 18p. Someone could always tell Mr Cameron & Mr Osborne that properly funded this policy might even have votes in it…..

    • oldtimer
      Posted January 9, 2009 at 11:05 am | Permalink

      Re Brown`s raid on pension funds:

      A rise in the stock market is not the answer. That is exactly what he (Brown) thought and argued in 1997 when he imposed his tax on the pension funds. The problem is more fundamental than that. The tax undermined the actuarial basis on which the viability of funds was then based. The funds either had to persuade the employer – or the employee – to pay in higher contributions to offset the Brown tax or face long term decline and an inability to meet their obligations to fund members.

      The Brown tax on a fund of which I am a member cost an estimated £11 million per annum (I asked the administrator the question). Cumulatively that has compounded to over £100 million so far. The fund has a big deficit; it is not clear that the employer will continue to fund this deficit. The fund has suffered further stock market losses. The employer is now on short time. The outlook for scheme members looks bleak. Maybe the M and S scheme is better placed. If I were you I would start making enquiries.

      • Matthew Reynolds
        Posted January 9, 2009 at 7:32 pm | Permalink

        You are wise to make those points. The pensions changes only impact on me inasmuch as only the first 1% of any pay rise attracts extra employer contributions toward my retirement pot. My point is different to Gordon Brown in the sense that I want lower taxes to help pension funds rather than seeking to justify higher taxes on pension funds. The Brown pension fund raid is infamous and ending stamp duty on shares would according to George Osborne add about £11,000 on average to a workers pensions pot when they retired.

        • oldtimer
          Posted January 11, 2009 at 12:25 pm | Permalink

          The chances of lower taxes on pension funds as such are about zero. The final salary pension scheme is now a lost cause. The problem for members of those schemes that survive is this. How long can they survive, especially if the sponsor company has now gone out of business or is in serious financial difficulty. Many have been, or will be, unable to meet their obligations to scheme members. For example, it may not be possible to sustain annual increases for inflation. One small closed scheme I am familiar with had to revert to a fixed amount of pension per annum with no increase for inflation – and hope that assets available would last out the lives of the members. In real terms this means a relatively declining value of the pension payment for the scheme`s members.

    • Lola
      Posted January 9, 2009 at 11:13 am | Permalink

      In my Utopia, on 13K you would not pay any income tax at all.

      • mikestallard
        Posted January 9, 2009 at 5:46 pm | Permalink

        Move to Dubai, Lola, and don’t even pay any tax on £130,000!

  25. anon
    Posted January 8, 2009 at 8:37 pm | Permalink

    I doubt anyone is listening, is interested our understands but for me, the situation exposes the evil that is fiat currency.

  26. Adrian Peirson
    Posted January 8, 2009 at 9:03 pm | Permalink

    GB and the Globalists want it all, they want to encourage you with low interest rates to hook yourselves on credit, then, when enough are hooked they will hike them up again.
    why do you think they always say ‘your home is at risk blah blah blah…’

    they do not want you to be independant, why do you think stalin murdered the farmers then took over their farms.

    To make Britain dependant on the EU / NWO They have destroyed fishing, farming, industry, now they want your posessions, savings, even your house so you will be forced into state subservience.

    You will be forced to pay rent to the state forever.

    Stop looking at innocuous details, look at the Big Picture, a One World Communist Governement.

    The New World Order.

