Mr Carney’s rising interest rates

 

I promised to come back to Mr Carney’s “forward guidance” and Nottingham speech. I needed to undertake a long detour via Syria, given the run of news and the business before the Commons.

Mr Carney inherits a monetary policy badly damaged by successive misjudgements of his predecessor and Bank of England team. They first allowed too much money and credit in circulation. They failed to raise interest rates soon enough, and failed to work with the FSA to rein in banking excesses prior to 2008. They then held interest rates too high  for too long and assisted in squeezing the banks too hard, creating the worst crash of the last 80 years. Some of us warned about both these mistakes in good time, to no avail.

He inherits a monetary policy that is at last beginning to create enough money to finance a recovery. It relies heavily on the money created by the central Bank and given on easy terms to the banking system. The banking regulatory side of the Bank of England  is still applying the brakes to the commercial banks, necessitating the continuation of extraordinary monetary policies. These mean ultra low interest rates, which damage savers, and a greatly expanded Bank of England balance sheet. The failure to split up RBS and to get  all the semi nationalised banks back into shape more quickly has delayed rccovery and required more extraordinary Bank of England measures. I would have preferred them to fix the banks rapidly and do without the extra money printing.

If you take the monetary base  at the beginning of  2008, the UK’s monetary base has now increased fivefold. The US is almost the same, with a fourfold increase. Japan’s has merely doubled, but they plan another doubling from the end of last year. All these countries have resorted to money printing to offset the weakness of the commercial banking systems.  The total amount of  money amongst the leading advanced  countries has ballooned from $3trillion to $8trillion. The reason that has not caused a runaway inflation is the weak state of many commercial banks and the new extra tough controls placed upon them to stop them creating money and credit.

Mr Carney issued forward guidance to say interest rates will not go up soon, and probably not before 2016. The markets meanwhile have ignored his advice, and have driven government borrowing rates up. The 10 year cost of money for the government is now 2.99%, compared to a low of under 1.5%. It has risen more than 1% or 100 basis points since Mr Carney’s arrival in the UK. It rose above 3% yesterday.

The markets are doing this because the extra printed money is beginning to boost asset prices, and may in due course feed through into higher inflation as the banks mend. Mr Carney has responded by saying he will take banking action to stop another asset bubble. He wants to keep people believing interest rates will stay very low, so they commit to more spending and to investing in riskier ventures. I think he is right to argue that official interest rates will not go up for a couple of years. It is important for the strategy to work that the markets come to believe him. He will later need to demonstrate the ability to fine tune  through banking regulation to avoid a real  assets bubble. There is already a bond bubble, created by official interventions in the main  global bond markets.

 

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69 Comments

  1. Nina Andreeva
    Posted September 6, 2013 at 5:50 am | Permalink

    Its a pity you cannot get a US style 25 year fixed rate mortgage in the UK otherwise I would be locking into one of these super low rates. The best I can get is a 10 year deal. However the yield on a 10 year gilt needs watching, the more that goes up the more mortgage interest rates will follow (as it becomes more expensive for the lenders to get hold of money to lend). Then its back to business as usual, the residential property market slumps and you can kiss your “recovery” goodbye! Prepare for the worst we are not out of this one by anybodies measure, other than whoever who is in charge at Westminster. It does not matter which party, they will keep peddling the same old cobblers

    • Ralph Musgrave
      Posted September 6, 2013 at 9:25 am | Permalink

      Nina,

      How do you imagine those 25 fixed rate mortgages are possible? Like all things that are too good to be true, it’s the taxpayer that pays for it all.

      • Nina Andreeva
        Posted September 6, 2013 at 2:40 pm | Permalink

        I cannot see how a lender needs taxpayer support to market a 25 year mortgage. Or are you alluding to the fact that in America you can deduct your mortgage interest from your tax bill. Or that in some of the states mortgages operate on a “non recourse” basis, so that if you default, unlike here, you do not have the hounds of hell chasing after you for the rest of your life?

        • Denis Cooper
          Posted September 6, 2013 at 4:17 pm | Permalink

          I recall that about 15 years ago there was an effort to promote 25 year mortgage loans, part of the preparations for joining the euro alongside the totally barmy idea of getting people paid in sterling to take out loans denominated in euros, but very few borrowers were interested in either.

