In the footsteps but not the shoes of the Governor

Yesterday I was asked to step in to speak to a lunch of Parliamentarians and business people in the House of Lords because the Governor of the Bank of England had cancelled. He was detained in the Bank, unable to get in and out easily owing to the protesters.

I decided to develop two of the Governor’s sensible remarks last week. I hope he privately approves of what I said. He himself is rather more constrained than I am by his need to work with the current administration.

I began by praising his comment that the UK cannot afford another “reflationary” package. I went on to agree with his comment that switching inflation targets in December 2003 made it much more difficult to conduct a sensible money policy during the build up of excess credit and lending.

We have three simultaneous crises that egg each other on.

There is the monetary crisis. We lurched from too much cash and credit in 2007, to too little in 2008. The authorities are now literally printing money to try to get cash and credit growing quickly again. If they succeed too well it will be inflationary.

There is a banking crisis. The banks lent and borrowed too much. The Regulators egged them on by approving their business plans, ticking their boxes and setting requirements that were too lax. Now we have a series of broken banks that need to get on with the job of managing their bad loans and worse investments.

There is a collapse in parts of the real economy, led by the property and housing crash and followed by the auto crunch. The real economy will not work well until money and banking are stabilised. The saving and exporting economies need to spend and borrow more. The importing and over borrowed countries need to save and export more. The G20 needs different solutions for different countries, not a new credit bubble based on government bonds.

The rest of what I said will be familiar to readers here. It can be summed up in four soundbites.

You cannot solve a crisis of over borrowing by borrowing more.
You do not make toxic debts friendly assets by nationalising them.
It does not help solve the crisis by undermining national credit worthiness. There must be prudent limits to how much a country can borrow.

The Governor might be pleased to be reminded I do want to see the Bank of England reunited with full Central Bank powers to handle government debt and regulate the banks. That way we might go back to avoiding monetary disasters and banking crises.

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10 Comments

  1. alan jutson
    Posted April 2, 2009 at 6:58 am | Permalink

    Delighted to see your are regarded as a substitute for the Governor’s role in speeches.
    High praise indeed
    Do you think you may get asked to deputise for him on other occassions.
    Do you think he thinks, that you have common Policy ideals.

  2. Brian Tomkinson
    Posted April 2, 2009 at 8:15 am | Permalink

    Sounds like a good sensible speech. How interesting that you were drafted in to deputise for the Governor. Whose good idea was that I wonder? What was the audience reaction?

    reply: The event organisers invited me, and the reaction was good, save perhaps from a few Labour MPs and peers who sat quietly through it.

  3. Ian Jones
    Posted April 2, 2009 at 8:19 am | Permalink

    What the Governor said will be ignored. Brown smells the best opportunity ever for a socialist to distribute the wealth of the nation. Its why he is best mates with Obama who wants to do the same.

    Specific Measures as the Governor called them……

  4. Jim Pearson
    Posted April 2, 2009 at 8:25 am | Permalink

    Good job it was you and not a labour politician. Then all you would have heard was ” it’s not our fault, Greedy Bankers, More Reg’s and Global Problems, etc.” Hope some of the worthies took on board your points.

  5. Acorn
    Posted April 2, 2009 at 8:41 am | Permalink

    JR, your last paragraph raises some questions which I hope you can find time to answer.

    Since the DMO (government debt management office) now does the job the BoE used to do before Gordo; does it have a set of rules somewhere in legislation, that limit how much and what type of IOUs it can issue. Does the DMO have to seek approval from parliament on a routine basis to issue debt? If so is this part of the “supply” procedure.

    How did the BoE regulate government debt issue in the old days, if it ever did; and, is there no limit to the amount of government IOUs the BoE can buy in and “monetise” with crisp new notes?

    Your party has proposed a US style Congressional budget office, how will this work here, particularly as the opposition can never win a vote against whipped government lobby fodder?

    Reply: In a sense all the borrowing has Parliamentary approval, as estimates and tax forecasts and laid before Parliament, including a forecast on how much will be obtained from gilt issues. Parliament can debate and vote on it all. Some of us have complaiend about the volume of debt being raised, but of course the government has a large in built majority to get through “whatever it takes”.

  6. Denis Cooper
    Posted April 2, 2009 at 10:33 am | Permalink

    As I said in my comment which you kindly published here:

    http://www.johnredwoodsdiary.com/2009/04/01/this-chancellor-has-never-met-prudence/

    yesterday the Bank of England created £3.5 billion and bought existing gilts, while half a mile away in Philpot Lane the Treasury’s Debt Management Office sold new gilts also to the value of £3.5 billion, money which the Chancellor can now provide to other government departments so that they can continue to spend.

    This silly game can’t continue indefinitely; but while private investors are able to make a quick turn on it then they’ll allow themselves to be bribed, until such time as they start to grow concerned that creating so much new money will cause inflation and devalue sterling.

