Filling in that Jackson hole

 

              The Bernanke speech on friday was not so much nuanced as non existent. The guts of it came down to the statement that the Fed would have a longer meeting to think it all through again on 20-21 September. The conclusion was:

          “The Committee will continue to assess the economic outlook in the light of incoming information (i.e. do what it is paid to do and always does) and is prepared to employ its tools as appropriate to promote a stronger recovery in a context of price stability”

          Of course. But how? When? What can it do? Which tools might work? Which tools might just create more inflation?

          The Chairman did also have some interesting sideswipes at others involved in economic policy. It was a humble address, underplaying the importance of monetary policy. Mr Bernanke passed the two bad balls of high unemployment and a weak housing market swiftly back the politicians. They needed to fix those things,then we can have a great recovery. You don’t say!

           The media found the most interesting thing about the speech was the implied criticism of the politicians on both sides of the Atalntic. Whilst Mr Bernanke expressed the assurance that Euroland leaders would sort out their own mess, he did not suggest they had already done so or were not in a mess at the moment. 

               He was bolder nearer at home.  He stated baldly for a grand official:  “The negotiations which took place over the summer (about the US debt and deficit) disrupted financisal markets and probably the economy as well”. In a genuflection to his ultimate boss, the President, he said the US could make itself fiscally prudent over the longer term with a suitable deficit plan, but did not need to do so in the short term as long as the intended cuts were clearly set out for the future.

              That’s alright then. Mr Obama can carry on spending until the election. Euroland will get out its magic wand after a long period of keeping  it in hibernation. US policymakers will suddenly fix the broken housing market. The long term unemployed will come streaming back into work as a result of trying  that well know Obama recovery spell one more time.

                      The BBC Today programme kindly invited me on to discuss whether this all means the politicians are to blame after all, and the Central bankers are off the hook. I tried to explain that there is no such thing as an independent central bank in a democracy. The elected officials are ultimately resposnible, they set up and change the system, and they intervene in extreme circumstances or when there is strong pressure for them to do so. I agreed that the lack of political direction on the debt and deficit in the US over the summer had been unhelpful. I confirmed that in Euroland the absence of an economic sovereign with authority and wisdom was causing serious damage. I pointed out that in the UK the promise of easy money  from the Bank and tight fiscal policy from the Treasury has so far been delivered by neither side. We have tight money and large borrowings.

 

 

 

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57 Comments

  1. Duyfken
    Posted August 28, 2011 at 7:05 am | Permalink

    JR, I wonder if you might find time to explain and expose the position of the French and their banks. At Jackson Hole, Mme Lagarde appears to have made bail-out pleas for the beleagured European banks, doubtless with the French economy mainly in mind. Lagarde camouflages her true agenda.

  2. lifelogic
    Posted August 28, 2011 at 7:10 am | Permalink

    Insanity in the EU and the US. In the UK we have tight money (for productive industry) and huge treasury borrowings despite (or rather because of) absurdly high tax rates. Plus all the other kicks in the teeth from cast rubber Cameron, the absurd new regulations he has implemented, the mad green over priced energy and new green religion, Labour quite soon, riots, Osbourne’s mortgaging our children to tip the borrowed proceeds down the PIGIS, HS2 …. black holes and the last vestiges of UK democracy being stolen and given away. All cheered on the BBC at licence fee payers expense.

    Still one can always move somewhere more sensible – if you can still afford the tickets.

    • Bazman
      Posted August 28, 2011 at 9:28 pm | Permalink

      The most sensible place to move to would be Monaco where badly dressed people are put in prison.

      • lifelogic
        Posted August 29, 2011 at 10:24 am | Permalink

        I can’t go there then. Fomula 1 too noisy anyway for me.

        • Bazman
          Posted August 30, 2011 at 9:50 am | Permalink

          You need working on boy.
          If F1 is to noisy for your delicate self. I wonder how long you would last in some of the low paying jobs and the low living standards you constantly advocate for the rest of the population? Same old story.

  3. Public Servant
    Posted August 28, 2011 at 7:42 am | Permalink

    I am finding this blog fascinating and am learning a great deal from it and from some of the debate which it generates. Absolutely correct that there is no such thing as an independent central bank. As lifeslogic will point out, irrespective of the subject under discussion, it is a pity that the BBC, the 6m civil servants with pensions to make Sir Fred Goodwin envious, lefty academics, climate change fundamentalists, unelected Eurocrats, the ECHR, elf n safety and the Guardian continue to bankrupt the country.

    • lifelogic
      Posted August 28, 2011 at 8:46 am | Permalink

      However did you guess?