  27. Posted January 8, 2009 at 11:24 pm | Permalink

    The comments by WheresMyVote on 08 Jan 2009 at 4:06 pm and Acornon 08 Jan 2009 at 11:14 am about the recent banking bill proposing to scrap weekly reports reminds me of the New Classical Macroeconomics of the 1980s. A “bastardized” form (as taught by some of my economics lecturers) was that “quantitative easing” would only work on the real economy to the extent that economic agents believed that monetary changes were in fact signals of real changes. This is why, when bringing down inflation in 1980s, money supply figures were headline news, so that the real impact on the economy could be reduced.
    The Government, seems to have taken on board a cynical interpretation of “The Rational Expectations Hypothesis” in so far as hiding this quantitative easing, maximizes the “real” impact. It is ironic that some of the Government as students would have marched against the monetarist policies of a generation ago, seemed to have swallowed whole this aspect.
    However, the “quantitative easing” will not work, as the cause of the downturn is fact that the previous boom was carried on far too long by artificially low interest rates. Businesses will not invest until the future becomes more certain. People will not buy houses until prices have fallen to affordable levels; until the job situation is clearer; and until they have reduce debt and saved a deposit. Banks would be imprudent to lend more to businesses in order to let their overdrafts escalate out of control, or for house purchase when the value of the house could soon be less than the loan.
    The government must wait until the imbalances have cleared before acting. The current action of reducing interest rates and “quantitative easing” will only work in so far as they will further delay the necessary adjustment and make the reckoning more painful and drawn out. As Mr Redwood points out, interest rates should have been raised, not lowered and government finances brought under control.

  28. Posted January 9, 2009 at 5:04 am | Permalink

    I don’t think it should surprise anyone to find that a long-term problem cannot be solved in a matter of weeks or months. It took the banks several years of bad lending to get themselves into the present pickle and it will take time for their businesses to get back on track. After all, the massive profits they made from the dodgy loans and the derivatives thereof aren’t just sitting under a mattress, they have gone in salaries, bonuses, dividends and tax. They cannot just be brought back to restore a degree of financial equilibrium.

    I wonder to what extent Mr Darling is a victim of his own optimism. Many of us commented at the time of November’s budget that his prediction of a short and shallow recession was hopelessly wide of the mark. Having made that prediction, however, two things followed. First his budget was based on that prediction, with the result that estimates of tax receipts and plans for government expenditure have been set on the assumption that the prediction is correct. Secondly, political pressures require him to try to make his prediction come true.

    The more inaccurate the prediction appears to be, the more the political pressures require him to act. Waiting to see what effect existing measures will have is not an option for him because those measures were never thought, by even his most ardent supporter, to be enough to deal with a deeper and longer recession than the one he predicted.

    I am very much in favour of waiting and seeing, while also scrapping needless gimmicks like the new anti-blubber campaign. It’s far more important at the moment to trim government expenditure than waistlines. Only by waiting and seeing can anyone be in a position to decide what should be done next. Trying to double-guess at a time when the effect of current measures is not on the radar is, to my mind, absurd.

    (I must declare an interest, I am a chubby boy).

  29. Posted January 9, 2009 at 2:33 pm | Permalink

    Alan Wheatley Reply:
    January 9th, 2009 at 11:17 am

    Alan, given the situation in reality, the days of government running the country on an economy based on personal debt is over. Ask most people and they’ll tell you their intention for the future is not to have it. The banking industry hasn’t the ability to cover its losses and heaping taxpayers money into them in an effort to create confidence of people in fear of job loss and debts up to their eyes already, isn’t going to work. Consumerism is the only way banks can continue in their present guise but meanwhile we will meet their bills through borrowing which doesn’t have a cats chance in hell of being repaid without a real economy. Thus Brown borrows and meets the interest rather like the minimum payment on a credit card, and ‘hopes’ that the same system which placed us in this predicament will somehow miraculously get us out of it. A National Bank could determine different levels of interest for commercial lending and make profits for the treasury. It could absorb the asset values of homes and make a profit on those too, thus helping to minimise taxes as the country itself would be making the profit rather than private investors and shareholders. Private banking ( if viable ) could still operate but would not have as big an impact on our economy.

    • mikestallard
      Posted January 10, 2009 at 7:03 pm | Permalink

      You don’t see this massive readjustment as being global then? I am not sure that the balance of the world’s economy hasn’t shifted to the Far East (where it always used to be before Imperialism) and that our own woes are not caused by the fact that we are living like world leaders even when we no longer are.
      If this is true, then we need a huge rearrangement in our productivity, less luxuries and more very hard work and thought to keep up with the Chinese and Indians.

