Time for a reality check from the MPC?

Most commentators expect the Bank’s Monetary Committee to admire their handiwork and recommend more of the same. They are likely to blunder on with cheap and easy money for the public sector, a shivering small and medium sized business sector denied credit at a sensible price, and a rotten deal for savers. They call this supporting the recovery, and skate over their considerable role in the inflationary boom and the credit squeeze slump that preceded it.

So what should they do to restore some private sector jobs, prosperity and balance to the UK economy? They should send a letter to the Chancellor telling him to make necessary changes so they can run an intelligent money policy that does support recovery. The letter should recommend:

1. The FSA relaxes cash and capital controls on banks lending to the UK private sector, so more money can be released for companies in the UK to expand jobs and investment.

2. The government should start immediately on a deficit reducing package of spending reductions to cut the government’s demands on credit markets.

If the FSA did what it needs to do, the Bank of England should at the same time start to unwind the £200 billion of quantitative easing, providing us with a target of how much money and credit it is happy to see in circulation. Unleashing bank lending without a phased withdrawal of the QE would be inflationary.

If the government does not start to cut the deficit the Bank should raise interest rates. The fall in sterling we are witnessing is inflationary. Delaying raising rates will lead to a worse problem later, and to higher rates later. Once again this MPC seems to want to live in denial, and will end up doing too much too late as it has done over the last five years of this monetary crisis. The current Bank rate bears no relationship to the structure of rates being paid by business, or even by the government itself for anything other than very short term money. It is time for a reality check. If the MPC doeds not seek to get back in charge, it will continue to be made irrelevant by the markets who have a very different view of the success of UK policy to that of the government and its MPC.

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23 Comments

  1. waramess
    Posted March 4, 2010 at 9:49 am | Permalink

    Surely this is not a question of enabling the banks to lend it is more the case of a private sector not willing to borrow.

    It is clear that a lot of companies are in the market to borrow in order to survive but, in these dire times credit worthyness becomes paramount.

    Some quite stunning stats I heard recently were that five companies in the UK provide fifty percent of the entire corporation tax revenues and that two companies (both oil majors) provide twenty five percent.

    This is the terrifying state of our economy, left in tatters by successive governments busily meddling, when they would all have done us a great service by keeping well out of the way.

    Stimulating investment is not something that will excite the average politician because it cannot be done instantly, and politicians do like to see results coming through next month, or sooner.

    Nevertheless it must be done sooner or later, with or without the UK finally being relegated to the role of a beggar on the world stage.

    What we do not want is the Mandelson/Darling solution of throwing money at their selected favourites, what we do want are lower corporation taxes and lower levels of regulation.

    The Tories are suggesting that cutting the size of government should be enough to pay down our debt, and all praise to them if they can do it without resorting to higher taxes. However, even more urgently, they need to cut the size of government in order to cut corporate taxes and stimulate investment.

    Then you will see the banks back lending again to a far more healthy economy wth a good and vital need for bank funds.

  2. Brian Tomkinson
    Posted March 4, 2010 at 9:59 am | Permalink

    I don't expect the MPC to take any action. We seem to be mired in a period of inactivity before the election. Following the election no doubt the situation will change dramatically as politicians are forced to face up to the enormity of the debt mountain. Can we please end the pretence that the MPC is independent of government?

    • oldrightie
      Posted March 4, 2010 at 11:55 am | Permalink

      Spot on. Independence is a new Orwellian word for "state control".

  3. Lola
    Posted March 4, 2010 at 10:24 am | Permalink

    You can absolutely forget the FSA. They have failed, spectactularly, and are now engaged on a credibility rebuilding strategy of setting about publicly shooting people that upset them. They are the financial services equivalent of the Stasi. The only way to get the FSA on side is to shut them down and reduce it to a rump. Putting the banking supervision back to the – reformed – Bank of England.

    It was / is the ludicrous FSA rule book that largely got us into this mess in the first place, and I know about its rule book, I run a retail FS business. The FSA rulebook is simply nationalisation by regulation. The FSA is one third of Brown's loony tripartite system of reg-yew-lay-shun. A system designed simply to concetrate knowledge and therefore power in Brown's sticky mitts.

    So when you write to the Chancellor, make sure that you explain just why this whole 'system' is so bloody hopeless.

    Oh and by the way, I am restructuring my business by moving from a partnership to a limited company. The FSA require that I find at least £11,500 to do this. This is money that I could use to create good real wealth creating jobs and take on a trainee. The whole system is totally insane.

    • Stuart Fairney
      Posted March 5, 2010 at 6:41 am | Permalink

      I feel your pain, some years ago, myself and a friend were planning on setting up a commercial property investment vehicle. After spending a week (really) reading the regulations and taking legal advice, we concluded life was too short.

