What the Bank of England needs to do

The Monetary Policy Committee will probably keep interest rates at 0.5% and chug on with their programme of quantitative easing. This policy will keep house prices higher than they need to be, will keep many savers starved of a proper return, will extend the government bond bubble,encourage too much debt and do nothing to sort out the huge imbalances in our distorted economy.

Sometime the authorities have to

1. End quantitative easing
2. Curb the public deficit
3. Bring the recommended interest rate into line with the reality of what banks are offering and charging
4.Offer help in the form of lower taxes and less regulation to the exporting private sector, to slash the trade deficit further

They may not want to start to do this even now, but they could at least tell us they want to do it, and sketch a timetable for returning their management of money markets to something more normal. Otherwise it will look as if they are just going in for a political fix for this year, delaying the essential adjustments the economy needs to make.

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39 Comments

  1. Mick Anderson
    Posted June 4, 2009 at 6:15 am | Permalink

    Yes, but even if the current encumbents ever consider these questions in private, they are not going to make their thoughts public.

    They are too scared either of having to say how bad it really is, or they don’t want to be found out as being very wrong. Remember the outcry at the last budget when AD had to downgrade his forecasts….?

    The Opposition have just as many problems with this, compounded by not having the raw data to process that is in the sole possession of HMG.

    Equally, even if they offer their views, they can’t implement them, and Downing Street has the opportunity to “adopt” the best ideas.

    I understand that there is a convention which allows the Opposition parties full access to all Government data six months before a General Election. As the Prime Minister appears deaf to the public with for such an election, the best we can hope for is that the information will be shared in six months time. Even that assumes that convention is adhered to, and there is no sign of such honour in the Corridors of Power at the moment!

    However, go back just as far as the last change of governing party in 1997 and remember how much less information we had. We didn’t have wide access to things like the Internet and blogging to allow us to discuss matters so freely, and we didn’t expect such information to be available to the ordinary public.

    Just like everybody else, I would like to know when the things that affect my life (high taxes, low savings rates, the weather) are going to change (perish the thought that improvement will ever appear!). But that doesn’t mean that the fog is ever going to clear from my crystal ball, and I’m not sure it’s reasonable to expect it.

    If wishes were horses, beggars would ride.

    Reply: There is no convention allowing us access to more government information at the 6 months stage. What does happen is meetings between Shadow Cabinet members and senior civil servants, so the civil service can start work on plans for new government should one be elected.

  2. Brian Tomkinson
    Posted June 4, 2009 at 6:57 am | Permalink

    Your final sentence says it all. I thought the Bank of England was independent (just joking)!

  3. Colin D.
    Posted June 4, 2009 at 7:01 am | Permalink

    And item 5…
    Tell us HOW and WHEN all this money borrowed from overseas is going to be paid off and SPECIFY the financial impact that the timely achievement of these objective will have upon the standard of living of all of us.

  4. Tom Knight
    Posted June 4, 2009 at 7:29 am | Permalink

    Well said. The only course of action possible for our long-term survival. Savers are the forgotten majority here in favour of those who overloaded on mortgage debt in Mr Brown’s illusory good times, who seem to be protected from the consequences of their actions in a way that no-one else (bankers excepted) seem to be in this whole sorry affair.

  5. Surpised of Chancery Lane
    Posted June 4, 2009 at 7:47 am | Permalink

    Things must be badly amiss – I agree with John Redwood.

    • Surprised of Oxford
      Posted June 4, 2009 at 12:00 pm | Permalink

      Yes indeed, I can’t stand the man, but he is right on the money with this.

      • Freddy
        Posted June 4, 2009 at 3:14 pm | Permalink

        How very ill-mannered. You could have just said “I agree”.

  6. Posted June 4, 2009 at 7:59 am | Permalink

    The real danger facing our economy will begin once the US and others start to come out of recession. This will be the point when Sterling is likely to be exposed as it comes under pressure from the dollar in particular.

    Axel Weber is the president of the Bundesbank. At a meeting in London last month he pointed out that Germany’s financial stimulus – ‘will have to be reduced or even inverted very quickly as soon as the situation improves, otherwise there is a risk that inflation could make a rapid and powerful comeback’.