        • Leslie Singleton
          Posted September 6, 2013 at 4:29 pm | Permalink

          Nina–In the nicest possible way, you don’t know much about interest-rate risk. Could go on, but it is not possible to lock in funding for such a long period.

        • Bazman
          Posted September 7, 2013 at 5:54 am | Permalink

          Read this. To good to be true? It was and that why I filled my boots while I could during the boom years.
          http://www.theguardian.com/books/2013/aug/18/default-line-extract-faisal-islam-housing

        • Ralph Musgrave
          Posted September 7, 2013 at 6:49 am | Permalink

          As Leslie says, accepting interest rate risk involves cost. If government absorbs that cost from general taxation, then it’s subsidising mortgagors. Alternatively, if it makes a specific charge to mortgagors (a sort of insurance premium) then that’s not a subsidy. But in that case the average mortgagor is no better off: the cost of the insurance cancels out the benefits.

          However, there could well be mortgagors who greatly value a 25 year fixed and are willing to pay the premium, while others aren’t bothered. So best thing might be to make the thing voluntary. I’m not whether the system actually is voluntary.

  2. lifelogic
    Posted September 6, 2013 at 5:53 am | Permalink

    The problem is the banks are currently able to demand very large margins on loans due to the lack of lending competition. Loans that would have been at base plus 0.8% six years ago might now be at base plus 5.5% or even more and often with larger fees, less good terms and lower loan to security values. This on very, very, low risk and well secured lending too.

    Commercial property, business and development lending is particularly expensive. We need some real competition in banking, base rates should be about 3% but margins nearer to what they where 6 years back. If banks are charging base plus 6% or so and base rates rise very much we will have another a big problem soon.

    Relax rules on pensions and allow businesses to access them more easily within the business, get some real competition in banking and relax the EU banking liquidity rules which are clearly killing bank lending in the UK. Outside owner occupied and buy to let residential mortgages there is a real lack of competitive lenders which is hugely harmful to growth. Growth that is already hugely depressed by Cameron’s expensive energy, the bloated and inefficient state sector, over taxation, over regulation and the almost certain prospect of Labour in 2015.

    All thanks to Cameron’s broken compass.

    • lifelogic
      Posted September 6, 2013 at 5:55 am | Permalink

      Of course if Cameron actually fixed his broken compass then the banks might have rather more confidence to lend in the UK.

    • lifelogic
      Posted September 6, 2013 at 7:53 am | Permalink

      I mean allow directors and business owners to use their pension funds to lend to their own businesses without many of the current restrictions.

      • nina Andreeva
        Posted September 6, 2013 at 11:12 am | Permalink

        How are the current restrictions too onerous? Directors can borrow from a SSAS at base plus 1%. Apart from giving them a chance to recapitalize, why should a bank bother making loans? The big boys know the demand is not there and will not invest and that is why they are holding a lot of cash within their companies. So why should the banks put their capital at risk? If anything they should have being doing this prior to 2007.

        • Leslie Singleton
          Posted September 6, 2013 at 4:35 pm | Permalink

          Nina–Second verse same as the first. In my lending career we used to live breathe and die to make (good) loans. We were a very well regarded Bank and the problem was what to do with the money (chunks of $100 million) that in particular the Middle East wanted to deposit with us.

        • lifelogic
          Posted September 6, 2013 at 7:11 pm | Permalink

          Well you have to move money from your existing pension or SIPP to an expensive SASS arrangement and then you are limited to 50% of fund assets and it can only lend to the company that sets up the SASS and on a first charge only. It is your pension fund and you should be allowed to invest it entirely as you wish, in genuine investments. New start ups, secured loans to other companies, private equities, property, second charges, anything you think is the best investment at the time.

      • margaret brandreth-j
        Posted September 6, 2013 at 1:49 pm | Permalink

        Far too risky.

        • lifelogic
          Posted September 6, 2013 at 7:14 pm | Permalink

          Far less risky than investing in RBS, Lloyds, Northern Rock, Halifax seven years ago, all of which were allowed.

          • APL
            Posted September 7, 2013 at 7:42 am | Permalink

            lifelogic: “Far less risky than investing in … ” named junk bond and junk companies.

            Good point.

  3. Mike Stallard
    Posted September 6, 2013 at 6:34 am | Permalink

    Everyone knows what QE is. And, as ever, you have described is very clearly for us.

    What is the opposite and is it possible?

