Yesterday’s papers were briefed to tell us we can expect £100 billion of extra money printing in QEII. On top some of this new money will be lent directly by the government to small and medium sized enterprises. We are promised adherence to the deficit reduction programme as the prudent offset to the monetary adventurism.
I would suggest this package has been flown as a kite which might not make it to formal launch. First, the deficit reduction. Does it mean they will find ways to reduce spending below current plans, given the likely shortfall in tax revenues as growth slows? Will sacred cows like overseas aid and HS2 at last come up for review and possible deferral? Will they stop replacing civil servants who retire or leave the service? Will they remove some more quangos? Or do they intend to use the “fiscal stabilisers”, which in effect means borrowing more and a less tight fiscal stance? I suspect they mean the latter. They should recognise this means less scope for monetary experiment, as bond markets will be getting more nervous about the amount of debt the UK continues to build up.
I am also worried about the idea of a new state owned bank. Who would run this? Why should we trust them to make good judgements about who to lend to and what security to take? How can a new state bank avoid lending too much to the wrong people, damaging commercial banks it competes with, or lending too little because it is understandably cautious with taxpayers’ money? The bank would need great wisdom to get the balance right, and to avoid more taxpayer financed banking losses of the kind we are used to from RBS.
My preferred route to stimulate the private sector without adding to the burdens of the state sector remains to finance new banking activity in the private sector. The government should be prepared to stand up to the existing management of RBS and tell them to create three new banks out of their UK assets, and sell these on , raising more private capital for them at the same time. That way we get banking competition, properly financed new banks, and some capacity to lend subject to a market test.
A new state bank leaves the risks with the public sector, does not strengthen fair competition in a guaranteed way, and makes a loss of market confidence in the UK state less unlikely. If we want to live in a free society we have to find solutions to our banking problems which give the state a smaller role, not a bigger.If we wish to get state finances into order, an orderly disposal of banking risk is an important part of that task.
Gordon Brown’s effective nationalisation of RBS was a disaster. It is still there , on the state’s books, losing money, paying large sums to its senior people and not lending enough. The government should tackle that, rather than trying to by pass it with a new state bank spending newly printed money. We need some market discipline, and hard earned and taxed cash committed to new banks, not artificial money created by fiat at the Bank of England.
Sterling has been falling in anticiaption of more QE. Expect more inflation to result.
September 25, 2011
Either you have to get a top position with this coalition or this coalition should pack up. I think I’ve heard all the necessary rational proposals to deal with the debt crisis on these pages, and the coalition consistently does otherwise. Osborne has to decide if he wants to a achieve a state share of GDP below 40%, and decide if it’s possible while collaborating with Vince et al. Leaving the country with 47_50% of GDP in the hands of Government would be a terrible legacy for a conservative-led government.
September 25, 2011
“…conservative led government.”
I sometimes wonder who is leading the coalition.
On the use of the word “conservative”, I know it’s difficult to break the association between conservative and Tory in ones mind, but we need to judge them by their actions, and their actions classify them as something other than conservative.
September 25, 2011
Expect more inflation to result, as you say, but do not worry this will be due to “international factors” and rises in energy and commodity prices therefore beyond Osbourne’s control!
If they just sort out Lloyds and RBS/Natwest and stop them clawing back funding and pushing away good customers, as they are doing relentlessly, on to the other banks it would be a start. Property development lending is almost unobtainable and long term investment lending hard to obtain.
Cameron this morning talked about the low 2% interest rates – well perhaps for wasting on HS2 current spending/waste or other pointless bloated government schemes. But for business long term borrowing it is more likely to be nearer to 10% with fees and margins and not easy to find at all even with very good security available.
September 25, 2011
I reed in the telegraph that we are likely to have to help Greece again with yet more rescues – will we be assured we will make a “profit” on these too I wonder?
Also BAe Systems, poised to cut 3,000 jobs probably mainly in Warton, Lancashire.