    This was echoed in the US that same week by John Taylor; the author of the ‘Taylor Rule’ on inflation when he pointed out that as recovery there begins, their own stimuli ‘will be have to be forcefully reversed … in order to avert a sharp spike in inflation.’

    These statements matter a great deal to us because as leading economies start to reverse their own versions of quantitive easing the pound is going to come under very heavy pressure. The inevitable result of this are likely to be inflation at far higher levels than we have seen for a generation. The only credible answer to side stepping this threat is to address the present level of public expenditure as a matter of urgency.

    Waiting until the problem hits us is not an option, we have to start resolving it now. It is clear however that there is no chance that this government would contemplate such a move, regardless of who is leading it. This is why a general election by the Autumn is so important.

  7. alan jutson
    Posted June 4, 2009 at 8:03 am | Permalink

    Let us be charitable.

    Perhaps they do not wish to spill the beans on any sort of timetable they have in mind, as this may screw the markets, and set their planned route off course.

    At least let us hope that is the reason.

    I do however wonder who is behind the decisions being made and driving it forward.

    Is it really the BOE, or the Goverment, or a mixture of both.

    If a mixture of both, who has the final word.
    The answer to this may well determine the answer to your questions.

  8. None
    Posted June 4, 2009 at 8:19 am | Permalink

    The question is, is there really quantitative easing now ?
    Yes the headline interest rate is low, but in many ways this does not reflect reality. Very low interest rates are not being passed on to the man in the street, and the difference between what the BOE lends at and the banks lend at is used to paper over the cracks in the banks themselves.

    So although the headline rate is low, it’s not quantitative easing to the majority of the economy.

    There’s nothing i’d like more than to borrow huge sums of money at 0.5% and put it into a wide assortment of investments which despite the market rally are still yielding over 5%.

  9. Posted June 4, 2009 at 8:20 am | Permalink

    Excellent thoughts.
    If only…
    When I went into debt I did three things.
    1. I tried hard to earn more money.
    2. I cut back hard on my outgoings so as to balance the books.
    3. I made a detailed plan to recover in a specified time.
    4. I avoided going any further into debt by making promises I could not keep.
    Erm…..

  10. DBC Reed
    Posted June 4, 2009 at 8:20 am | Permalink

    Your statement “This policy will keep house prices higher than they need to be” is curious,as it implies that average house prices need to come down.
    This is just fine with us land-taxers but does seem like a quantum discontinuity in your usual support for a high property price-level.( I refer to you statement from less than a year ago “one thing worse than house prices soaring and that is house prices falling” But now ,house prices falling is not the worst thing imaginable)
    The problem is any increase in the money supply,not just through quantitative easing will tend to keep house prices higher than they need to be.
    We have been proposing that LVT be imposed when house prices bottom out to stop them going up again,partly by forcing the hundreds of thousands of unused building -sites with planning permission into development.Can we count on your support?

  11. None
    Posted June 4, 2009 at 8:32 am | Permalink

    Actually I just had a quick look around:
    http://www.lovemoney.com/loans/?source=1000001
    All the loans there are around 8% APR and yet the headline interest rate is 0.5%

    I wish I could borrow at 0.5% and lend at 8%.

  12. Michael Lewis
    Posted June 4, 2009 at 8:49 am | Permalink

    Absolutely spot on! Could not agree more.

  13. Acorn
    Posted June 4, 2009 at 8:59 am | Permalink

    Mr Redwood and fellow Redwoodians. I am this day amused by your naivety when it comes to financial matters.

    Here at the BoE, Enrique and Jens have been burning the midnight oil re-examining the ability of sticky-price models to generate volatile and persistent real exchange rates. (And explain why the pound is going up)

    Further more, you have totally ignored the dynamic stochastic general equilibrium (DSGE) models that take into account the evolution over time of interrelationships between agents in the economy, where there are random (‘stochastic’) shocks hitting that economy. (And why if we saved more the problem would go away)

    You appear to be totally ignorant of the “PPP Puzzle”; and, thus, fail to address the “persistence anomaly”. Also you fail to address the “real exchange rate (RER) volatility puzzle”. (And why the pound is going up)

    I would have expected better of you Mr Redwood with your Banking background and hope you will correct such deficiencies in future post.