      • Public Servant
        Posted August 28, 2011 at 11:23 am | Permalink

        Sorry for my earlier sarcasm. I actually enjoy reading your contributions even if I do like the BBC (iplayer is fab by the way) and even though I would be for the chop come the revolution. The issue for me as a public sector worker is not necessarily that there are too many of us but that the state engages in too much. Cut back wholesale on what the state does rather than top slicing each area of spending. It is by no means obvious to me that the state should do anything other than defend itself from aggression and keep the peace internally and provide a bare minimum safety net. That requires a police service, an armed forces and a welfare department (but I stress for a basic safety net). If there is a demand for anything else e.g. transport, healthcare, education then let the entrepeneurs compete to provide to those that can pay for it. In our current setup we cant avoid huge numbers on the public payroll. The only way is for the state to retreat. This may seem like a parody but I am serious. The debate almost always gets sidetracked into one about public sector parasites and levels of taxation. Seriously cut back the activities of the state and both will fall as a consequence. The minimal activity of the state could then be paid for by a flat rate of tax on individuals and probably zero taxation on business activity. Whilst such a retreat will never happen in reality let us honestly accept and debate the real issue which is not how can we do everything with less but what should we do at all.

        • John Moss
          Posted August 28, 2011 at 7:00 pm | Permalink

          What a sound idea. I even have the catch-phrase.

          Less Government, done better!

        • lifelogic
          Posted August 28, 2011 at 9:20 pm | Permalink

          I agree with all that pretty much – but, given the current system of purported “Democracy” the BBC and the other vested interests, how do we get from here to there?

          I to do like much of the BBC output mainly radio 3 and 4 particularly at the moment the 500+ desert island discs pod casts available when I go walking. But even these are not immune the “BBC think” and the dumbing down, increasing politically correct (dishonest) approach, over the years is also very evident in them.

          Just how can it be that almost everyone in the organisation seems to think in the same pro EU, big government, green religion, arty and anti real science way? When the public and most of the intelligent and knowledgeable think the complete opposite on all counts.

          • lifelogic
            Posted August 29, 2011 at 7:38 am | Permalink

            Also of course, the state sector is hugely inconvenienced by health and safety, employment, human rights and other regulations just as the private sectors is. Also by absurd systems put in place by law such as the Tax, benefit and NI mad complexity.

        • Bazman
          Posted August 28, 2011 at 9:32 pm | Permalink

          What about the people who cannot pay? They should just put up and shut up? See how far that one would go.

        • lifelogic
          Posted August 28, 2011 at 9:56 pm | Permalink

          I agree BBC I-player is very good. You can watch, Newsnight, for example in about 10 minutes flat – by cutting out all the silly BBC pre-framing of the debate and all silly padding and the topics of no interest to anyone and some of the silly lefty, feminist, presenters with chips on their shoulders.

  4. Denis Cooper
    Posted August 28, 2011 at 7:50 am | Permalink

    But even if there was an economic sovereign in euroland it might have authority but it would not necessarily have wisdom; if the political elites of the component countries had been wise in the past they would not have talked each other into embarking on such a dangerous experiment in the first place, knowingly disregarding all the well-founded warnings; and if they were wise now they would not be desperately searching for every possible way, legal and illegal, to continue the failed experiment but instead they would be working out how to terminate it with minimum economic and financial fallout.

  5. Javelin
    Posted August 28, 2011 at 7:54 am | Permalink

    If you dont mind I’ll repeat this comment. All the traders, including German, French and US jumped on the key This is the paragraph below.

    What does it mean?
    Why on earth would he include it?
    Why would he talk so ambiguously?

    The unanimous view was that it was the US wanted the Eurozone to get sorted out.

    http://www.federalreserve.gov/newsevents/speech/bernanke20110826a.htm

    “I have confidence that our European colleagues fully appreciate what is at stake in the difficult issues they are now confronting and that, over time, they will take all necessary and appropriate steps to address those issues effectively and comprehensively. ”

    This is my interpretation

    “I have confidence that our European colleagues fully appreciate what is at stake [THE EURO] in the difficult issues they are now confronting [BREAK UP OF THE EURO] and that, over time [IN A FEW MONTHS], they will take all necessary and appropriate steps [CREATION OF NEW CURRENCIES] to address those issues effectively [MULTI SPEED EURO INTEREST RATES] and comprehensively [FINALLY SORT OUT THE EURO]. “

    • APL
      Posted August 28, 2011 at 9:12 am | Permalink

      javelin: “This is my interpretation”

      Does this mean that the US is at the end of its ability to bail European banks? It has been doing this via various mechanisms over the last three years – some might say disregarding the US constitution in the process.

      • Javelin
        Posted August 28, 2011 at 2:11 pm | Permalink

        It might mean pressure to create a Eurobond or eject The PIGS or Germany.

        I think this is by far and away the most important part of the speech. It is basically a message that the US will not support any more bailouts of Eurozone problems unless the Euro leaders sort their mess out.

      • Stuart Fairney
        Posted August 28, 2011 at 5:00 pm | Permalink

        They have been ignoring the constitution since FDR!