Perhaps we need to get that the Lancashire gas field going fairly quickly. Mr Hunhne could announce perhaps a big U turn back to a sensible energy policy based on science, engineering and economic reality and away from the feed in tariff funded, energy house bling religion.
Just how much energy has Huhne’s windmill given out so far could he tell us the figures please so as to deter others from this nonsense?
September 25, 2011
QE 2, it quite simply beggers belief.
The savers and those on a fixed income are screwed yet again.
More inflation.
More devaluation of sterling.
A new state bank !
Do we not have enough taxpayers money in Banks already ?
RBS is in effect under Complete State control already with the huge majority share holding owned by the taxpayer.
If you want to stimulate the economy (attempting to get people to spend money) then raise the personal tax allowance to £15,000, allow people to keep more of their earnings, and they may just spend some of it, it also gives more encouragement for those who work. Then cut government expenditure to pay for it.
If the government wants to encourage people to be responsible and prudent, then offer them a real inflation proofed savings scheme. Not withdraw them !
Once again we have all those people who have attempted to do the right thing being undermined yet again with government interference/manipulation.
Surely one of he first duties of government is to uphold a sound money system, that and defence of the County, I would have thought were the first principles of honest government, to do anything else is surely treasonable.
More and more the focus should be on waste, how best to save and cut spending, but more and more as time goes by, it seems that the government is either impotent to act or chooses to ignor profligate and uneccessary expenditure.
It would appear that politicians (JR and one or two others excepted) simply cannot see the wood for the trees, and yet again want to kick the can down the road, rather than tackle the problems head on.
The markets will eventually take their toll, and then the government will really be out of control and fire fighting (without the £500,000,000 wasted on control centres to help)
Simply depressing.
September 25, 2011
“Surely one of he first duties of government is to uphold a sound money system”
No, there is a whiff of real estate price weakness in the air, and their first duty seems to be to prop up that sector and the banks which have liabilities in that direction. There is clearly something in the system, be it run by Labour or Conservative, that is scared to death of a property crash necessitating slicing up and restructuring the banks.
September 25, 2011
Jim – agreed on that.
I fail to see why runaway property inflation is heralded as a ‘joy’ by The Express.
Can’t they see that this represents people getting poorer and not richer ?
We may have more equity but even those already on the housing ladder can’t make the next step up because the differential has become too great.
Those not on the housing ladder and on average wages ? The lending multiples required to make the step are frightening.
September 25, 2011
“A new state bank leaves the
risks with the public sector”
ALL banks leave the risks with the public sector. That is the problem, but you can seem to bring yourself to acknowledge that. Until that public underwriting of private banks is severed for good, bringing more private banks into being will not make a jot of difference. It is a red herring.
Reply: Not so – I have opposed bail outs, and recommend controlled administration for bank failures.
September 25, 2011
So politicians have decided that the underlining structural economic problems are not going to be addressed. How they think more of the same is going to stimulate growth is a mystery. Money does not grow on printing presses it has to to earned. Lending for lending sake does not make businesses viable good business practices not hampered by expensive regulations, high energy and raw materials, labour costs and taxes do. If the markets are gullible enough to fall for this renewal of so call stimulus then a respite of the crisis will be seen. However the next crisis will be worse and so it will go on until the whole artificial edifice collapses into dust and rubble.
September 25, 2011
Mr Cameron is often critcised by your correspondents Mr Redwood. But I think he should be congratulated. He has managed to persuade most people that he is cutting public expenditure whilst he is in fact increasing it. I’ve never met anyone who believes your constant refrain that in real and cash terms, public expenditure is rising. I believe you – but few others do.
September 25, 2011
John is not believed because there are visible cuts going on as well as expenditure increases.
We have been expecting essential services to be cut in spite whilst back-office departments are protected.
September 25, 2011
I agree almost everyone thinks that drastic cuts are being made. The BBC sets the agenda, also labour, Libdems and the Tories all say that they are and it is a good excuse for the state sector to use all the time: “Oh it the cuts you know”.