    Yours Acorn (Head of Difficult Numbers BoE)

    OK; YOU TRY READING THE BLOODY THING. Do you think these guys are on the same planet as us?

    http://www.bankofengland.co.uk/publications/workingpapers/wp368.pdf

    • Sally C.
      Posted June 4, 2009 at 5:49 pm | Permalink

      I don’t know how you found that working paper but well spotted. Hayek always maintained that economics could not be treated as a science. He said that the desire to mathematically model economies would lead to the wrong conclusions. I am not sure if that paper ever came to a conclusion but the authors are definitely living on a different planet!

  14. Will Hicks
    Posted June 4, 2009 at 9:36 am | Permalink

    But you’re forgetting we need to keep house prices over inflated, so the property developers in the HoP can rake a tax free profit. No wonder this big elephant of social misery has been avoided for years.

    The decision is clear: do we base our economy on selling increasingly higher valued properties to each other, or do will regulate prices to return to normal, enabling the man in the street to spend his money on something other than a misery mortgage ?

    • DBC Reed
      Posted June 4, 2009 at 2:43 pm | Permalink

      Right.The house-price elephant has been ignored successfully for decades.
      You would have thought that it would have occurred to some of the property profiteers in parliament hat nobody on average wages would have been able to afford a place in London. But apparently not.
      It could be that they are just stupendously thick but more likely they are deluded by the all-party propaganda typified by the headlines such a “Hope for the housing market as house prices rise.”This is not really double-think or is it?The wage inflation bad/house price inflation good formula certainly looks like it.

    • Adam Collyer
      Posted June 4, 2009 at 4:38 pm | Permalink

      “Regulating prices” is not the answer. The answer actually is less regulation. House prices are high because the supply is artifically constrained by stupid planning laws that constrain the supply of building land. The government even defines the minimum number of houses that shall be built per acre (sorry, hectare) of land, thus distorting availability in favour of tiny houses with even tinier or no garden.

      We need to sweep away all the ridiculous paraphernalia of decisions made in Whitehall about how many houses will be built in each area, that cascade down into local council development plans. There should be a presumption in favour of any planning application unless it directly harms another individual. And above all we need to stop councils making “zoning” decisions about what land will be used for. Enough of seeing derelict land that has been zoned for “industry and employment” and has been left idle for decades when it is wanted by housebuilders.

      • DBC Reed
        Posted June 5, 2009 at 7:56 am | Permalink

        I referred in my earlier letter to hundreds of thousand of building sites that have got planning permission but which the developers are waiting to
        develop.Waiting till house prices go up and volumes increase, that is.
        Jim Clayden of the Royal Town Planning Institute got so sick of the kind of criticisms made by ,for instance,Adam Collyer above that he published figures showing there were 225,000 building sites with planning permissions ready to go but that the free market incentivised inaction.
        The problem with free markets is that they give the freedom to owners of land and capital to do nothing,to lay up money on deposit,to leave fields to grow weeds while they wait for an upturn:only labour as a factor of production does not have this option, as non-particpation in the economic process leaves them to starve.

        • Adam Collyer
          Posted June 5, 2009 at 3:43 pm | Permalink

          Well, the Royal Town Planning Institute would say that, wouldn’t they? After all, their livelihoods depend on town “planning”. I would point out that they have an absolutely lamentable record of creating decent towns in the UK, with massive traffic problems and deliberately created slums their main legacy. I wonder what makes them think they know better than the market what is actually needed?

          With building plots now in the region of £100,000 each, it really isn’t surprising houses are unaffordable. And if you want to hurt those developers sitting on great quantities of building land, release lots more onto the market and watch prices slump. They are currently making money from the artificial supply constraint.

  15. Denis Cooper
    Posted June 4, 2009 at 9:58 am | Permalink

    The 1998 Bank of England Act lays down, page 11 here:

    http://www.opsi.gov.uk/acts/acts1998/pdf/ukpga_19980011_en.pdf

    “11. In relation to monetary policy, the objectives of the Bank of England shall be –

    (a) to maintain price stability, and

    (b) subject to that, to support the economic policy of Her Majesty’s Government, including its objectives for growth and employment.”