    • StevenL
      Posted August 28, 2011 at 3:02 pm | Permalink

      Or it could be:

      “I have confidence that our European colleagues fully appreciate what is at stake [THE WORLD ECONOMY] in the difficult issues they are now confronting [THE NEED TO PRINT A TRILLION OR TWO EUROS] and that, over time [IN A FEW MONTHS], they will take all necessary and appropriate steps [STICK TWO FINGERS UP AT GERMAN VOTERS AND GET PRINTING] to address those issues effectively [BAIL OUT THE BOND HOLDERS] and comprehensively [START AGREEING WITH ME ON THIS]. “

      • zorro
        Posted August 29, 2011 at 10:24 pm | Permalink

        Agreed and along the lines I posted on a recent blog. People need to think WHY the EU was created (and for whose benefit in the long term) and who were the brains behind ‘The European Community’ in 1940 (Walther Funk) and later the EU’s predecessor in the 1940/50’s…..

        zorro

  6. Public Servant
    Posted August 28, 2011 at 8:00 am | Permalink

    Not sure whether its true but I read just now that Spain, Portugal, Greece and Ireland have a number of things in common. As well as all having to a greater or lesser extent a sovereign debt crisis, they have the lowest levels of tax take in the EU and the smallest public sectors in the EU. This doesnt quite fit the narrative does it? It might not be true of course. May just be BBC / Guardian misinformation.

    Reply: they are amongst the poorest countries in the EU so they also have small private sectors. Relatively they have bloated public sectors for their levels of income

    • APL
      Posted August 28, 2011 at 9:07 am | Permalink

      Public Servant: ” .. lowest levels of tax take in the EU ..”

      Ireland has relativity low personal and corporate taxation as an instrument of policy to attract businesses. More businesses equals more taxation, more businesses equals more employment which in turn equals even more taxation.

      The Irish governments error was to selectively encourage FIRE corporates. As a result and like the UK, their economy is top heavy in financials and light in industrial activity.

      When the turmoil broke in the FIRE economy there was nothing much else to take up the slack, so where in the past the Irish government could spend lots because it had high income, now it is stuck with high spending and sudden and catastrophic fall in tax revenue.

    • norman
      Posted August 28, 2011 at 9:19 am | Permalink

      Yep, pretty much propaganda. Bear in mind the debts these countries have also ran up so we’re not talking about something that has suddenly happened or been sprung on these countries due to the credit crunch but long term financial imbalances.

      In fact, Portugal’s seeds were sown at least a decade ago and the Euro masked the problem initially but then it all blew up when the Euro blew up. Ireland looked like it was going strong (Tiger economy) again for the same reasons, the Euro helped create the illusion that the era of boom & bust was over and from here on in it was boom all the way.

      From wikipedia, tax take as a % of GDP, government spending as a % of GDP:

      Spain: 33.9%, 41.1%
      Portugal: 37.7%, 46.1%
      Greece: 35.1%, 46.8%
      Ireland: 30.8%, 42%

      And for anyone who is interested.

      UK: 38.9%, 47.3%
      US: 26.9%, 38.9%
      China: 18.0%, 20.8%

      All these countries, with the exception of China, are living wildly beyond their means with massive public sectors (compared to the overall size of the economy) .

      It really says something when our tax rate is over twice that of Communist China and our public sector almost 2.5 times.

      Info taken from http://en.wikipedia.org/wiki/Government_spending#Government_spending_as_a_percentage_of_GDP

      You can argue wikipedia isn’t a definitive source but I’d be surprised if these figures weren’t as close as you’re going to get.

      Reply: Indeed- that is the problem

      • alan jutson
        Posted August 28, 2011 at 11:16 am | Permalink

        Norman

        Many thanks

        The most simple comparison I have seen (if accurate) which shows exactly why we have a huge debt problem, along with many others.

        Government has for years been spending wildly beyond its income, and a huge and growing proportion of the countries GDP.

        As you say, the government are presently spending more of GDP than a Communist state. If ever there was a case which shows how far we are out of reality whilst supposidly running a democacy, this is it.

  7. APL
    Posted August 28, 2011 at 8:54 am | Permalink

    JR: “prepared to employ its tools as appropriate to promote a stronger recovery in a context of price stability”

    ‘tools’ Bernanke is one, so at least he is being employed. Instead of promoting a recovery you only need to look at the US government statistics ( as revised always look at the revised statistics, since the current stats. are issued as an instrument of news management) to see he has been counterproductive and actually destructive of economic activity.

    How can he claim price stability when his policies of exporting inflation have caused such disruption in the middle east and increased costs for everyone else?

    stronger recovery ” Where do politicians get this rubbish. What recovery? We have banks that are swallowing whole the so called stimulus, yet still rumors are flying of bank instability and potential failure, both in Europe and the US.