  4. Steve Cox
    Posted March 4, 2010 at 10:35 am | Permalink

    Very well said, John. It's a disgrace the way the country is being trashed to suit Gordon Clown's political shenanigans. I know that economics is usually referred to as the dismal science, but somehow they seem to manage to find a particularly dismal crowd to man the MPC. Given the utter mess they have made of things, in connivance with their political masters, anyone with any sense of honour on the MPC would surely have (resigned by now….they have damaged savers-ed)

  5. alan jutson
    Posted March 4, 2010 at 10:51 am | Permalink

    I guess it will do what Gordon Brown has requested it do.

    • Eotvos
      Posted March 5, 2010 at 5:34 am | Permalink

      Alan, should that be, "…….Gordon Brown instructs it to do."

  6. Derek Emery
    Posted March 4, 2010 at 11:46 am | Permalink

    Labour is like a snob who feels he requires a certain lifestyle, well outside his salary range. A cellar of fine wines, a couple of jaguars, a roller, a big house in the country, and two overseas plus servants and a couple of mistresses are the minimum needed to satisfy his lifestyle. Less than this is not acceptable. He has taken advantage of the low interest rates of the boom to establish his lifestyle but is now having difficulty borrowing yet more money to meet loan repayments. The lenders start to close in on him and want details of how he proposes to pay back the loans. He is loathe to give up the good life but his proposals are not accepted. That's the stage we are at now. We all know this cannot end well but he will live the dream for as long as possible.

  7. Dan H.
    Posted March 4, 2010 at 12:33 pm | Permalink

    JOhn, we both know that the MPC are going to keep interest rates just as they are. The Great and Prudent one has, in his almighty omniscience, decreed that it be so since he has an election to fight and can't be having with anything that might disrupt the Brownian view of reality. So the fantasy interest rates will remain way too low, and most banks will carry on completely ignoring these fantastical figures and charging economically sensible interest rates on loans to business, whilst cunningly giving savers below-inflation returns on saved money.

    For his part, Gordon will carry on running up a poisonously huge deficit until his odious government is finally consigned to the dustbin of history where it belongs. No, the only real choice now for the Tory party is this: do you want a hung parliament, a marginal win or a landslide?

    If you fancy a hung parliament, carry on like you're doing now and let Mr Cameron lose it for you.

    If you fancy a marginal win, take the fight to the Labour Party and explain just how abysmal Gordon's performance is; repeating little things like his incompetent gold sale and so on will help immensely here.

    Finally if you fancy a landslide, all you have to do is turn all populist all of a sudden. Offer a referendum on membership of the European Union (stay in or secede and negotiate a trade deal) and legally bind yourselves to it, and see what the electorate think. The upside is you get a landslide and most likely regain British sovereignty. The downside is your politicians have no more cushy sinecure to retire to.

    • APL
      Posted March 4, 2010 at 4:15 pm | Permalink

      Dan H: "all you have to do is turn all populist all of a sudden."

      But this is what the Tory party has done each and every election since 1997.

      Pull a few 'populist rabbits' out of the hat a couple of weeks before an election. This exposes them to two accusations,

      1. The Tories are just being populist. (not necessarily a bad idea, this is supposed to be a democracy after all).

      2.The Tories don't really mean it and all the new policies will be abandoned immediately the election is over/won. This is the accusuation that does the most damage because it is born out by experience.

      Tories have had thirteen years to establish a platform of (yes) right of centre policies, who cares if the Labour party steal some of them? On those issues the Tories simply move a little further to the right. If Labour want to follow them there, we all win, on core Labour policies Labours core vote won't follow them, and eventually we would have a Tory party anyway.

      The problem has been the Tories party has refused to draw the Labour party onto its ground, it has insisted on squabbling over the 'centre ground' and even been drawn into left of centre policies, Howard with Identity Cards, and now, the latest obscenity the Tory idea that government should be able to direct debit your bank account with what ever they feel you owe to support the ponzi scheme that is National Insurance.

    • Alan Wheatley
      Posted March 5, 2010 at 6:24 pm | Permalink

      Your landslide scenario will not happen because those running the Conservatives Party are Eurofile. This makes no sense, so the only thing I can think of is that this is what the bankrollers want.

  8. Javelin
    Posted March 4, 2010 at 2:27 pm | Permalink

    We've had Stealth Taxes.

    With QE it's now the turn of Stealth Spending.

    Stealth and not Health is the goal for the BofE.

    Stealth can only go on for so long. You can't buck the market but the BoeE is trying to sneak as far as possible under its radar.

    • Mark
      Posted March 5, 2010 at 10:10 pm | Permalink

      I think you are right. We know that the budget deficit is running at say £15-20bn per month. If we don't see the government funding itself to that sort of tune via gilts and treasuries, then we know that they have borrowed it under the table instead. A "secret" loan made to a bank "in trouble" loaned back via a fancy derivative a la Grecque perhaps.