The same applies to the absurd global warming exaggerations, the so called renewable energy insanities and the belief that government can create jobs (by investing in overpriced pointless activity) or can make everything equal, fair, nice and safe for everyone regardless of their circumstances – just by passing more and more laws and regulations.
September 25, 2011
It is business lunacy to create a state bank, probably with a state of the art IT system, that of course costs a fortune and doesn’t work.
As you suggest RBS should be split and sold off. The taxpayer would take hit a big hit, but time to cut our losses whilst there may be some value left.
September 25, 2011
Oh dear !! Why are they doing this??
The only sign of hope in this post is ‘flown as a kite’.
It feels like we are having a war waged against us – QE is the weapon that brings inflation. Immigration brings more people to fight over resources. Planning is destroying our communities (I’m already involved in two battles). Welfare and socialists (including Cameron), together with armies of new tax inspectors are stealing our money. The BBC is tasked with destroying our culture, aided by their attack dogs the Licensing bods. Climate change dogma is making energy unaffordable. And that is all before you mention the EU !!
The EU is our only hope; I hope they crash and burn and take the economy of Europe and the world with it. This is the only way we are going to be able to build honest, trusting, cohesive, working societies again, it seems.
September 25, 2011
Amanda
Yes agreed, all very depressing.
I wish I could see a light at the end of a very dark and long tunnel.
But afraid not.
I have just seen some of ED M interview on the Andrew Mar show.
I had to walk out of the room halfway through in disgust.
The man has not got a clue as to how to properly resolve our problems, that he helped cause, along with Brown and Balls.
So no hope of an opposition party to question present Government policies either.
The sun is shining so think I will cut the grass, I always seem to get pleasure from that.
Shame the politicians cannot cut the waste and interference from our lives in he same manner.
The more you do it, the less you have to cut each time, weeds are thus managed and not allowed to take over and suffocate the new green shoots of grass, and the better it looks and performs in the longer term.
September 25, 2011
The fact the Ed Milliband (yet another PPE at Oxford person what do they do to people brains on that course) is so clearly useless is the one bit of light at the end of the tunnel. Can Cameron be finally turned around to face the right direction in time for the next election – I suspect not.
Which party will promise a referendum first (and how will they hide the small print in the promise this time). A promise from Cameron with not look very convincing what ever he says this time.
September 25, 2011
As predicted, QE to follow, and somehow I don’t think inflation will be falling back. It’s all part of the strategy to use inflation to reduce the debt. As I mentioned in previous blogs, this will be critical to the markets and when they decide to target the UK. Low growth contrary to plan will mean Osborne borrowing more (aka cyclical stabiliser). Osborne’s ‘golden rule’ will be as infamous as Brown’s…..Expect a market raid on UK within 6-12 months unless they change tack.
Zorro
September 25, 2011
This is not a “rescue” but digging the hole we are in deeper and deeper. The Coalition is failing to do what it set out to do; it is not serving its purpose and should be put out of its growing misery. This is, unfortunately, unlikely to happen. The principals will cling to office and the privileges that come with it. They will also seek to protect the significant benefits their families enjoy, all provided by legislated tax payer subsidies – namely the wind farm scam. No wonder they stitched up a deal for a five year Parliament.
September 25, 2011
Not that there was any doubt. The Prime Minister is heir to Blair and the Chancellor is heir to Brown. Same policies, same mess and same confusion. The only difference is that the Liberals are calling the tune and they are not very cautious about who they offend.
At the next election the British people have a choice between Labour and Conservative or to give neither a majority and leave the Liberals to decide omce again who will further ruin the country
What a choice between a rock and a hard place.
September 25, 2011
I would love to see a ‘none of the above’ box on our voting slips.