    For propaganda to be effective it must build on a grain of truth.

    • Gary
      Posted August 28, 2011 at 1:54 pm | Permalink

      Managing the economy, an oxymoron. Managing prices, is another. When are these bureaucrats going to understand that the Problem of Economic Calculation can never be solved outside of the market ? But don’t let that stop them, they will plough on regardless, until they have managed us into poverty.

      • APL
        Posted August 28, 2011 at 5:20 pm | Permalink

        Gary: “Problem of Economic Calculation can never be solved outside of the market ?”

        The problem for these types is that the ‘market’ doesn’t deliver what they want. Thus they characterize that failure to deliver their desired result as ‘market failure’.

        That in turn requires more official oversight, more regulation etc. etc, and before you know it, you are where we are now. In dire straits!

        It’s not because the market failed, it’s because the market wasn’t allowed to work.

  8. Tedgo
    Posted August 28, 2011 at 9:01 am | Permalink

    I think the likes of Mr Bernanke know that there is very little they can do to resolve the situation. Likewise the political leaders haven’t a clue as to the way out of the mess, most remain on holiday exercising good old masterly inactivity.

    I think the markets have been slightly calmer in the last few days, market players probably realise they are not going to panic the politicians into action and volatile markets simply cost them money.

    • backofanenvelope
      Posted August 28, 2011 at 11:55 am | Permalink

      Personally, I think our political leaders know exactly how to get out of this mess. However, knowing what to do and doing it is the problem.

    • APL
      Posted August 28, 2011 at 1:30 pm | Permalink

      Tedgo: “I think the likes of Mr Bernanke know that there is very little they can do .. ”

      If only that were true. Bernanke is the ‘student of the Great depression’, the only thing he seems to have learned from his studies is how to replicate the exact conditions to recreate the second great depression.

      The real problem for America, they have allowed government to become the retirement playground of former bankers. Their attitude has been to save their former employees regardless of the consequences.

      As each measure fails, the sticking plaster has become more and more outrageous. All to cover up acts perpetrated by people who should be in goal now.

  9. Geoff not Hoon
    Posted August 28, 2011 at 9:48 am | Permalink

    Mr.Redwood, Warren Buffet said recently that the US has one million homes too many given the state of the market. If he could he would get rid of that number and the market would be better in balance to go forward. Surprise surprise on Bloomberg on Friday 26th the biggest gains on the Dow were house builders who to a one are experiencing new orders like not seen for 4 years. One has to ask where is the money coming from?

  10. Steve Cox
    Posted August 28, 2011 at 10:03 am | Permalink

    Ben Bernanke, Mervyn King and JC Trichet were all in charge of their respective central banks before and during the crisis, and as has been pointed out on this blog many times in the last their failure to foresee or predict the long-term consequences of their misguided monetary policy was at the root of the credit bubble and the resulting implosion of the western financial system. What never ceases to amaze me is that these same three people are STILL in their jobs as if they are totally blameless. In what other profession can one be so consistently wrong, fail to meet your stated targets month after endless month, produce forecasts that are treated as a joke just a few months later, and yet still retain your highly paid job? The simple fact is that while these three bunglers, who helped to start all of our current problems, are simply not the people to solve the mess that they created. It’s like asking an arsonist who has just set your home on fire if he’d please mind helping to put it out? Get rid of Bernanke, King and Trichet and put somebody in charge of monetary policy who actually knows what they are doing, and who is not just a cosseted academic.

    • Geoff not Hoons
      Posted August 28, 2011 at 11:32 am | Permalink

      Mr.Cox, In the case of King I believe he does know what he is doing even though millions are or will suffer as a result of his actions. Two years of 0.5% Bank rate achieves 1)improving balance sheets for his pals banks 2)keeps the pound weak so any industry there is left here can be told he is helping the UK’s export drive. 3) the weak pound drives up import prices so we eventually buy less. 4)those that saved for the proverbial rainy day are being penalised by negative real savings rates. 5)Were rates to rise the housing market would fall as it did in the US with many many repossessions wiping out those banks/building societies with big property books which of course King cant allow.
      John Maynard Keynes said “by a continuing process of inflation, government (King) can confiscate, secretly and unobserved, an important part of the wealth of their citizens”. Keynes must have been clairvoyant to see Britain 2011.

    • Public Servant
      Posted August 28, 2011 at 11:34 am | Permalink

      The only other job that immediately springs to mind is government minister.

    • StevenL
      Posted August 28, 2011 at 3:14 pm | Permalink

      In what other profession can one be so consistently wrong, fail to meet your stated targets month after endless month, produce forecasts that are treated as a joke just a few months later, and yet still retain your highly paid job?

      Local government.

  11. Edward
    Posted August 28, 2011 at 10:37 am | Permalink

    John,

    Methinks you downplay in this blog post the brilliance you displayed in your responses on the BBC Today program. It was clear, concise and got to the point.