    • Ralph Musgrave
      Posted September 6, 2013 at 9:40 am | Permalink

      Mike, Re negative QE, Warren Mosler (who actually runs a bank) sort of answers your question in the very short paragraph in red at the top right of his blog.

      As he puts it, “The funds to pay taxes and buy government securities come from government spending.” In other words government cannot borrow money without first spending money which its own central bank has first spent into the economy.

      So on that basis, negative QE is not possible.

      However, I don’t actually see why it wouldn’t be possible to change the rules of the game and have no central bank created money at all: i.e. just have commercial bank created money. (About 97% of the money in circulation is actually privately created already).

      If government then borrowed some of that money, that would be sort of negative QE. But I’m not sure what that would achieve. I suspect very little, but I’ll have a think about it!!!

      Reply Of course you can have negative QE – the Bank of England sells the bonds back to the private sector. We used to have a policy called overfunding, which was negative QE – the government borrowed more than it needed to cover its deficit.

    • Leslie Singleton
      Posted September 6, 2013 at 4:41 pm | Permalink

      Mike–Dead easy–Sale (rather than purchase) of assets takes cash from (rather than gives cash to) the economy. You cannot spend assets the way you can spend cash is what it all boils down to, though I agree sometimes you wouldn’t think it this simple.

    • Denis Cooper
      Posted September 6, 2013 at 4:44 pm | Permalink

      Of course it’s possible.

      The Bank has created £375 billion of new money and used almost all of it to buy up previously issued gilts from gilts investors:

      http://www.bankofengland.co.uk/markets/Pages/apf/results.aspx

      In parallel, the Treasury was selling new gilts to much the same set of investors at much the same rate, and using the receipts from those sales of new gilts to help fund the government’s budget deficit.

      So in effect the Treasury has indirectly borrowed (almost all of) the £375 billion of new money created the Bank, and government departments have spent (almost all of) it into the economy.

      If the Bank just held all the gilts it has bought to maturity, then the Treasury would pay the Bank interest on each gilt every six months, and then it would finally repay the capital sum; as the Treasury would be using money taken out of the economy as tax revenues for that purpose, that would reverse the previous process.

      There are additional complications, such as the Treasury either being entitled to all the profits the Bank made on its asset purchase operations, or alternatively having to make good the Bank’s losses when the Asset Purchase Fund is finally wound up, and details such as the Bank making a small extra purchase of gilts as announced in a Market Notice yesterday, essentially rolling over the maturity proceeds of one of the gilts it holds:

      http://www.bankofengland.co.uk/markets/Documents/marketnotice130905.pdf

      “As set out in the MPC’s statement of 5 September, the MPC has agreed to make £1.9bn of gilt purchases, financed by central bank reserves, to reinvest the cash flows associated with the maturity on 27 September 2013 of a gilt owned by the Asset Purchase Facility (APF).”

      Which will push the final winding up of the APF further into the future.

      But basically the process of the Bank creating new money and arranging for it to migrate to the Treasury through the gilts market can be reversed by the Treasury collecting money from taxpayers and sending it back to the Bank.

      • zorro
        Posted September 8, 2013 at 6:33 pm | Permalink

        Indeed, excess taxation and withdrawing from money supply is reverse effect.

        zorro

  4. JimF
    Posted September 6, 2013 at 6:34 am | Permalink

    You’d expect somebody in this position to be able to assess whether guidance like this would work or not wouldn’t you? It appears to have backfired within a couple of weeks.

    • Leslie Singleton
      Posted September 6, 2013 at 4:45 pm | Permalink

      Jim–Well actually, No, you wouldn’t, to answer your question. What you are suggesting amounts to predicting future interest rates which is about as easy as predicting the Stock Market. If it were easy and one knew (which one never does) that rates were going down, making fixed rate loans would be a doddle.

  5. Roy Grainger
    Posted September 6, 2013 at 7:01 am | Permalink

    We are already in an asset bubble in government and other high-grade bonds. As the government have forced pension funds and banks to hold more of these instruments and wildly inflated their prices through QE the crash when it comes will be severe.

  6. Brian Tomkinson
    Posted September 6, 2013 at 7:10 am | Permalink

    Doesn’t Carney need to ” demonstrate the ability to fine tune through banking regulation to avoid an asset bubble” in order for the markets to believe him? Why should they take his words on trust? Previous experience, as you highlighted, hasn’t given confidence that the BoE will get it right or do as they say. So far his influence with the markets has resulted in exactly the opposite to what he wanted.