September 25, 2011
I see in the Telegraph that a 2 Trillion Euro fund is being put in place to bail out the banks, particularly those in France. The money is coming from the European Financial Stability Fund (EFSF).
The article does not explain where the EFSF will get all this money from, other than member states. Is this a massive printing press job.
September 25, 2011
Mais oui…..what did you expect? This is a political project which will not be allowed to fail…..To paraphrase Von Clausewitz….'(economic) warfare is the continuation of policy/politics by other means’
Zorro
September 25, 2011
I’m so tired of repeatedly pointing this out, not least in comments on articles by Telegraph journalists, that I’ve started to put it into capitals:
THE EFSF OPERATES BY BORROWING MONEY FROM INTERNATIONAL INVESTORS AND LENDING IT ON TO DISTRESSED EUROZONE STATES.
As they could easily find out by looking at its website:
http://www.efsf.europa.eu/about/index.htm
I don’t know how much money the EFSF actually has on hand, but it’s nothing like £350 billion, and yet a Telegraph journalist writes today:
“The fund is currently valued at £350 billion”,
and adds
“but would need much more cash pumped into it from its member states”
when in fact it would borrow the money, either from international investors or the ECB.
The member states would only have to stump up if/when the loans extended by the EFSF weren’t being repaid, to ensure that the EFSF bondholders who lent money to the ESFD would still get repaid in full.
As for where the ECB would get the money to lend to the EFSF to lend on to distressed eurozone states or banks or whatever, if necessary the ECB would create some new money out of thin air.
Just to make some numerical comparisons between the UK and the eurozone:
During the period of QE the Bank of England created £200 billion, which was equivalent to about 14% of UK GDP.
The GDPs of the eurozone countries add up to about €9.2 trillion, and 14% of that would be €1.3 trillion.
So if the Grand Plan to Save the Euro meant that the ECB had to create €1.3 trillion of new money, presumably the inflationary effects would be comparable.
September 25, 2011
State owned bank. Yep, you’re money given to people to invest in uneconomical projects such as HS2.
No private investor is going to touch it because it doesn’t add up, unless part of the deal is milking the tax payer just like Huhne’s madness.
It’s yet another example of why regulation goes wrong.
You’ve insisted that banks have more capital to lend. At the same time you tax them, more than other people, so its not a good deal for the investor. Vince Cable needs to be whipped into line on this, but he would probably enjoy it.
September 25, 2011
“The government should be prepared to stand up to the existing management of RBS and tell them to create three new banks out of their UK assets, and sell these on , raising more private capital for them at the same time. That way we get banking competition, properly financed new banks,. and some capacity to lend subject to a market test.”
Yup. Exactly.
But I’m curious: why three particularly, John? As opposed to 4 or 5 or 6 plus the remnants of RBS? Just curious, that’s all.
Reply: There are three main brands in the RBS stable, and enough branches/assets to make 3 plausible.
September 26, 2011
Fair enough. But are not existing brands seen as toxic? Wouldn’t they take their mind sets and modus operandi with them—the ‘doing you a favour by looking after your money’ attitude and the like?
I don’t think your suggested split would be enough: its necessary to have more competition but not sufficient. Most retail customers want efficient, cost effective access to their money and means of making payments; some want access to reasonably priced loans.
Mobile phone operators are developing payment systems which cost consumers a tiny fraction of historic bank charges. Developments in this direction are not going to suddenly dry up any time soon.
We need more radical changes and not just the idea of changes but firm, detailed proposals.
When I moved to Luxembourg to live (for 4 years) in 1977 I found a banking system (retail) that was still more advanced and customer service focused then than our majors are today, 34 years later. Enough said?
September 25, 2011
Why did we bother having an election and voting in such a useless bunch?
They are either doing nothing or making thing worse in just about every important area.
EU – fail
HS2 – fail
Inflation – fail
Deficit – fail
Taxation – fail
Public sector reduction – fail
Banks – fail
Cutting regulation – fail
Ending wars – fail
Energy security – fail
I’m sure I could list more but it’s Sunday and I’m off to investigate emigration and watch the F1 race as it’s more productive and I don’t get as angry.