    Edward

    • Duyfken
      Posted August 28, 2011 at 11:10 am | Permalink

      Seconded.

  12. Caterpillar
    Posted August 28, 2011 at 10:49 am | Permalink

    I like Allan Sloan’s article in Septenber 19th Forune ‘Relief From Economic Turmoil’, in which he presented ways forward from which both TeaPartyRepublicans and left-wing Democratics could gain political capital with their core voters and yet progress the US situation. The optimism of a solution to the US problems is interesting in itself, but this is offset by the following quotes;

    “The root of our current problem is that there are no grownups in positions of serious power in Washington. I’ve never felt this way before.”
    “The one saving grace we have is that the rest of the world seems to be run by midgets too.”
    “Yes, rationality is out of style, and fanatisim is the new normal. But do we really want a national life like the one we’ve had the past few years? All shrieking and no thinking?

    But whether I look to the US, Europe or UK, or to politicans or central bankers it does appear that party-politics and favourite academic theories take precedence over rationality and grownup behaviour.

  13. Acorn
    Posted August 28, 2011 at 11:03 am | Permalink

    What’s going on? Greece is bust but it’s central bank is buying Gold. Are they using bail-out money to do this? The Germans are suggesting that Gold be used as collateral against bail-outs! The Greeks want their gold back that the Germans stole from them in WW2!

    Capital is flying out of the Eurozone into Gold; Dollars and other States currency, where there is a chance you might get it back in three months time. Large Dollar deposits now have negative interest rates at the short end!

    Is there a secret plan to move the planet back to a Gold standard? The world’s local bank (with the biggest vaults in the business), is rumoured to be telling its coin and small bar Gold customers to come and collect their deposits from its vaults, to make space for the 100 and 400 ounce bar clients (Sovereigns / Institutions) to move in.

    Is this the end of fiat currencies er… or just the Euro? What you say JR?

    Reply: the high and rising gold price shows many are buying it for speculative or other reasons. I daresay some Central Banks are buying it, but they are usually too canny to tell us in advance as they do nto wish to move the price against themselves further – unlike Mr Brown who pre-announced his sales.I do not expect a return to the gold standard any time soon.

  14. Martin
    Posted August 28, 2011 at 11:39 am | Permalink

    Reports I’ve seen of various speaches recently don’t inspire.

    Defacto devaluation seems to be the favoured approach and isn’t working as everyone (almost) is at it. All economic levers are in extreme setting positions and the best we get is “don’t panic”.

    There are three things we all need to do

    1) Get interest rates to inflation +2%. This will get free capital back into our banks and economy.

    2) Public spending – needs short term cuts and long term wages/pensions linked to the private sector equivalents.

    3) Regulators and risk assessors should be working in the boom times. This might have stopped the housing market nonesense that has plagues the UK since 1980.

  15. Tedgo
    Posted August 28, 2011 at 12:17 pm | Permalink

    Slightly off topic, but I have just been interrogating my Partner as to why she received a £535 bonus last month (MOD grade C2). Apparently everyone in the MOD, except those on restoring efficiency, has had one.

  16. alexmews
    Posted August 28, 2011 at 12:23 pm | Permalink

    While your point about tight money and high tax for the UK is no doubt true – at least as it pertains to the UK – the market so far seems to look at the UK as comparatively safe. Right?

    The irony is – and I am no expert here – the UK gov’t can borrow more cheaply than at any time in recent history. I am not suggesting that it should. Just that so far the market seem to be buying George Osbourne’s plan. At least in comparison with others on offer.

    Reply: that’s good news – I just think the markets are buying the plan, so the government now needs to deliver it. In the end the numbers are what matter, not the spin.

  17. Gary
    Posted August 28, 2011 at 12:28 pm | Permalink

    Bernanke spent his adult life studying the Great Depression. He was convinced that insufficient liquidity made the depression worse. He was born for this, we were told. Now that he has hosed liquidity everywhere, and we are headed back into recession, he must be terrified. What he has not worked out yet is that you can’t fight insolvency with liquidity. Much to our cost.

  18. Damien
    Posted August 28, 2011 at 1:16 pm | Permalink

    Christine Lagarde has called for recapitalisation of the banks only weeks after the vast majority were given flying marks under the bank stress tests. She is suggesting seeking private resources first, but using public funds if necessary(no surprise there!). This throws up a the specter that indeed our banks are under-declaring their toxic debts. The markets have been heavily discounting the banks and this looks to worsen in the coming days and weeks.