  7. zorro
    Posted September 6, 2013 at 7:40 am | Permalink

    There a number of points here which primarily include the huge expansion in the monetary base to try and stimulate a recovery. However, this has caused a bubble in commodity prices and also maintained/increased house prices. This has been a result of QE policies and not private banking credit, which, as John says, has been restricted. The main reason for this being that unleashing private banking credit would have forced up interest rates to control inflation…….and the government would have to pay a lot more interest on its debt. They are going to find it difficult to get out of this dilemma and past evidence would suggest that our trust in them being able to do it should be slim.

    zorro

  8. A.Sedgwick
    Posted September 6, 2013 at 8:04 am | Permalink

    10 Year Gilts were just over 3% yesterday according to the TV ticker tape. This should be the Bank Rate, adjusted monthly and down to the nearest 1/4%. One of the many adages acquired over my 40+ business years – like recruits like – and Mr.Carney obviously is on the same wave length as GO. From initial armchair assessment he does not seem to be brimming with alternative ideas and is quite happy to continue to ignore the market, penalise savers, waffle about controlling house prices and encourage bureaucracy. The amount we save as a nation is near the bottom of the league table and this Government prefers to print money rather have its citizens buy savings bonds with of course fair and attractive interest rates.

    One of my numerous fiscal bugbears – basic tax on savings interest – promised on a couple of occasions e.g. Hague/Portillo manifesto 2001. This common sense never registers with Chancellors, like flat taxes, too uncomplicated for maintaining the financial mystique of government.

    • A.Sedgwick
      Posted September 6, 2013 at 8:06 am | Permalink

      ….removal promised…

      • nina Andreeva
        Posted September 6, 2013 at 11:15 am | Permalink

        Why should he do anything different? All he is doing is nothing at variance than all the other Goldman Sachs alumni who have made it into central banking, which is carry on printing.

  9. Martin
    Posted September 6, 2013 at 8:22 am | Permalink

    “fine tune through banking regulation” sounds like the late 1970s Labour Government’s price control mechanism reborn for banks.

    Do you have the comparable ECB and Swiss money supply figures from 2008 as well?

    The near zero interest rates for savers are hacking folk off. They are in reality confiscatory. Guaranteed losses at your soviet socialist state owned/controlled banks.

    • zorro
      Posted September 6, 2013 at 12:38 pm | Permalink

      The monetary base for the Euro from 2008 to 2012 roughly doubled. I will try and post the exact figures later if time permits.

      zorro

      • zorro
        Posted September 6, 2013 at 4:07 pm | Permalink

        From October 2008 until June 2012, the Euro monetary base expanded from 900 billion Euros to 1.9 trillion Euros. From Oct 2008 to June 2011, the increase was only to 1.1 trillion Euros but there were rises and falls. However, from June 2011 unti June 2012, period of one year, the monetary base almost doubled to 1.9 trillion Euros. I shouldn’t need to tell you the reason for that…..

        zorro

  10. Mike Wilson
    Posted September 6, 2013 at 8:45 am | Permalink

    If you take the monetary base at the beginning of 2008, the UK’s monetary base has now increased fivefold.

    Mr. Redwood, for those of us who are not trained economists, could you define ‘the monetary base’ please?

    Reply Also called narrow money, or cash in circulation plus banks’ cash reserves and holdings at central Bank.

    • Mike Wilson
      Posted September 6, 2013 at 9:02 am | Permalink

      Sorry, reply to my post as you can’t edit posts here …

      Wikipedia says: ‘In economics, the monetary base (also base money, money base, high-powered money, reserve money, or, in the UK, narrow money) in a country is defined as the portion of the commercial banks’ reserves that are maintained in accounts with their central bank plus the total currency circulating in the public (which includes the currency, also known as vault cash, that is physically held in the banks’ vault).’

      So, Mr. Redwood, when you say ‘If you take the monetary base at the beginning of 2008, the UK’s monetary base has now increased fivefold.’ could you explain, in layman’s terms, what that actually means?