September 25, 2011
An excellent summary.
September 25, 2011
Immigration – FAIL
Alas – if there is an economic recovery (and even if there isn’t) – we are about to swamped by refugees from the PIIGS and they will have every entitlement to be here.
This really does feel like The End.
September 25, 2011
I wish David Cameron could wear our shoes.
September 25, 2011
I think the problem is a reluctance to recognise that the equity of the state owned banks is almost certainly worthless, should their assets be marked to market and should they be required to raise capital to a prudent level. A break-up and recapitalisation is an excellent idea. The key lessons from Japan’s 20 years of stagnation are: 1) more and more state borrowing + very loose monetary policy doesn’t produce growth; and 2) it is essential to recognise losses, restructure and start again with a clean sheet. The Eurozone needs a grand reckoning, but in the absence of it we should at least have one in the UK with state-owned banks.
September 25, 2011
Another problem Japan had was that people were saving too much money, rather than spending or investing it. They also have an ageing population.
September 25, 2011
You should not blame people for saving to protect themselves in old age. That is not a “problem” as you put it but a success. If the UK personal savings ratio was back where it was in 1996/7, at about 9%, the UK would be in a much stronger position than it is today. People now have to try to pay down the excessive debts they accumulated over the past 15 years. Unfortunately it has been the policy of successive governments tacitly to accept inflation as a way of devaluing its own debts but leaving those on fixed incomes hanging in the wind. If you do accumulate some savings then these are subjected to savage taxation. The outlook is truly bleak and it is the politicians who must share a big share of the blame.
September 25, 2011
Will there be a debate (or even vote) on QE2 or will the Chancellor simply sign off a second round?
Points that I would like to hear the Commons debate on this are;
(i) The inflation target (symmetric treatment – when do we het the 0 to -1% rate, comparison of effectiveness with price target, role of exchange rates, drivers of inflation, failure of MPC/BoE, why the Chancellor doesn’t remind the BoE of its target?)
(ii) Whether the MPC target is actually 5-6% nominal growth and is not inflation? (And if so is it the Government or MPC that is being dishonest?)
(iii) The redistibution of savers’ wealth to debtors, whether such redistribution should be as hidden as it seems to be, its morality and its effectiveness?
(iv) The medium to long term effects of inflation over 3%
(v) The effect of the devalued currency on the details of migration – are retirees remaining in the UK but skilled youngsters leaving? (I don’t know what is happening but I would think that the exchange rate must be having some effect).
(vi) Why the Govt wishes to run an interest rate policy where those who effectively rent a house from a bank, pay less than those who rent from a landlord?
(vii) The reliability of the BoE models.
(viii) If another print run goes ahead, why it should go to business and not to savers?
But overall I suppose I would just prefer the Chancellor to make a statement saying that he would not permit any further QE, and that he has reminded the Governor that the target is 2% & no medium term remains to get there, and that if CPI isn’t down to 1.5% by mid-2012 it isn’t only those who have indicated that they will resign who will be going, but they all will.
[I like the idea of an RBS split. I naively believe a National Savings scheme should be able to offer nominal growth rate as a return.]
Reply: The Chancellor does need to give his approval to any Bank plan for QEII. If the government does not offer us a debate and a vote on any such decision the Backbench business committee will probably receive a request to hold one, or the Opposition could table a motion.