      • Alan Wheatley
        Posted January 11, 2009 at 9:09 am | Permalink

        Whether or not we are “living like world leaders even when we no longer are” may be an interesting academic argument but of not much practical benefit.

        What we want is to do the best we can as a nation. While there are no doubt those who could work harder, I think that in general we will achieve more by working smarter.

        • mikestallard
          Posted January 11, 2009 at 5:41 pm | Permalink

          I have often thought about this. Is it what people mean by the “Service Economy”? Is it why we are (disastrously) producing semi-literate graduates in huge droves?
          The Chinese work very hard often in unpleasant surroundings. They save. They are paid next to nothing ($2,000 p.a. average). They are docile and flexible. They eat a lot less than we do. There are lots of them. They are extremely intelligent and have lively minds.
          We used to do all this in our glory days during Victorian times. Now we seem to assume that we have a right to live much more richly than the Chinese, even as we outsource our factories to China and buy up their sweat shop clothes. I reckon that between a third and a half of English people are unproductive at the moment (dole, incapacity, civil service, government jobsworths, OAPs), maybe more.
          The world is hard and economics deal in reality. Why should we live better than the Chinese?

    • Alan Wheatley
      Posted January 11, 2009 at 8:59 am | Permalink

      The role you describe for a “National” bank seems to me to be exactly the opposite of what is wanted in a well regulated free market economy. It’s profit making role is yet another form of taxation. What is wrong with private investors and shareholders making a profit?

      • Posted January 11, 2009 at 1:34 pm | Permalink

        Nothing is wrong, is the short answer. And thus private banking which is ‘viable’ has a place. But which are viable and non-viable except for our money which is made up by taxes ? You say a National Bank profit would be a ‘tax’. Yet private profits taxes are net to the revenue whereas gross revenue of national profits could in fact lead to LESS tax not more simply because the rats who glibbly take handouts for their failings are still picking up corporate bonuses, fat salaries and buying yachts in the Bahamas whilst the very people who made their profits possible are having their homes and cars repossessed and being turned out of work.

        Incidentally, I’m not counting the private corporation which avoid paying tax at all, as many inevitably do, nor am I counting the losses made by some banks in relation to ‘fines’ which they’d struggle to pay if not for support by the taxpayers.

        Certainly a National Bank ( although it’s a hypothetical pipe dream ), would be fairer to the masses of public and business who would undoubtedly use it and would also likely have a great deal more confidence in leaving their savings in it if such a bank actually existed.

        • Posted January 12, 2009 at 9:13 am | Permalink

          Ahem !
          I don’t know whether I should throw my crystal ball away or rub it clean.

          BBC says:-

          Taxpayer to own 43% of superbank

          The Treasury is to own 43.4% of the merged Lloyds HBOS bank, after few shareholders bought new shares.

          Only 0.24% of the 7.5 billion shares HBOS offered to existing shareholders were taken up while Lloyds TSB saw only 0.5% of its offered shares taken up.

          The newly named Lloyds Banking Group will control about 25% of British customers’ personal bank accounts and about 28% of the mortgage market.

          If this is not a “National Bank” in all but name, except to the degree of 8% more ownership, then I’ll be happy to eat my bowler hat.

  30. Rare Breed
    Posted January 9, 2009 at 4:43 pm | Permalink

    The biggest risk at present is inflation.

    The Govt. have masively increased the money supply to no avail and look set to continue.

    If you imagine that money flow is a river and the banking crisis is like someone built a huge dam that stopped the banks lending the money. The flow stopped, contracting the money supply and reducing aggregate demand.

    Rather than take down the dam the government turned on all their taps and instead of starting the flow again they have just flooded the valley behind the dam with money. Eventually the money will over top the dam, but this will only be a the same flow as before the dam was erected so everything will seem ok again……………………….until you take down the dam by getting the banks to loan freely again….then there will be an almighty tidal wave of money leading to massive inflation.

    Simply guaranteeing the loans or eating up the bad debt would have saved the day originally but now, due to the monetary expansion, the 12% return on the bailout and the increased reserve requirements for tier 1 banks is all that is keeping us from Zimbabwean inflation.