  9. Mark Parker
    Posted March 4, 2010 at 2:40 pm | Permalink

    So you think we should borrow our way out of debt?! Perhaps borrowing will help dig us out of this hole we're in. Sorry but no; the only solution to too much debt is: repayment. That means debt must be made harder to obtain – not easier.

    Our economy is currently configured to benefit from massive public and private deficit expenditure. We have £5 cups of coffee; inflated house prices and rampant taxation. There is no painless solution to this. The air must be let out of the bubble. A cup of coffee should be 50p tops and the average house £50K (ie affordable to the average worker) but getting there will be painful.

    The government can take some of the pain itself by cutting the tax burden. They could slice £100bn off "social protection" by deporting the 3 million most recent immigrants and giving their jobs to unemployed natives. They could probably lose a million public sector workers without any noticeable effect on services delivered: administrators, coordinators, quangocrates and the like.

    Lopping £50 off the TV license would be nice little bonus and I doubt the BBC's output would get any worse; there'd just be less of it.

    And apparently there's $4.5 trillion worth of oil under the Falkland Islands (60bbl @ £75 each) so how about bringing that on stream PDQ and this time don't waste it: pay off the national debt and put the rest into a sovereign wealth fund.

  10. English Pensioner
    Posted March 4, 2010 at 2:47 pm | Permalink

    Unfortunately, whilst I support your viewpoint, it seems that George Osborn, as shadow Chancellor, seems to agree with what the BoE is doing, which is why I have little confidence that the Conservatives are capable of dealing with the situation.

    • Eotvos
      Posted March 5, 2010 at 5:50 am | Permalink

      John, I agree with EP.

      Why do we not hear the topics you raise here being debated by Messrs Cameron and Osborne with the solutions you propose?

      I've lost faith in this duo and most of the Shadow Cabinet.

  11. David Hearnshaw
    Posted March 4, 2010 at 3:04 pm | Permalink

    John – you should be our next Chancellor.
    Savers are being royally screwed in all directions at the moment – the next Conservative government MUST restore the value of prudence and clamp down on profligacy.

  12. Jonathan
    Posted March 4, 2010 at 4:26 pm | Permalink

    So the MPC keep rates at their current fantasy level, savers loose out but surprisingly Brown gets a boost.
    Do these people know anything about the economy or do they just want to keep their comfy jobs? They've already admitted that inflation is rising and that people and businesses aren't getting even close to the "official" rate so they decide in their "wisdom" to hold rates down.
    Bad decision. It looks as though these rates will be held until the election which makes the "independent" Bank of England a joke.

  13. StevenL
    Posted March 4, 2010 at 5:23 pm | Permalink

    On #1 – Isn't Basel 3 requiring that banks hold a lot more capital in cash. Hence the QE generated wall of money deposited at the B of E is here to stay for now?

    Will this lead to banks lobbying regarding the repo rate they want?

  14. Sally C.
    Posted March 4, 2010 at 6:26 pm | Permalink

    Personally , I would like to see some sign from the Bank of England that they recognise the huge responsibility they bear for the mess we are in.

  15. Bazman
    Posted March 4, 2010 at 8:13 pm | Permalink

    No comments on Lord Ashcroft? It's like Soviet Russian news blackout on this site! Oiks like me and their questions ain't going to go away. You all must think the public was born yesterday.

  16. Lindsay McDougall
    Posted March 5, 2010 at 2:46 pm | Permalink

    I'm not convinced that most private sector borrowing and lending rates would be all that different if base rates were to be raised from 0.5% to 3.0%.

    Looking several years ahead, assume that total government debt is back down to acceptable levels, what is the correct annual average borrowing requirement for zero inflation? Average compound real GDP growth between 1979 and 1997 was 2.1%. Between 1997 and 2009 it was 2.1%. Annual UK GDP is running at about £1400 billion (2009 figure, 2009 prices).
    So, if you want fiscal and monetary policy to be aligned, the annual government deficit to aim at is 2.1% of £1400 billion, i.e. £29 billion pa in 2009 prices. In a typical year, if the government prints that much money it will exactly finance the increased volume of goods and services.

    If you really must have 2.0% inflation, the required average annual deficit rises to 4.1% of £1400 billion, i.e. £57 billion. At £178 billion, we are running at more than 3 times that level.

    Granted, it's nowhere near that simple over short time periods, and monetary policy is important in this context, but the amounts calculated above are sensible long term averages for annual government 'borrowing'.

    Just in passing, when did GDP growth average more than 3% pa? (1) Between 1982 and 1987, the hayday of Thatcherism (I have omitted 1988 and 1989 because of the inflationary pressures building then) and (2) Between 1997 and 2000, when Labour stuck to Conservative spending plans. It appears that reducing public expenditure (and taxes) is THE key factor in generating good GDP growth.

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

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