Author: johnredwood

Readers have asked me to update them on the debates about QE. The UK is not adding to its stock of £375 bn of created money and bond purchase. The US is just about to end its latest programme of money creation. Japan is well advanced with another very large programme and is likely to continue for the foreseeable future, as inflation (ex tax increases) is still low. The Euro area is not undertaking formal QE, but is seeking to increase liquidity by the ECB buying loan packages and bonds from commercial banks.

Before the UK crisis hit in 2007 (Northern Rock) and 2008 (RBS and HBOS) I urged a different policy towards the banks. I wanted the Bank of England to lend as lender of last resort . I urged them to supply more liquidity to a very damaged inter bank market. They chose not to, citing moral hazard. As a result they allowed major banks to collapse. The FSA banking regulator switched from being too lax in its standards of cash and capital to being too tough for the circumstances,  increasing the damage done.  This was a predictable tragedy which this site chronicled at the time and warned against in advance.

I also opposed the pumping of large sums of taxpayers money into commercial banks to provide new capital. I recommended controlled administration once they had helped bring the banks down. The shareholders and bondholders rather than taxpayers should have taken the hit. The authorities should have lent money to the parts of the commercial banks they needed to support and preserve whilst they found their own new arrangements for owners and capital. This approach has now been adopted for future crises through the so called living wills, a type of controlled administration.  I wanted to see radical changes to the numbers of banks and the shape and performance of the banking industry by a market led reorganisation and recapitalisation of the commercial banks that were in trouble.

If this had all be done in a timely way the Bank of England would have financed the system by shorter term loans for a period and we would have seen a competitive sensible banking  industry emerge much more rapidly. We would not have needed QE.

QE was required because the Bank did not keep the banking markets liquid and because the badly damaged commercial banks in the system meant they could no longer finance a normal level of economic activity and modest growth. QE did provide some relief to a very troubled market by releasing cash into the hands of people and institutions who previously owned government bonds. This money then found its way into the commercial banking system and averted an even larger decline in the money supply with worse recessionary consequences. Much of this injection in the US, Japan and in the UK did not prove inflationary for the simple reason the commercial banks needed the extra deposits and additional cash and did not lend this money on or gear it, which would have proved inflationary. The only caveat to that comment is in the UK QE may have been a reason sterling devalued, which did give a one off boost to inflation. In Japan a large devaluation of the yen did not have similar consequences as it is an economy less dependent on imports.

I see no need for either the USA or the UK to undertake any further QE. Both have reasonable recoveries. Even with the poor performance of the Eurozone and slower worldwide growth, most forecasters think the UK and US will continue to grow at a  reasonable pace this year and next. Japan needs to fix its commercial banks more successfully. Its massive QE programmes achieve very little by way of extra output or inflation.  I will study the Eurozone in more detail in a later post.

QE has adverse side effects. It damages the returns to savers and grossly distorts the price of financial assets.

This week one of my Parliamentary colleagues in a private meeting (not the NTB lunch!) summarised the problems with Mr Obama’s coalition in such scathing terms that quite a few MPs present just laughed in nervous agreement and changed the topic with the Minister present. Many of the MPs who would normally agree with the USA and be willing supporters have grave doubts about the current war.

The first concern many have is where are the boots on the ground to win this war in a timely way? Are the armies of Iraq and the Kurds able to defeat ISIS with just some air support by the west?  How long will it take the west to train and arm the Iraqi forces to ensure victory? What guarantee is there that  rearming the Iraq forces will not lead to more loss of good US equipment to the forces of ISIL?

The second concern is what is the future for the Kurds. If their army is successful in the north will it then hand over to the Iraqi forces, go home, and accept Iraqi rule? How hard will the Kurds push their claim for an independent state?

The third is the role of Turkey. Turkey should be one of the USA’s prime allies in the region, as a member of NATO with substantial ground forces, planes  and airbases. Turkey’s recent  intervention has been against the Kurdistan Workers party. Turkey remains very nervous about helping the Kurds, and ambiguous about the whole coalition strategy.

The fourth is how do you define the ISIL enemy? It may be clear in the areas ISIL has seized in Iraq, though even here identifying and killing or capturing every ISIL soldier is an extremely complex and difficult task as they are embedded in the local community and have taken over many flats and homes. In Syria it is even more complex, with the need to distinguish ISIL fighters  against Assad from so called moderate opposition fighters against Assad. The coalition is not seeking to defeat a field army in uniform willing to come out and fight conventional battles which the west could win.

The fifth is where will the political leadership come from in Iraq to unite the country, offering fair and peaceful government to Sunni, Shia and Kurd that each community accepts? How do more deaths and more destruction of property assist the task of reuniting the country? What does victory look like, and when does politics take over again from war? In Syria where is the political leader or coalition of parties that can take over power and unite that country behind peaceful democratic government?