    Ireland was first off the blocks to secure a first and second bailout and to set up a national asset management agency http://www.nama.ie/Enforcements.php
    NAMA CEO has said in his report last month there will be “no fire sales but no speculative hoarding either”. Contrast that to the UK where there seem to have been few sales but rather speculative hoarding (including government shareholdings in our banks).Nama have secured approved sales of e3.9bn in the past year. The “properties enforced” list is described in some detail here http://www.guardian.co.uk/business/ireland-business-blog-with-lisa-ocarroll/2011/jul/29/ireland-property-crash-nama-list

    If I had crippling debt I would not speculate on property and shares but rather dispose of those assets that can be sold at the market price. The coalition is now looking at a paper loss of £70 billion on its holdings in our nationalised banks. Meanwhile the Irish are showing that disposals can be made even in the UK capital. Which body have the coalition formed for the disposal of assets?

    My impression is that the new intake of (post expenses scandal) politicians may be insulated from currency devaluation, inflation, property depreciation and recent falls in share values. This however does not account for the perceived lack of engagement by the remainder of the wealthier MP’s (present company excluded). My guess is that the latter will be returning from their summer recess 25-40% poorer in the value of their assets held. Will this galvanise them when they realise there is nowhere to hide and we are all in this together?

  19. Ross
    Posted August 28, 2011 at 2:16 pm | Permalink

    I think that there is a lack of political leadership in the USA, – as you’ve described and in the the Eurozone – do they want to go for a political marriage or a partial abandonment ? – and there appears to be a lack of political leadership unfortunately here in the UK, with our increased spending and low growth, high taxes.

    Maybe what will happen is that the UK’s growth will continue to disappoint, there will be little in the way of deficit reduction, taxes will stay high as the Lib Dems continue to influence this policy.

    Then at some point the markets decide that they won’t lend to the UK at current rates – we’ve got a problem then – higher borrowing rates, more borrowing, stalling growth, high taxes maintained.

    At this point the government are forced to make the sort of reductions that they should have been doing all along – the economy will probably recover – but the government will not receive the credit for it.

    If Mr Cameron would really think, or explain to us – where is this rising tide of growth, that his strategy need, going to come from? If it doesn’t what’s the back up?

  20. Thomas Ec
    Posted August 28, 2011 at 2:46 pm | Permalink

    I think, at the moment, a lot of talk seems to be about moving the deck chairs on the titanic in order to hear the band better.

    Maybe it is because it is not on T.V. yet, but anyone following the European mess knows that we are actually in a more dangerous state economically than any time in the lat fifty years.

    Look, banks in Ireland, Portugal, Greece and Italy are now effectively in a credit crunch. They can’t borrow on the market. Greek banks have been experiencing a slow run for the last year, where 20% of deposits have fled.

    Sooner or later, this is going to blow up.

    Why is the government on holiday? Surely they realize we are at a knife edge?

    At this stage, even if the UK were to eliminate the deficit tomorrow, the chances are foreign crises that is coming will bankrupt RBS, Barclays, and Santander.

    Can we bail out RBS? It is a company larger than the entire UK economy.

    So, no.

    • APL
      Posted August 28, 2011 at 5:29 pm | Permalink

      Thomas Ec: “Can we bail out RBS?”

      1. I thought the English government already had bailed out this Scottish bank.

      2. Yes, taking the bank onto the UK sovereign balance sheet was reckless. Given the fellow who arranged it are you at all surprised?

      Likely, it was just a last minute tactic to get past the last election.

      • Thomas Ec
        Posted August 28, 2011 at 7:58 pm | Permalink

        I wasn’t talking about what happened under the last government, APL, I am talking about what looks like happening right now under this government.

        Sovereign debt crises always morph into Banking Crises, since (a) banks are required to hold large amounts of their money in bonds and (b) in uncertain times, depositors rely on the ability of governments to guarantee their loans. In a sovereign debt crises this in not a reliable guarantee.

        If the european debt crises really explodes, then almost every UK bank will be insolvent again over night.

        At that point, what is the plan B?

        • APL
          Posted August 30, 2011 at 12:44 pm | Permalink

          Thomas Ec: “At that point, what is the plan B?”

          Mutuals? Those things the Tory party used to say needed access to the capital markets and should demutualize.

          Whoops!

  21. John Moss
    Posted August 28, 2011 at 7:04 pm | Permalink

    I believe the western economies have one further card to play to save themselves. Free trade.

    Counter-intuitive it may be, but scrapping CAP in the EU and farm subsidies in the USA, together with a removal of import tariffs and other trade barriers will allow Africa and Asia to flourish, opening up opportunities for western businesses and investors. Their re-invigorated profits can then be taxed to help ba;ace the books.

    Of course, we also need to reduce the reach of the state generally and keep reducing public spending for a generation or two, lowering taxes as we go and so regaining true prosperity, but growing the world economy will benefit everybody and help create more stability in the countries to which we currently give billions in aid.

    • Matt
      Posted August 29, 2011 at 12:55 am | Permalink

      Agree, abolish farm subsidies investment will, through time, reach Africa. Better than aid. Better for the taxpayer, consumer and the third world.