      • zorro
        Posted September 6, 2013 at 4:13 pm | Permalink

        The US monetary base has increased fourfold from around 850 billion dollars to around 3.1 trillion dollars from 2008 to January 2013.

        zorro

        • zorro
          Posted September 6, 2013 at 4:17 pm | Permalink

          Remember that money supply is different in that it includes total currency in public circulation in addition to non bank deposits with commercial banks.

          zorro

    • Mike Wilson
      Posted September 6, 2013 at 10:04 am | Permalink

      Mr. Redwood – thank you for your reply. But what does it MEAN.

      We have 3 components:

      Cash in circulation
      Banks’ cash reserves
      Holdings at central bank

      The total of these has, it seemed, increased 5 fold since 2008! But what has increased 5 fold? What has caused the increase? What is the affect of this increase?

      • margaret brandreth-j
        Posted September 6, 2013 at 2:02 pm | Permalink

        I am not sure what you are asking John, Mike. If there is a sudden increase in money printed, then it will effect all aspects of economics . If 5 times the circulating money was printed since 2008 then the base is 5 times greater?
        If what you mean is what impact has it on our current situation , then we are living in it!

        • margaret brandreth-j
          Posted September 6, 2013 at 2:13 pm | Permalink

          affect of course.

        • Mike Wilson
          Posted September 7, 2013 at 9:00 am | Permalink

          Margaret, my question to John was:

          We have 3 components:

          Cash in circulation
          Banks’ cash reserves
          Holdings at central bank

          The total of these has, it seemed, increased 5 fold since 2008! But what has increased 5 fold?

          To the uninitiated, his initial answer meant nothing.

          1) Cash in circulation – that seems easy enough to understand. I think it is probably safe to assume there is not 5 times more cash in circulation than there was in 2008?

          2) Bank’s cash reserves – what does this mean, I wonder. I am under the impression that banks have to maintain some cash to pay people who walk through the door and who want to withdraw the cash they have previously deposited. Is this what is being referred to? Have banks set aside 5 times more cash than they had in 2008?

          3) Holdings at central bank – no idea what this means. Whose holdings? Holdings of what?

          I find, always, people bandy economic expressions around as if they think everyone has an in depth understanding of how the banking system works – and how it all interconnects with the Bank of England and the settlement system etc.

          When I ask for an explanation, I find very few people can provide one without making assumptions about what the person asking already knows and understands.

          As has happened here. We are told the monetary base is 5 times larger. But, what does that MEAN? Literally, what does it MEAN and, what does it mean in terms of its affect.

          Simply stating, ‘we are living with the affect’ isn’t really helpful.

      • Acorn
        Posted September 6, 2013 at 4:39 pm | Permalink

        (unchecked ref removed ed)

        Remember, there are two types of money, government (treasury and central are one and the same) and commercial bank money (credit). The government always spends twice, it will deposit your pension in your current account, and it will, at the same time, deposit an equal amount into your banks “reserve account” at the Bank of England. The “reserve” is not cash, but it will be if you want your pension in pound notes. If you move your pension to another different brand bank, the reserves at the central bank move banks as well.

        The fivefold increase is practically all in increased amounts in commercial bank reserve accounts at the BoE. The BoE created new money and bought government debt (gilts) that were held by the banks and put the “money” in their reserve accounts. It’s the equivalent of cash on the hip when banks don’t trust any bugger with credit. Call it the Arthur Daley mode of business.

        If you get through the above, you will start to understand that the phrase “record budget deficit inherited from Labour”, doesn’t actually worry the central bank, as it can never go broke in its own issued currency. Like wise, the Treasury can always pay any bill presented to it in pounds sterling.

        There is an interesting teaching bit from the Bundesbank.

        “How do we assess the heightened financial risk associated with the crisis-related measures with regard to central banks’ equity capital? The assets purchased by the Eurosystem during the sovereign debt crisis constitute an ongoing transfer of risk from the private to the public sector. Any losses would be socialized. Unlike a private enterprise, however, a central bank can never become illiquid and therefore technically insolvent. Central banks can always hold assets until maturity, which is why they are only exposed to credit risk and not to liquidity or interest rate risk. Losses incurred by national central banks do not necessarily have to be offset directly via additional capital injections from their owners and a loss brought forward would have no impact on the Bundesbank’s business requirements.”

        Can you imagine how nice it would be knowing you could never go broke in your own currency, because you issue it. It is a good job that the little people don’t know that, isn’t it?