The sixth is how do you prevent any military success against ISIL merely displacing the centre of their activities? What relationship does ISIL have with some of the armed bands that now roam in Libya? Where else could ISIL forces go for cover and assistance?

The seventh is to learn the lessons from western intervention in Libya. The democratic government there is now cowering in Tobruk, unable to venture into much of the rest of the country and unable to enter the capital city. Successful  military intervention by the west got rid of the dictator, but local politicians were unable to establish their authority and construct a government that works. Do we now know how to get a better outcome in Iraq and Syria?

In an April survey on the “Future of England”  (You Gov, sampled English voters)  62% wanted English votes for English issues, with only 12% against. ( 5 to 1)

42% of voters also favoured giving control of the majority of taxes raised in Scotland to the Scottish Parliament, with 25% against.

Many people in England like the idea of more fiscal devolution to Scotland, on the basis that Scotland would then be responsible for raising much more of the money itself which it wishes to spend.

I chair the NTB group of about 100 Conservative MPs. Formed in the 1980s to support  Margaret Thatcher and her  famous statement “The Lady’s not for turning”, the Group has evolved over the decades to offer frank advice to Ministers and Shadow Ministers in private, and to work together from time to time in public with campaigns that matter to us. The Group today as with Margaret Thatcher is there to support Conservative Ministers trying to do difficult but sensible things that can improve our country and its government, and to be candid friends in private where things are not working as we would wish.

We hold either a  working sandwich lunch, or a  working  buffet dinner once a month. We usually invite a Minister as guest, and raise matters about  their departmental policies and activities with them. Sometimes we invite an interesting non Ministerial speaker. Nigel Lawson came, for example, to tell us of the work of his Global Warming Policy Foundation,which most of us support. Occasionally one of us leads a discussion of what needs to  be done next.

We do not inform the media of these events, as we wish to have good private conversations with Ministers. They need to know they will not read about it next day in the papers so we can have more wide ranging and honest discussions. I was therefore surprised to learn that on Wednesday the NTB had been invited to lunch at Downing Street for immediate topical reasons. This is simply untrue. I had invited the Prime Minister some time ago to be our guest in the Commons for a working sandwich lunch and he had agreed. The invitation was before recent by elections were in the air and was not about them.

I am grateful to the Prime Minister for the time he gave us  and for his attention to a number of issues where we wish to see changes and improvements in policy as we move from Coalition government to Conservative manifesto. I intend to keep silent over what was said and how the meeting went, as I remain strongly of the view that it is better if these exchanges between colleagues are done in private.In this hectic media world any critical comment or disagreement is blown up out of all proportion, as there is the absurd idea that members of a party always have to agree with one another.

I note that the UKIP supporters who write into this site who have in the past picked up on a very misleading account of a private meeting I attended with the Chairman of the Conservative party, have not come forward with comments on the selective reports of the NTB lunch with the Prime Minister as they clearly see no party advantage in quoting what it is alleged some of my colleagues said at this latest meeting.

Gordon Brown has changed his mind on English votes.

In the  1980 book ‘The Politics of Nationalism and Devolution’,  (which he co authored with H Drucker)Gordon Brown accepted that on one of his two possible models for  future  devolution (and the one he favoured for Labour) Scottish MPs would be prevented from voting on English or Welsh domestic matters as the quid pro quo for devolution to Scotland of  tax-raising powers.

These are the words from page 127 on the future:

“Some form of taxation power could be devolved if the price were paid. It is scandalous for the British Treasury to deny that it is capable of devolving any powers to levy tax when so many other countries do it. Most of all, a revised Scotland Act could embody some form of the ‘in-and-out’ principle. Under such a principle the remaining Scottish MPs at Westminster would not be allowed to take part in the proceedings of the House when it was debating England or Welsh domestic matters. The ‘in-and-out’ principle ought to be attractive to Conservatives since it would ensure them a semi-permanent majority on most social issues at Westminster – no small prize. Labour remains formally committed to devolution and may be expected to consider a plan along these lines in the future.”

So now we know that he and his co author once saw as a possible solution to the problem of devolution in Scotland offering some fiscal devolution. The authors  saw the justice of England’s case, and saw no impediments to devolving  tax raising powers to Scotland as long as there were also English votes for English issues

In my participation in debate  with him on Tuesday   I challenged his statement that Conservatives  had not alerted the people of Scotland to the English votes issue before the referendum, and so raising it now was unreasonable. I pointed out that I deliberately  raised it in Prime Minister’s Questions shortly before the Scottish vote, which got a lot of media pick up at the time. I also reminded him that English votes for English issues has been Conservative party policy since the 2001 Manifesto. We have given 15 years warning of the need to do this!

It is fascinating to discover he too had been thinking about the merits of this case in the context of fiscal devolution when he was a Politics lecturer at the Glasgow College of Technology.