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.