    There’s a strong suspicion that the MPC is now stretching (a) to accommodate (b).

    In other words, the Bank is printing money which is being passed to the Treasury via the gilts market, ostensibly for the purposes of (a) but in reality to ensure that the government can pay its bills.

    Eventually the MPC will find it impossible to reconcile a continuation of “quantitative easing” with objective (a), and then we could all be in very serious trouble unless there’d already been a significant recovery in the economy.

    • Javelin
      Posted June 4, 2009 at 1:34 pm | Permalink

      Good point – is QE legal if it isn’t achiving price stablity.

  16. Mark M
    Posted June 4, 2009 at 10:04 am | Permalink

    It’s not just savers. It’s also pensioners who aren’t on cushy public sector final salary deals that are struggling for proper returns. My mother will soon be reaching retirement age. She will be putting off cashing in her pension for some years yet, thanks to the destruction Labour have brought to our once great pension system.

    It’s going to take some years to fix Britain after the Brown years. What an apt surname he has.

  17. Javelin
    Posted June 4, 2009 at 10:12 am | Permalink

    Two days ago (2nd) Reuters has M4 (bank lending) up ONLY 0.2 percent last month, slower than earlier in the year.

    They lead with the head line.

    “M4 data show no sign QE policy working”

    http://uk.reuters.com/article/businessNews/idUKTRE55146A20090602

    It seems bank strategists are using savings to bolster reserves and pay off debts – rather than stimulate the economy – because of the regulatory demands and high interest rates the Government has demanded.

    Once the balance sheets look better perhaps they will lend again?

    But what did QE achieve – well basically bridging loans to get round regulatory failures.

    I guess the new PM and Chancellor needs to learn some lessons

    1) You can’t make competing demands without them competing with each other (i.e. lend and don’t lend) before or after the crunch.

    2) Change your Chancellor every few years to stop dead wood thinking.

    3) More transparency and power to shareholders.

    4) Don’t limit the MPC to narrow inflation definitions.

    5) Make the banks balance sheet ratios more flexible and cyclic sensitive – subject to open MPC like committees.

  18. Posted June 4, 2009 at 10:13 am | Permalink

    One can see why, in an election year, politicians want to pretend they can borrow & spend forever. That is, allegedly, why we have an MPC – to give economic rather than political advice. More than time for them to start doing so.

  19. Michael Lewis
    Posted June 4, 2009 at 10:19 am | Permalink

    I’m really worried the UK could become an economic basket case for years if Labour don’t leave power soon. I used to own a house in London, but sold in early 2007.

    In theory we should be thinking about buying a house again and planning our future.

    In practice, we’ve moved all our savings from our house sale to foreign currencies, bought resource shares – Gordon Brown can’t debase the price of uranium or copper, bought defensive shares – could Brown manage better than the managers of Johnson and Johnson? Don’t make me laugh.

    The major problem for me with a young family is this:
    We’ve saved, made some (not a fortune by any means) money from a house sale, put aside some money for our pension (which if I’m honest I neglected slightly).

    Now with a young family – what does the UK offer? Gordon Brown and Co. are trying to prop up an unsustainable house bubble – and I and I suspect many like me – think enough is enough – I’m not going to borrow vast sums. If people have been profligate and over-borrowed – why should I subsidise them with my bailout taxes?

    Labour may want to inflate everyones debt away – but it will destroy the value of sterling.

    Our family is split between the UK and NZ and frankly with Brown trying to print his way out of a debt, I’m trying very hard to look for opportunities in Asia.

    • Posted June 4, 2009 at 6:29 pm | Permalink

      I am a pensioner and I have four children of, I regret, middle age.
      Three of them live abroad now. One remains here. Although he is a Director of a Company, he has now lost his company car and all bonuses. His pay has been cut back severely. Remember that, like the rest of us, he pays about half of his salary in taxes. there is also a lot of law and red tape.
      The other three are in Australia, Thailand and Saudi. They are minting money and get very few tax demands. They eat out a lot and have a fine social life. There is, at the moment, little or no chance of redundancy.
      My grandchildren, in UK and abroad, seem to be growing up nicely with a good education.
      Politics hardly impinges – yet.
      Religion in both Saudi and Bangkok is taken very seriously indeed. But farang can live with it. In Australia you have to pretend to vote Labour.
      I would say, go for it!