        • Acorn
          Posted September 6, 2013 at 5:02 pm | Permalink

          BTW, you can see what JR is talking about with the BoE balance sheet at http://www.bankofengland.co.uk/markets/Pages/balancesheet/default.aspx .Note the size of the “reserves” that have been created with new money.

          Also the Bundesbank bit about the Eurosystem crisis at http://www.bundesbank.de/Redaktion/EN/Standardartikel/Press/Contributions/2012_08_31_nagel_ie.html#Start .

          • Denis Cooper
            Posted September 7, 2013 at 9:48 am | Permalink

            And those “reserves” appear on the liabilities side of the balance sheet, while the assets side is (indirectly) boosted by the gilts held by the Bank’s APF; hence if the Bank agreed that the gilts could just be cancelled without any further payments from the Treasury then the Bank would be bust; except that the Treasury agreed that it would cover any losses made by the APF, so cancellation of the gilts would not allow the Treasury to escape paying the Bank back.

    • JimF
      Posted September 6, 2013 at 11:52 am | Permalink

      Reply to reply:
      Mr R can you let us know which preventative measures are in place to prevent that 5 fold supply of cheap money for the banks turning into inflation via lending into asset bubbles such as the housing market. It is a disaster waiting to happen, isn’t it? Once there is sufficient air again in the housing bubble (it’s getting there), then rates of 5% start looking attractive to house buyers, the banks have a collateralised guaranteed income stream, and off we go again. Pull that money out of a buoyant housing market and we have consumer inflation. Just in time for the next government.

      • zorro
        Posted September 6, 2013 at 4:22 pm | Permalink

        The way that QE is operating means that the banks are parking that money at the BoE, and they are not able to lend the money out, although there are some major exceptions with the Funding for Lending scheme which s feeding through into some of the house price increases. The international banking restrictions are holding back expansive lending at t he moment which is good because otherwise we would be facing another credit bubble potentially on the back of QE.

        zorro

    • Acorn
      Posted September 6, 2013 at 11:56 am | Permalink

      Mike. It might be helpful if you had a look at “Saturday Quiz – August 24, 2013 – answers and discussion” (Google it) on Billy Blog. Question 3 is relevant for the above. Don’t forget that coalition economic policy is based as if we were still on the Gold Standard.

      “Some progressives call for bank lending to be more closely regulated to ensure that all bank loans were backed by reserves held at the bank to stop another credit binge. However, financial market interests argue that this would unnecessarily reduce the capacity of the banks to lend and damage the economy. Both are wrong.”

  11. Andyvan
    Posted September 6, 2013 at 9:11 am | Permalink

    The whole central bank system is fundamentally flawed. It assumes that the people running it can take into account the billions of factors affecting an economy and accurately judge the correct interest rate for savers, borrowers, multi nationals, corner shops, governments and set it at that rate despite political pressures to engineer constant bubbles in stocks and/or house prices. This is a total impossibility as has been proved again and again in recent years across the world. There is only only entity that can do the job, the free market. The reason it won’t get the chance is that the groups that directly benefit from currency debasement- government, bankers, big business won’t let it. Just follow the money to the criminals and you’ll see who benefits and who doesn’t. It isn’t us poor tax slaves that get the cash you can be sure.

    • uanime5
      Posted September 6, 2013 at 6:36 pm | Permalink

      How exactly would the free market calculate the rate for savers and borrowers? Also given the dominance of bankers and big business in the current “free” market what safeguards will be put in place to prevent the rate being set so it only benefits the wealthy?

  12. Ralph Musgrave
    Posted September 6, 2013 at 9:22 am | Permalink

    The idea that central banks have artificially reduced interest rates is a myth. Given the astronomic amounts borrowed by governments, the net effect of government is to artificially INCREASE interest rates. As pointed out by Warren Mosler in his second last paragraph here:

    http://www.huffingtonpost.com/warren-mosler/proposals-for-the-banking_b_432105.html

    However, central banks do VARY the extent to which the “government / central bank machine” artificially raises interest rates.

    Second, JR’s claim that the authorities are “applying the brakes to the commercial banks” is not true. According to Andrew Haldane of the Bank of England, bank subsidies are now larger than ever (despite the attempts of the Vickers commission to reduce them).

    Vickers suggested making the bank leverage ratio a bit safer. George Osborne refused. In short, the constraints being put on commercial banks are MINUTE.