  22. waramess
    Posted August 28, 2011 at 7:08 pm | Permalink

    Now that it is clear none of the Keynesian nonsense is working, Bernanke wants to take a back seat and pretend that he has been waiting for the politicians to do something.

    Lagarde on the other hand misses the point altogether as she is calling on the banks to raise more cash.

    The simplicity of it all is lost on these deep thinkers; if the banks have a material amount of the funds available to them sunk in unmarketable assets, which they do, to a sum equal to a high percentage of their respective countries GDP, then the answer is not to go and raise more cash but to fire sale some of the assets, either voluntarily or forcefully through the liquidator.

    Raising more cash is no more than adding petrol to an already out of control fire.

    Bernanke on the other hand is just a busted flush; he has no idea what is going on and can’t understand why everything he does has failed to deliver as he had expected.

    We, and Ron Paul, on the other hand, understand exactly why it has not worked………..

  23. sm
    Posted August 28, 2011 at 9:26 pm | Permalink

    Lagarde urges banks to recapitalize – why not just stop banks making distributions or increasing pay until they have met the target you wish. Perhaps inaction has left them little time and the fence is now painful.

    Our turn is coming so and we will be found wanting.

    Im bought on the positive money,nef , university of southampton proposal for full reserve banking.

    I would suggest setting up New banks , publicly full funded (debt free financed ) national clean banks with tight remits (e.g. sme’s financing, a housing bank to buy discounted and distressed properties and rent them out at market rates which should fall also because of discounted purchase).

    Then sell them on into the private sector and or allow pension funds, supermarkets,telco’s to setup or fund narrow full reserve banks all with access to the banking system.

    More competition in banking. More funds to sound business. This will force the crunched existing banks to compete or shrink- mitigating the cash-crunch effect.

    As this money is injected directly into the economy via new banks and also direct spending activity may start to rise.

    Interest rates should rise slowly in lockstep to squeeze out the mal-investment and align the economy on sound money. (As the money supply and its use determines inflation)

    I dont think we have started Keynsian infrastructure builds but we could and should to avoid stagnation/stagflation where cash just sits in banks. This is better than paying skilled labour to be idle.

    King has basically said monetary policy is at its limit in the current system.

    Other than borrow long and low, inflate the debt away and then deflate with high interest rates, im not sure any would survive financially but the mega banks probably would (so is that the plan). Would that be legal? not that it seems to make any difference in finance these days.

  24. Mark
    Posted August 29, 2011 at 11:23 am | Permalink

    A weak housing market is simply a symptom that banks have failed to sort out their balance sheets. Only when the stock of bad loans and loss making derivative positions falls to levels consistent with “normal business”, and when house prices have clearly overshot to the down side, will there be confidence among house buyers and bankers alike: there may then be a bounce in the market as both take advantage of oversold conditions. The bounce then needs to run out of steam before it becomes the next property bubble.

    It is of course possible to try to ignite the housing market before it has properly corrected if enough people can be persuaded to put money into housing rather than other assets: for example a rapidly falling stock market might encourage asset switching, exacerbating the stock falls. Such bounces are not soundly based and merely serve to trap buyers into losing the real value of their wealth by overpaying for housing.

    Someone who bought a house for £100,000 who saw its value reach £300,000 at the peak of the boom only loses paper profit when prices retrace. Someone who buys for £250,000 and finds the price falls to £150,000 loses real money that is not then available to invest in a pension. That loss will probably leave the economy, since mortgage borrowing has depended on international funding rather than domestic deposits since 2000.

    It is to be noted that the UK has much, much further to go before its housing market will have retraced fully from its bubble highs: only in Ireland where prices have halved in sympathy in both Eire and Northern Ireland are prices perhaps close to a bottom.

  25. Conrad Jones (Cheam)
    Posted August 30, 2011 at 1:53 pm | Permalink

    “I tried to explain that there is no such thing as an independent central bank in a democracy.”

    I think you are implying that the Central Banks are influenced by the democratically elected Politicians?

    In the U.S, the Federal Reserve is truely independent from the control of congress.
    In fact, it’s difficult to say what policy it is actually implimenting. It is a PRIVATELY owend company. This institution, which has doubled the number of US Dollars around the World, is controlled by a few shareholders in New York City. The companies that own these shares also have shareholders who – allegedly; are based within the Merchant Banking community in the City of London.

    It seems plausible as why would a democratically controlled Central Bank choose to Bail Out Banks and to hell with everone else. The Bail Out policy allowed Banks to carry on as before – paying out large bonuses while employment and the Housing Market crashed.

    Ben Bernanke is affectively operating as a dictator under the direct control of his shareholders.

    “Mr Bernanke passed the two bad balls of high unemployment and a weak housing market swiftly back the politicians.” – of course it’s those democratically elected people who are at fault.