      • Michael Lewis
        Posted June 4, 2009 at 10:11 pm | Permalink

        I’m not surprised your children are enjoying life overseas. For me, its a shame to have to think about leaving. At the moment, I believe we live in a country where hard work won’t count for much. We’ll have it taxed from us. I’m not having half my pay taxed to bail out someone who took out a 6 times interest only self certified mortgage.

        Pensioners have Sterling devalued and now food price inflation is rampant. We’re paying for Labour to sustain a house price bubble, and worst of all, it just won’t work.

        In industry, many people who abjectly fail have the decency to resign or go quietly when taken aside. And try and learn from their experience. Brown – he’s been a disaster, but he won’t admit it and resign. He’s incapable of recognizing the damage he has done.

  20. Dan Tubb
    Posted June 4, 2009 at 11:49 am | Permalink

    If it were up to me I would simply let the market set the rate. But I would be interested to hear what Mr Redwood would do if it was in his gift to set policy on this issue. Would you keep it in the hands of the BoE but change the index used to RPI, or something far more radical.

  21. david skinner
    Posted June 4, 2009 at 12:23 pm | Permalink

    Well Mr Redwood, I’ve never been a fan of yours but you are absolutely spot on with your views on this.

    The present policies of money printing and zero interest rates are designed to do nothing less than reflate the debt based boom. This is not being carried out with the best interests of the country at heart, but for political expediency. Trying to keep house prices at the current ridiculous levels will cause social damage for many years to come. Illusory wealth is not healthy in the economy and certainly doesn’t lead to any degree of stability.

    The debt burden is huge, and adding to it will surely come back to haunt us. Economics of the madhouse comes to mind.

  22. albion
    Posted June 4, 2009 at 12:59 pm | Permalink

    And how exactly is the trade deficit to ‘be slashed’? More desperate devaluations of the ‘Peso’ Pound perhaps?
    Does John Redwood not realise that the rot set in in the eigthies with Thatchernomics and its brutal neglect of the manufacturing sector. Just look at Germany – they’ve had a strong currency for years and still managed to become the world’s largest exporter.
    The UK on the other hands, despite being year after year the largest recipient of foreign investment and a relatively small net importer of oil, has a current account deficit approaching £90 billion !! Well, could it be that much of this foreign investment is simply foreign companies buying privatised utilities at knockdown prices before ripping off us with high charges and selling on to the next set of spivs. Just take a look at Thames Water if you want a recent exemple. Well, I suppose the City has done very well out the whole process and I dare say many Tory MP’s and supporters.
    After thirty years of Tory/NewLabour ‘neo-liberal’ policies, the UK is heading for bankruptcy and social anarchy thanks to its huge irredeemable underclass, itself the product of the said policies.

    Reply: We had a lot more manufacturing in the 1980s than we do today.

  23. Rob H
    Posted June 4, 2009 at 1:42 pm | Permalink

    Who’d have thought it, a Labour government trying to make houses more expensive than they should be by manipulating the “independent” Bank of England.

    Seems to me that despite common sense telling us that houses are overvalued, pretty much every independent commentator saying the same thing and even Mervyn King commenting that “by any measure” they are overvalued, the government needs to have a recovery in the housing market to get some more votes.

    When I was younger and a bit more naiive, I thought that the Tories were being harsh with their economic policies but I realise now that they were probably being long term and more cautious.

    When Blair got in, he took on Thatcherite principles but implemented them without any sense of responsibility and bred the dependency culture we now have where everyone is looking for a bailout and failure is rewarded.

    I just hope that, if the Tories get in, they think long term and try hard to prevent asset bubbles forming. Despite what fools like Greenspan say, they are easy to spot.