September 25, 2011
I also noted at the WSJ an interview with Mr Posen;
http://online.wsj.com/article/SB10001424053111904563904576584852970748000.html#articleTabs%3Darticle
Mr Posen is quoted as saying;
“If there’s no wage growth—and there isn’t—and the pound has been stable and the futures markets tell us that energy prices, oil prices, are going to be flatter down the line, then today’s high inflation doesn’t have any forecasting worth for what we should do for next year,”
Well plenty of ‘ifs’ therein, but that someone on the MPC disregards current levels on inflation even though he recognises that there is no wage growth is rather remarkable – it seems to show a belief that there is only one feedback to be watched … but the wrong one in the MPC’s case. The real terms effect on incomes seems to not even be ignored, it is just not even observed. And to dare to even utter a sentence containing the “forecast” word when the BoE’s forecasts have fallen rather short of relevance let alone accuracy is frankly stunning.
A couple of years at 0% or even -1% would be nice to offset the years at 3 to 5% – let’s call it a medium term average.
Why doesn’t the Chancellor act?
Reply: Mr Posen should know there is some growth in nominal wages, and plenty of growth in energy prices and other imported items in UK family budgets.
September 25, 2011
I welcome Mr Redwood’s straight talking this is badly needed.
The majority of politicians just don’t get it. Most still believe, despite all the evidence that a desperately sick and lop-sided economy can somehow be revived by pulling the correct economic levers.
The simple fact is that in the boom years, nobody cared enough about the kids that left school without the basic skills needed. About the manufacturing indisutries dieing and with them years of hard won experience and expertise. About the high burden of tax crippling those businesses.
A boom built on phoney money masked this decline for a few years but now the real state of the Uk economy has been laid bare.
The fashionable view was that by helping China and India to develop these states would turn into new and vast markets for our exports. Instead we have simply exported far too much of the know how, machinery and jobs we now desperateley need. Now our money and living standards are heading that way too.
We were happy to take China’s billions to grotesquely inflate our public spending and use the cheap consumer goods to keep inflation low. Now we have to take the pain for our stupidity.
The coalition has shown that it does not have the stomach, or political will to make anything but token spending reductions. So the easy route is being taken by devaluing the debt, salaries and benefits it pays out to it’s army of employeees in it’s client state. I can’t imagine the coalition announcing a 10% reduction in family credit and child benefit. However let inflation do the same job and nobody would bat an eyelid.
Ofcourse the liberal/Cameron clique will love this act act of levelling,effectively stealing the savings of the thrifty.
Is there any difference between QE II and theft ? – the treasury is is effectively dipping it’s grubby, incompetent hand in my bank account.
September 25, 2011
Steve.
Yes theft of citizens money by stealth, the running of endless ponzi type schemes, almost limitless borrowing, further borrowing so as to lend to bankrupt or near bankrupt nations. Off balance sheet liabilities increased, the introduction of payment for nothing benefits, the effective payments for votes policy by social engineering, where now nearly half the popuation rely upon the state for some financial reward.
Governments for decades of all Party’s have just lost the plot.
The time of exposure is near, all of the chickens are coming home to roost in a big way.
In any other position (than acting as Minisers of State) these could/may be seen as criminal acts, at the very least in business they would be banned from holding a directorship, but the guilty who engineered all of these schemes seem to get off, or find themselves with a title in the House of Lords.
One really does wonder where and when it is all going to end.
September 28, 2011
Alan,
I agree with everything you say except for one point.
I do not believe that politicians have ever really ‘lost the plot’. They see the current economic crisis as just a blip.
I take the view that the worst examples of disastrous decision making inflicted on the Uk over the last 40 years cannot be explained by incompetence alone. It was no accident.
The left are getting,by stealth, the ‘levelled ‘ or ‘equal’ society they have been dreaming about since the 60’s . That is why the levellers are so keen to marginalise decent politicians like John Redwood who dare to utter the factually correct truths that so often don’t fit in with their ideal world vision.
The roots of the tragedy lay in Marxism
What better way to loosen the cultural and patriotic ties on England than to fail to stand in the way of us being immersed in an EU Superstate?. Or allow uncontrolled mass immigration ?
Or how about stamping down on stable families by making divorce easy and turning the state into every other kids dad ?
Or how about wrecking the economy and destroying the savings of the hard working by de-valueing the pound?.