    Allowing Banks to fraudulantly create sub-prime mortgages in predatory lending in a deregulated Banking System which Ben Bernake and Alan Greenspan actively encourgaed by fighting any signs – by Politicians; to regulate derivatives such as Credit Default Swaps. Actively providing “Moral Hazzard” to encourage risky investments with peoples deposit money obviously – to Ben Bernanke; had nothing to do with the Financial Crisis. Alan Greenspan; using 9/11 to drop interest rates to near zero to encourage a false boom and fuel the bubble of 2008, obviously had nothing to do with the Financial Crisis either.

    The fact that Standard & Poors, Fitch and Moodys are paid by the very same Investment Houses that they are expected to “Rate” – which led them to rate AIG as triple AAA prior to it going bust. Same as Icelands Banks – which were AA+ prior to their collapse. It’s hard to call your employer’s investment “Junk” then expect them to pay you afterwards.

    The Economics Academics who sold their “Expertise” to people in the Banking Community accused of Fraud, and spoke on their behalf in a Court of Law to help keep thses fraudsters out of Jail.

    Damn right Central Banks aren’t independent.

    Reply: The Fed has a twin duty to promote growth and keep prices down. It works closely with the Administration of the day, recognising that monetary policy is only one part of general economic policy which affects the outcomes. The Fed, and the Bank of England, are public bodies under the ultimate control of the elected bodies which settle their foundign statutes and instructions. I do not accept your conspiracy theory about private shareholders and banking interests.

    • Conrad Jones (Cheam)
      Posted August 30, 2011 at 5:06 pm | Permalink

      Legal status of regional Federal Reserve Banks:

      “”The Reserve Banks are not federal instrumentalities for purposes of the FTCA [the Federal Tort Claims Act], but are independent, privately owned and locally controlled corporations.” The opinion went on to say, however, that: “The Reserve Banks have properly been held to be federal instrumentalities for SOME purposes.” Another relevant decision is Scott v. Federal Reserve Bank of Kansas City,[75] in which the distinction is made between Federal Reserve Banks, which are federally-created instrumentalities, and the Board of Governors, which is a federal agency.”

      http://en.wikipedia.org/wiki/Federal_Reserve_System
      I am not saying that the FED is a Privately Owned Profit making system in itself. You just have to look at the History of the Dollar since it’s inception. It is shrouded in secrecy,; it’s monetary policy and who it gives guarantees too and which Foreign Central Banks it deals with and why, and not open for scrutiny. It’s Actions benefit the Private Banks who hold Stocks in it’s Regional “Banks”. Those who hold stocks benefit hugely as they are supplied with virtually free bail out money – paid for through Inflation.

      The Dollar is worth just a fex cents of it’s 1913 Value. Financial Crisis have not been reduced, they’ve got worse since it’s inception.

      The Free Market will take over eventually, and when it does ; it won’t have anything to do with monopoly money that institutions like the FED, debase at will. The pound is also sinking fast – thanks to the inflationary skills of our own high street banks, and the privelege bestowed on them by Politicians (hidden in Fractional Reserve Banking practices) who also seem to benefit from lucrative employment after leaving office (mainly directed at Labour Politicians who I happen to personally dislike immensely).

      I noted that you did not refute my claims that Federal Reserve Chairman were actively involved in deregulating the Banking System (now and in the past) – or do you think that was a good idea?

      Perhaps there is no conspiracy – that would be even more worrying as it would suggest that these people haven’t a clue what they are doing. But the evidence points to a heavily advantaged Banking Community also helped by an ignorant public who are apathetic about the complexities of monetary systems and do not see how it affects them.

      Reply: I have written at length on the regulatory mistakes made on both sides of the Atlantic in the last decade.

      • Conrad Jones (Cheam)
        Posted August 31, 2011 at 9:46 am | Permalink

        Mr Redwood,

        You have called for deregulation in Businesses and also in Mortgages.

        This is a difficult one as those who have encouraged deregulation haved been criticised. I believe that deregulation was dangerous for tax payers as they would have to pay the bail out costs of Banks that got into trouble. In this context, Regulation was essential.

        I agree with your policy of deregulation if this is balanced with no tax payer support for failed institutions. That is regulation by the free market – and you are correct; we would have saved on the regulation costs.

        I must admit that I have not found any supporting evidence that you proposed deregulation, qualifying this with no Tax payer bail outs if Banks mismanaged their books. You may have said it but I have not found any proof.

        Thank you for your reply.

        Reply: I am fed up with this silly Labour spin. I pointed out that the regulation of the process of granting mortgages which Labour introduced was expensive and did not work – as results showed. We had a big mortgage crash after they introduced it! I also said we needed tougher cash and capital regulaiton of banks and mortgage banks, which would have prevented the crash.

  • 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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