    Presumably if a future government gave the Bank full powers to manage government debt, that could create some confusion when the Bank was simultaneously selling new gilts, and buying up existing gilts with money conjured out of thin air, but it would be more convenient when the entire portfolio of gilts acquired by the Bank was eventually cancelled.

    Instead of a messenger from the Bank having to take a taxi to Philpot Lane to deliver the boxes crammed with gilts certificates to be cancelled, they could just be put on a trolley and wheeled down the corridor to another office. A receipt would be signed, and then the certificates could be shredded.

    OK, I know that nowadays it would all be done electronically, so this is only figurative.

    I note that George Osborne still has a lot to say about Goodwin’s pension, and what some obscure goverment minister did or did not know about it at this or that time, and no doubt if that minister is finally forced to resign the Tories will celebrate the collection of his scalp as a major political triumph.

    It would be better if Osborne set aside that relatively trivial matter, or delegated it to a junior member of the shadow Treasury team, and instead started to ask some very searching questions about these peculiar multi-billion gilts transactions.

    I’ve remembered which company was found to have been rigging the market in its own shares:

    http://en.wikipedia.org/wiki/Guinness_share-trading_fraud

    which caused a massive scandal, and led to criminal prosecutions and prison sentences.

  7. oldrightie
    Posted April 2, 2009 at 10:41 am | Permalink

    Yuo do fail to mention the pain still to come of this recession becoming a depression. Which it will, in true night and day fashion. Why, just look at Downing Street to know.

  8. Denis Cooper
    Posted April 2, 2009 at 1:34 pm | Permalink

    Incidentally, it could be said that some of this newly created money has actually been put to a good use.

    £1.6 billion has been given to Nationwide Building Society, to enable it to take over the branch network, deposits and some other liabilities, and some other assets, of Dunfermline Building Society, so that its savers and borrowers can continue to have business as usual.

    A notional sequence of events would be as follows:

    1. Bank of England creates £1.6 billion and uses it to buy up existing gilts, making it easier for …

    2. The Treasury to issue £1.6 billion of new gilts, and …

    3. Transfer the sales proceeds to Nationwide; while …

    4. A “bridge bank” takes over Dunfermline’s social housing portfolio in Scotland – about £620 million – and KPMG is appointed to sell off its commercial loans – about £880 million …

    5. The proceeds of which sales will be repaid to the Treasury, which ….

    6. Will have to pay the Bank the interest on the gilts it owns, and eventually their redemption value, unless they are cancelled before they mature.

    Personally I’d think it would have been better to short cut this process, by having the Bank of England credit new money to the account of a unit set up to contract with financial institutions to remove and safely dispose of their “toxic assets”, in each case at a provisional valuation subject to later rectification, with the proceeds from selling those assets, plus or minus rectification payments, being passed back to Bank, and also allowing Dunfermline to survive but with a complete change of management.

    We have “The Bank of Darling”, which is prepared to lend (give?) taxpayers’ money to large financial institutions to keep them going; and we have “Darling Insurance”, which offers to insure their “toxic assets” for a ridiculously low premium, at massive risk to taxpayers; but what we really need is “Darling Waste Disposal” (or “Darling Recycling”, if that sounds better) to remove those “toxic assets” from their balance sheets, and replace them with cash created by the Bank of England.

  9. Demetrius
    Posted April 2, 2009 at 3:54 pm | Permalink

    You are standing at the top of a hill looking to the horizon and surveying the country to try to determine by which route a journey across might be achieved. The government is at the bottom of a deep valley trying to unblock the drains by forcing more sewage down them.

  10. mikestallard
    Posted April 2, 2009 at 4:24 pm | Permalink

    Meanwhile, this is the line being fed to Labour Supporters:
    “Today is also the day in which a host of measures will begin to make a real difference to countless families, businesses and communities across the country.
    We all joined this party because we recognise that we all owe a duty to each other – and that this is especially true during hard times.
    Today, the basic state pension will rise to £95.25 – just one of the ways in which we are putting money into people’s pockets during times of need and reaffirming our commitment to those who have given so much to this country.
    From today, people diagnosed with cancer will have access to free prescriptions – saving up to 150,000 people around £100 per year and fulfilling the pledge we made at conference last year.
    And from today, full time workers will be eligible for an extra 4 days holiday per year – benefitting up to 3.5 million women and 2.5 million men.
    These measures and countless others demonstrate our commitment to building a better society. This is something we should all be proud of.
    That’s why we’re all members of this Party and why we all work to avoid a return of the Conservative years – who are determined to undo the good work we’ve achieved together, cut the services people rely on during hard times and return us to all to the failed ‘do nothing’ policies of the 80s and 90s.
    The Party you belong to is making a real difference. Be proud.”
    Slosh more and more borrowed money at it for almost no gain.

    I am so pleased that, at long last, influential people are beginning to listen to your commonsense.

  • About John Redwood


    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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