    • Steve U
      Posted June 6, 2009 at 7:31 pm | Permalink

      Hi Rob,

      you will soon be able to see what the tory’s will do – it can’t be that long until we have a general election, and they will be favourites to win.

      For the Tory’s I say this. There are more BTL tenants than there are BTL landlords – do the maths, make things better for the tenants and secure their votes.

      Make it easier for building companies to be profitable by driving DOWN the price of building land.

      Use Northern Rock to make 95% LTV mortgages the norm again.

  24. Adrian Peirson
    Posted June 4, 2009 at 7:28 pm | Permalink

    I’m hoping Goebbels was right when he said, if you keep repeating it often enough people will believe it’

    The Bank of england is NOT the Bank of England, it’s a private company.

    • Denis Cooper
      Posted June 5, 2009 at 7:00 am | Permalink

      No, the Bank of England is publicly owned.

  25. Posted June 5, 2009 at 4:27 pm | Permalink

    The B of E paper by Enrique and Jens cannot be real. It is surely a parody? When I was Head of the Bank of England Economic Section – 1963-1965 – I would have trashed any such document and would not have published it in the Quarterly Bulletin.
    As I have said before the Governor of the Bank of England should never be an economist – unless he was of that rare breed today – a political economist

  26. DBC Reed
    Posted June 5, 2009 at 7:11 pm | Permalink

    @adam collyer
    What do you mean “release more plots onto the market and watch prices slump”? Give more planning permissions on sites?They would go into land banks just like the others.
    To quote Jim Claydon who I would suggest is in a position to know more about it than you do:”All landowners including housebuilders maintain land values by managing supply.It is not in their interests to release large quantities of land because this deflates its value.If we are to build houses at a faster rate we cannot rely on market forces…It will require government intervention”
    The centuries old method of getting land onto the market and get its price down from 100k a plot (which I agree is imperative) is to levy a simple tax on land values (by amending council tax and UBR to bear on land not buildings).By this fine old radical,liberal tradition seems long defunct.

  27. Matt
    Posted June 9, 2009 at 10:12 am | Permalink

    I agree and I am not a Tory. I’m a market libertarian who diverges from the Tories on social policy.

    Socialism feels good in the good times only. The booms it creates are so delicious and intoxicating that we start to assume they’ll carry on indefinitely. But they can’t and socialism says nothing about how to manage the bad times, because it cannot admit that the business cycle is a permanent fact of economic life and bites you even harder if you try to hold it off.

    Socialists get drunk on their idea of the golden dawn of eternal prosperity. They believe that capitalism will fail because of increasingly unstable business cycle. They believe that their genius can eliminate the cycle, yet the irony is that in so doing, their denial blows even bigger booms and busts. Which we now see.

    Honest common sense, based on real-world experience, and arithmetic are the only things that work in bad times. Our Socialists (no matter how nice their ties) will always be short on these. Mostly because they have never had their head on the block doing real jobs, running their own budget, managing real working people and answerable to their shareholders (be they friends, family, private or public). They think they can create the future by planning it, rather than going out and experiencing the world. They ignore that record of cycles extends back into antiquity, well into the pre-capitalist era. No society and no political system can refute the cyclicality of life.

    Frankly there is nothing like the experience of risking your job (and reputation, and pension) for failing to run a company properly to teach you what cyclicality really means. It would be better if Ministers had had a chance to practice, get it wrong and learn from their mistakes out in the real world before getting into government. Learning on the job is not really enough as the job is too important.

    Sure, Labour got rid of Miltant and Clause 4, but they are still big-government Socialists who usurp Keynes’ ideas from counter-cyclical spending in the bad times into permanent excess.

    The Tories (and LibDems) should make much more of the fact that Brown seems to care more about investing than whether the return is any good. Putting spending up is not enough as people just get fat, happy and lazy without necessarily working smarter. You need to invest where and when it’s smart to do so, and judge the results by the returns it generates. And of course, this needs to be based on real figures that are not fudged. But don’t wait for socialists to learn how to do that.

  • About John Redwood


    John Redwood won a free place at Kent College, Canterbury, He graduated from Magdalen College Oxford, has a DPhil and is a fellow of All Souls College. 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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