    This leaves an interesting dilema for a true socialist like Brown.

    At the flick of a swith he could halve the debt of people in debt while halving the wealth of those that prefered to save than borrow and have some wealth to lose.

    The best solution would be to use the return rate on the bailout and the tier 1 reserve ration to only allow the flow of money to come back slowly. So if the money behind the dam is going to be let out slowly then as growth returns (who nows when) these rates will have to be increased not decreased as DC has said.

  31. Bazman
    Posted January 9, 2009 at 9:57 pm | Permalink

    Have few light ales and investigate the lads of the Marylebone Cricket Club, British Broadcasting Corporation and MP’s. Marvelous!

  32. Tears for Tier 1
    Posted January 9, 2009 at 10:12 pm | Permalink

    Last year’s 10% rise in cash in circulation in the UK may actually be deflationary – if UK savers have collectively moved their savings into the collective mattress, the effect of these withdrawals on the Banks via their “multipliers” is actually serving to reduce broad money supply, just as occurred in the US during the 1930s.

    I know this is counter-intuitive. However it is difficult to see in this day and age (when NO ONE in the government sector is paid in cash), how the UK government could boost money supply by physically printing cash.

    M0 growth is being led by demand for notes, not the supply.

    ps well done on the radio interview.

  33. Steve
    Posted January 12, 2009 at 1:47 pm | Permalink

    If all the banks have lost so much money on credit instruments, one has to ask the pertinent question……where has it gone?

    And the second question – how do we get it back?

    • mikestallard
      Posted January 12, 2009 at 5:11 pm | Permalink

      I am so glad you wrote this.
      I don’t know either.
      Is it that the (needy) government is forcing them to lend them money by making them buy bonds at 16%? This would mean that they were, in fact, supporting the massive requirements of Big Government instead of doing what they were set up to do.
      Is it that the money is all there, but that a lot of it is tied up in worthless junk bonds based on sub prime mortgages etc? This would mean that the poor old banks wouldn’t actually know how much real money they had at their disposal – or whether other banks were, in fact, solvent?
      Is it that Basel I and Basel II have genuinely made it impossible for them to lend because their reserves just don’t meet the high standard demanded by the EU bureaucrats?
      Actually, bank lending has risen over the last ten years and is now on a high plateau (See “Burning Our Money” Website).

  34. pp
    Posted February 19, 2009 at 6:01 pm | Permalink

    http://www.ZOPA.com – the future of lending is here now.

    Traditional banks serve no useful purpose.

    It is typical for a labour government to sink taxpayers money into an industry just as it enters terminal decline.

    Why give money to the banks ‘in the hope’ that they might lend it out, when you can lend directly?

  35. hussein
    Posted June 3, 2009 at 4:57 am | Permalink

    dear /sir.
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4 Trackbacks

  1. By Quantitative easing « David Burbage’s weblog on January 8, 2009 at 12:14 pm

    [...] Posted by davidburbage on January 8, 2009 http://www.johnredwoodsdiary.com/2009/01/08/the-mpc-and-the-bbc/ [...]

  2. [...] “The Bank of England Weekly statements show that quantitative easing is well underway. The Bank’s balance sheet has ballooned from well under £100 billion last September, to nearly £240 billion by the year end. Actual printing of bank notes…are up over the year by more than 10%” – John Redwood’s Blog [...]

  3. [...] Posted by manicbeancounter on January 9, 2009 Following the Bank of England’s MPC cut in interest rates to the lowest level in it’s 300 year history, John Redwood MP posted the following comment under “The MPC and the BBC” [...]

  4. [...] John Redwood says – “Quantitative easing is well underway”. [...]

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  • About John Redwood

    John Redwood has been the Member of Parliament for Wokingham since 1987. First attending Kent College, Canterbury, he graduated from Magdalen College, and has a DPhil from All Souls, Oxford. A businessman by background, he has been a director of NM Rothschild merchant bank and chairman of a quoted industrial PLC.
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