    Along with Positive Money, I’m devoting a lot of effort to having much tighter controls put on private banks, with any deflationary of that being compensated for simply by having government create new money and spend it into the economy. That way there’d be less debt, so households and firms WOULDN’T NEED to borrow so much. Of course private banks would by crying their eyes out, plus they’d to running along to No11, where they’d be guaranteed an audience. After a few suitably large donations to the Tory Party, those banksters would unfortunately get their way in all probability.

  13. Terry
    Posted September 6, 2013 at 10:21 am | Permalink

    These interest rates, at 300 years lows, are merely to protect the banks from bankruptcy.

    They are wrecking the returns for savers and pensioners – the very consumers who account for 60%+ of GDP and despite all of the QE, the GDP is flat, at best. So where has all the money gone? Into assets, as you say and where will it end? Where is always was going to end, in a severe crash. These attempts to sustain the economy and money flow, although proven dubious, are merely prolonging the eventual agony that will descend upon the Western Nations (and beyond), for their profligacy over the past 80 years. The International Bond markets will determine when this credit waterfall restarts. Wall Street crashed in October 1029 but the LSE went down first, on Sept 20th. The anniversary of that is two weeks away.

    • Leslie Singleton
      Posted September 6, 2013 at 5:01 pm | Permalink

      Terry–You are so right about interest rates–I have just returned from rolling over a fixed rate term deposit and am in a state of shock. The poor girl quoting me alternatives was embarrassed. Personally I don’t think that it would make a rat’s rear end of difference to a borrowing investor if rates went up 2 or 3 points (at least it it did he should stay at home) but to a saver today with his income all of a sudden many times smaller it is a great deal.

      • Terry
        Posted September 7, 2013 at 12:30 pm | Permalink

        Low deposit returns have messed up life in our household. Those diminished returns have crossed over to our pension too. in 2007 we received around 4-5% now we are lucky to get 1.5%. 2/3 of our SIPP income sliced away to prop up the banks. These ultra low rates are going to create the elephant they were trying to avoid. Deflation. Who has money to spend and create growth? There have been some dumb policies actioned since 2007 and they are turning out to be very dangerous to our well being.

        • Mike Wilson
          Posted September 8, 2013 at 11:12 pm | Permalink

          What do you think is a reasonable risk free rate of interest to earn on your savings?

  14. lojolondon
    Posted September 6, 2013 at 11:35 am | Permalink

    Great article, John – it is so seldom that you see (slightly veiled) criticism of the bumbling Keynesian civil servants who were responsible for maladministration of our economy for so long, most refreshing!

  15. JimF
    Posted September 6, 2013 at 12:00 pm | Permalink

    PS I see the mickey is being taken out of Cameron for us being a small island with no influence. I don’t think his reaction should be to name every significant event from the dissolution to WW2. They are taking the mick because they know he U turns on every decision he makes, and because his decisions are always wrong. They are taking the mick because his government is making his citizens poorer whilst theirs is making theirs richer.
    Cameron needs to look in the mirror to see why he and by inference we are at the butt end of the joke. This is an embarrassment we haven’t suffered before – even Blair held his own intellectually at this sort of game rather than delve back through history.

    • margaret brandreth-j
      Posted September 6, 2013 at 2:04 pm | Permalink

      But we are a small island and everyone should get used it. Switzerland despite their size are not doing too badly.

      • lifelogic
        Posted September 6, 2013 at 7:18 pm | Permalink

        The UK could do far better that Switzerland it has sea ports and is much bigger and rather flatter, all that is lacking is independence and some sensible but visionary leadership. Cameron in reverse in fact.

    • zorro
      Posted September 6, 2013 at 8:33 pm | Permalink

      He was probably a bit riled, I guess that events have been catching up with him over the last days/weeks, and he’s feeling a bit tender. He should have kept his cool and not allowed himself to be provoked like that. A witty riposte might have played better, but he goes a bit too flashman like when things don’t go right.

      zorro

  16. behindthefrogs
    Posted September 6, 2013 at 12:59 pm | Permalink

    As a start we need the government to put some downward pressure on property prices particularly in London.

    Capital gains tax must be applied on all sales paricularly those by foriegn owners.

    Council tax must levied at higher rates on larger properties by creating new higher bands. This is preferable to a mansion tax as it creates more downward pressure as it applies to a wider band of properties.