That is what generations of politicians have done to us and it wasn’t because they are buffoons or they have ‘lost the plot’. They do it because they despise this country and want to see it changed radically.
September 25, 2011
Public sector accounting has always left me aghast. Margaret Hodge MP (Chair Public Accounts Committee) this week claimed it cost us, the taxpayer. over £2 million for the time ti takes MPs to complete their own expenses. Based on her formula it would be too expensive for her to do the household grocery shop. This is why we have £12 billion wasted on an NHS computer, aircraft carriers that are more expensive to scrap than build, BBC overspend £100 million on their new headquarters build (BBC Trust says lessons were learnt- no mention of discipline or sackings) and the regional Fire brigade Communications building scheme scrapped after the buildings were completed and costing us £5o0 million.
I say, once again, the MPs who attended the PPE courses at Oxbridge appear unable to add up or make proper business decisions. They simply are not fit to run the country’s budget. Most are highly educated ideological idiots.
September 25, 2011
Mr.Redwood, Whether it be £100B or any other figure for further money printing is it not simply as you say kicking the can down the road and unless spending by the state is reduced we will be back in the same place or worse??
Reply: i don’t think you can solve a problem of borrowing too much by printing – you need to spend less.
September 25, 2011
Another way to get more banks is to break up the existing banks into investment banks and saving banks. The investment banks can be make risky investments and be allowed to fail; while the saving banks, where people can deposit their money, cannot make risky investment and will be supported by the tax payer.
This is an easy way to double the number of banks.
September 25, 2011
Possibly may be useful and politically possible only if the money bypasses the banks almost entirely on first pass and is spent in. Not the way it sounded.
I think the idea of a new bank is good in the short term, a new private sector partner may help sharpen it up. Could even get some Dragons or similar involved with a match on investment loans terms.
Spent it directly into needed grid infrastructure -storage. Target import reduction. Reduce employee taxes on export industries or similar. Perhaps a rebate on taxes that really bite at low income levels and to those that actually pay them. Or use it to combine NI and PAYE and increase the thresholds at the lower level ahead of schedule.
At the same time we need an aggressive plan to detoxify the banks, force write-downs and deep discount capital raising. If they don’t or wont nationalize them and ditch the liabilities and then sell them on.
If we get a depression the new bank could with co-investors (after suitable haircut) purchase for rent distressed mortgage assets at auction. This should enable asset prices to fall, and maybe offer a temporary market-rent solution to those facing foreclosure or re-possesion due to loss of job Obviously we should take care to avoid peverse incentives or reward obvious speculation.
Otherwise we will just have more of the same inflationary effects with a slow of no debt deflation adjustment.
September 25, 2011
If there’s to be more QE, then surely the question arises how the many billions of new money created by the Bank of England would be used this second time round.
Buying assets would not be the only conceivable use for the new money, but supposing that the Asset Purchase Facility was re-activated what assets would it purchase?
With the Bank having already taken £198 billion of gilts out of circulation to prop up (rig) the gilts market to make life easier for the Labour government in the year leading up to the general election, the coalition government is now having no difficulty selling enough new gilts to fund its budget deficit at low interest rates.
So as further purchases of previously issued gilts would seem unnecessary and even undesirable, would Osborne direct the Bank to go back towards where it started in early 2009, with the purchase of private sector assets?
Here’s the link to the Assets Purchase Facility Results as they now stand:
http://www.bankofengland.co.uk/markets/apf/results.htm
and it can be seen that purchases of gilts accounted for £198 billion out of the £200 billion of newly created money, 99%, while only relatively small sums were used to buy private sector assets such as corporate bonds.
Yet when Darling wrote to King on March 3rd 2009:
http://webarchive.nationalarchives.gov.uk/+/http://www.hm-treasury.gov.uk/d/chxletter_boe050309.pdf
he authorised the use of “Central Bank Money” for purchases of assets up to £150 billion, and “in recognition of supporting the flow of corporate credit, up to £50 billion of that should be used to purchase private sector assets”.