  17. Lindsay McDougall
    Posted September 6, 2013 at 1:04 pm | Permalink

    Mr Redwood attributes the recovery to the increase in money supply. Certainly, a fivefold increase in the UK’s monetary base since 2008 is truly staggering. I used to share his view.

    However, an increase in MONETARY demand does not lead to a REAL increase in GDP in the long run. It is perfectly possible that the recovery in real GDP growth is something that would have happened anyway without the loose monetary policy.

    This sort of thing has happened before. In the 1964 budget, Reginald Maudling had a borrowing requirement of £800 million; to obtain the modern equivalent in today’s debauched currency, you have to multiply by a factor of over 60, giving close on £50 billion. Yet it was totally unnecessary; the UK economy was already recovering strongly in 1963, and the 1964 ‘dash for growth’ merely created inflation. In those days, the interaction between fiscal and monetary policy was simple; the Chancellor determined his borrowing requirement and if the net borrowing achieved at home and abroad fell short, then the gap was covered by issuing Treasury Bills (leading in short order to more money in circulation). It was an empirical fact that when the Chancellor was most anxious to borrow from the public, they were at their most reluctant to lend to him, and no one should be surprised at that.

    Mr Carney has tied his monetary policy to the unemployment rate. Given that we have no control over immigration from the EU, and that there is clearly going to be a lot of it next year, and that we don’t know how quickly they will find work, that was a most foolish trigger to select. Let us return to inflation targeting, this time including house prices in the inflation index used, and more sensible interest rates. And I still haven’t heard a good reason not to have a zero inflation target.

    • margaret brandreth-j
      Posted September 6, 2013 at 2:12 pm | Permalink

      Listened to John Humphries on Radio 4 discussing the same thing. It seems to me whilst there are diametrically opposed motives , that of reducing unemployment and that of becoming more austere and subsequently removing jobs, that tact will not work, however there was one comment which seemed hopeful on the horizon: a hope of more proper salaried jobs.This will create stability and more confidence for people to borrow. I hope employers will realise their responsibility to the economic situation and not give all the employees a hard time. We don’t need little Hitler’s , we need managers with a sense of overall responsibility to creating wealth and production.

      • Lindsay McDougall
        Posted September 6, 2013 at 4:09 pm | Permalink

        If immigration were to be severely restricted, there would be pressure on the existing labour force to produce more, giving higher productivity. That would help to produce the proper salaried jobs that you want. However, there are a lot of employers that like cheap labour.

  18. Anonymous
    Posted September 6, 2013 at 1:09 pm | Permalink

    If it’s going to go *pop* then before 2015 please.

    Mr Cameron shows his contempt for ordinary people by slackening our borders ever further and doing nothing about the expected influx from Bulgaria/Romania. Contrast this with his enthusiasm to intervene in Syria and sort out other people’s problems.

    He’s a fake Tory. We don’t want people voting him back in because of a cynically delayed slump made much worse because of that delay.

    Reply I read today that he has sued the G20 summit to ally with Mrs Merkel to tighten rules over inward migration and eligibility to benefits, something we have pressed him to do.

    • Anonymous
      Posted September 6, 2013 at 5:24 pm | Permalink

      Repy to reply: Thanks for doing that.

  19. rd
    Posted September 6, 2013 at 1:46 pm | Permalink

    Another boom-bust cycle coming… Listen to the markets.

  20. M.A.N.
    Posted September 6, 2013 at 5:12 pm | Permalink

    So is this right?. The lowering of the base rate and QE were for the government to pay its bills, ie print to buy your own debt. Presumably there weren’t (still arent?) enough buyers to buy said gilts. Inflation then, like QE, is a form of default in that it shrinks the debt, a sort of get out of jail free, at the expense of ruining the markets trust. Only we haven’t got rampant 1970’s style inflation, so we are just playing at that game. Defaulting on pension obligations in future years etc won’t balance the books. If the state won’t make huge cuts in spending, what then jon? You mix with people who go to Bilderberg, what do they actually say? is it a case now of a managed decline?. It does look that way, pictures of previous execs sleeping in makeshift tent villages in Japan, I reckon that’s london 2020 maybe sooner.

  21. Gary
    Posted September 6, 2013 at 5:29 pm | Permalink

    A shed load of credit via HTB has shocked the lifeless patient into a spasmodic twitch. Everybody celebrates that there is life.

    Let’s wait and see.

  • 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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