I suppose it would be a relatively simple matter for commercial banks to newly create such “private sector assets” for the Bank to purchase using its newly created money; for example, a bank which was in difficulties could sell the Bank a bond.
That would come into the category of “Corporate Bonds”, which so far accounts for only £1.1 billion in the Asset Purchase Facility results when it could be as high as £50 billion just on the basis of Darling’s previous authorisation of March 3rd 2009.
So rather than the previous indirect swap between the Bank’s IOUs, money, and the Treasury’s IOUs, gilts, so that the Labour government would have enough money to pay its bills, it would be direct swaps between the Bank’s IOUs, money, and commercial banks’ IOUs, corporate bonds, so that the banks were saved from collapse and could even lend some of the money on to businesses.
Does that make sense?
Reply: yes, it is possible. Private sector “assets” can be bought using newly created money, or from sales of gilts in a different version of Operation Twist.
September 26, 2011
The Operation Twist twist sounds quite reasonable.
September 25, 2011
The third European War is being fought by Buracrats. Armed with Power point presentations and led by consultants.
September 26, 2011
Ireland is a risk especially for RBS (reported at £53bn in Nov 2010 by the Telegraph), who were also reported as exposed to Spain for £35bn 16 months ago (Guardian) . The government has already issued a guarantee to RBS for £325bn to cover losses: it might be called on soon. It might be interesting to know how much money lent to Ireland financed golf resorts in Portugal and Spain: at least once the chain of transactions is identified it reduces the overall debt if they are netted off. There is still a lot of work to be done before RBS can be made viable – in parts or as a whole.
The QE sum has been rumoured as high as £300bn (Spectator). Whatever non zero figure is chosen, it will be bad news because it will confirm that there is no faith in the strategy for deficit reduction. Instead of having foreigners financing £85bn of the deficit as in 2010 we will have to find money to pay them for the gilts they sell on top of deficit financing: if this is done via QE it could easily become a dangerous spiral.
It is interesting to note that the BoE originally justified QE on the grounds that we might see deflation – not merely below target inflation. If their projection was correct, it implies that QE added 5-6% to inflation the last time – which is reasonably consistent with simply looking at the impact of 30% of the economy being supplied by imports that increased 25% in cost on account of QE induced currency depreciation.
The idea that inflation depreciates our debts assumes that debt is growing slower than inflation. Since the deficit is around 15% of the “official” debt, some of which is index linked, the arithmetic doesn’t work. Instead debt is continuing to grow in real terms, and if spending continues to outpace inflation while taxes fall short that will get worse: eventually the gilts bubble will burst, dramatically increasing funding costs. The consequences of 20% inflation should be clear: a trip to the IMF a la Healey.
Mr Cable clearly wishes to run the new bank, or at least have it do his bidding. The problem is that for the most part business is still trying to reduce its gearing, having become far too reliant on debt for its own good. We need to remove the tax disadvantage on equity funding. Banks too are deleveraging to meet their capital requirements and to provide cash against forthcoming losses on sovereign and property lending. This circle can’t begin to be squared until cross subsidy for mortgage markets is severely cut back. Businesses and taxpayers and savers are paying for mortgages to be subsidised. Business collateral needs the sound foundations of a property market that has corrected, not one where prices could easily fall another 30-40%.
Reply: I think the reports of £300 billion of QE meant the £200 billion we already have plus a new £100 billion, not an additional £300 billion.
September 26, 2011
John. Government ministers and Treasury officials can see and even understand the expert comments contained here. I suspect that they know the situation already. Do you think the decision to conjure up money and deny printing is an act of desperation, dishonesty, stupidity, or combinations of the three?
September 26, 2011
These panic PR responses are not what we need…any or all of your suggestions would be a better place to start. No direct loans to business please…your idea for more competition in the banking sector is what we need!