Author: johnredwood

I

The scale of Bank losses

In the budget figures we were told the Bank of England’s bond buying and selling will end up losing us £102 bn. In its early phases the Bank sent the Treasury profits of £124 bn, so on these OBR estimates there are astonishing total losses coming of £226 bn. As of March 2024  the Treasury had had to pay the Bank £49 bn to cover losses to date, so another £179 bn could become due if the OBR has  got a forecast right.

These losses are huge and unacceptable. A substantial portion of the loss is avoidable. The government needs to have urgent discussions with the Bank to slash these costs. Other major Central Banks including the US are not receiving any bail outs from Treasury whilst  China and Switzerland  did not buy too many bonds in the first place. The ECB  which made similar mistakes with bonds to the UK is now containing the losses much better with a different approach.

There are two simple changes needed.

1 Stop selling bonds in the market at low prices. The bonds repay on maturity when the Bank will get more for them than current prices, so stop selling.

2. Copy the ECB approach to payments of interest to commercial banks on their deposits at the Central Bank . The Bank of England is losing too much on the costs of remunerating the reserves placed with it by  the commercial banks compared to the interest it gets on the bonds. As the rate paid to banks is a managed rate fixed by the Central Bank cut the losses.

These changes would lead to a good improvement in  the public sector deficit x Bank of England, the measurement they use to control the economy, and to lower mortgage rates.

Ben Bernanke knows a lot about Central banks getting things wrong. On his watch at the Fed he saw inflation hit 5.6% in 2008 before watching it collapse along with important parts of the banking system. He was there for  the banking crash and great recession of 2008-10. He pioneered the money printing and bond buying policy that lies behind the wild ride the UK has experienced in inflation and growth 2019-24.

Recommending the same people on the MPC be asked to publish their own differing forecasts will not solve the problem, as there is too much groupthink on the MPC. Telling them to publish a range of scenarios does not help much either, because what we need and want to guide money policy is a reliable base forecast. How else can they set a good interest rate if they have no idea what inflation is going to be. That is why I have set out the need to completely change their forecasting models, to take money and credit seriously, and to recruit different people to provide diversity of thought.

1.The Bank should immediately conduct an internal review into its
models and forecasting to find out why it got inflation so wrong and to
propose amendments that would have produced better outcomes. It should
back test changes to the model to make sure they would result in material
improvements.

2.The Bank should produce an analysis of the role of money and
credit in inflation and discuss how this can be monitored and used in helping
make policy decisions about rates and money creation going forward.

3.The Bank should ensure in its future recruitment to senior roles on
the staff and to external appointments on its committee that it appoints to
obtain a greater diversity of views about economics and inflation. It should
wish to have representatives of the main strands of economic thought on the
important topics around the table.

4.The Bank should reward staff when it hits targets for accuracy of
forecasts and success of out turns to policy decisions.

5.The Bank should reconsider its attitude to Quantitative
tightening. If it is unimportant as an influence on inflation as it says and the
purpose is technical or tidying up it should stop selling bonds and let
maturities gradually reduce its balance sheet. It should consider whether its
bond sales do depress markets in ways which can disrupt them, consider the
flow across to its tasks in maintaining banking sector stability and ask
whether too many bond sales might make a recession more likely. Selling bonds at huge losses and sending the bills to the taxpayer is encouraging recession and preventing a growth policy.

One subsidy leads to another. One windfall tax soon becomes several permanent tax rises on overtaxed energy. One price distortion tempts Regulators to do more. Instead of pursuing the three aims of security of supply, affordable power, and environmental requirements we end up with energy which is too dear and a growing dependency on imports and the goodwill of foreigners.

The boost to oil and gas prices caused by the decision to get Russian oil and gas out of our supply chains in retaliation for the invasion of Ukraine was used as an opportunity to increase taxes on oil and gas. It was called a windfall tax  though the government did not specify what element of the price/profit was windfall, nor did it promise to cancel the tax when oil prices fell back. This then caused super profits for older renewable electricity investments so they too were put under a windfall tax. Subsequently new investment in renewables was exempted .  All this reinforced dearer energy, so then the government decided to spend a fortune on subsidies to domestic consumers. The government introduced a price cap on domestic energy bills. As prices fell so the price cap held costs up until the next review point. All these interventions were backed by the Opposition parties who usually wanted them to go further, last longer and tax and subsidise more.

This is a wasteful and worrying model for energy. It has meant higher public sector spending and borrowing. It has deterred investment in  new capacity through the higher and unpredictable taxes. It has helped close factories in the UK thanks to high energy prices, increased energy imports, and increased the imports of energy intensive goods.

The same thing is happening with energy using products. It is wrong to  tax car producers for selling too many petrol vehicles that people want to buy, and for  selling too few battery cars which people do not want to buy. It would be wrong to tax gas boiler manufacturers or to ban their product if people do not want to buy heat pumps. Government did not need to step in to ban blackberries in  order to promote smart phones, or to boost computer pads by taxing home desktops. There was no subsidy to promote mobile phones or internet services. Good products sell because people want them.

When we had many nationalised industries they dominated public accounts and caused some of the overspending and over borrowing that damaged the Labour government of 1974-9. Nationalised industries sacked a lot of employees, over charged customers and often lost taxpayers huge sums. Rail, coal, steel were in painful decline. Telecoms fell well behind technically with shortages of investment.

Today the public accounts are being damaged again by two nationalised industries, rail and the Post Office, and by the colossal losses of the Bank of England.  Since 2022 the Bank has demanded £50 bn from taxpayers to pay its bills. Network Rail has just got approval for £30 bn of taxpayer cash for the next five years. The Post Office has lost £1400 m in recent years and now expects taxpayers to pay up for all the repayments and compensation they owe the sub postmasters.

I have often reported on the needless damage to the accounts  being perpetrated by the Bank. The Fed does not send its losses to the US Treasury for reimbursement. The ECB does not sell its bonds at huge losses in the markets. Only The Bank of England does this.

Network Rail plans to rely on taxpayer grant for almost two thirds  of its cash needs. Only 4% will come from revenues of its commercial, property and freight interests. It has fabulous land and buildings, with key sites in the  centres of our cities and many towns . It fails to develop those and to harness private capital to make more stations good locations to visit with retail and services. It fails to develop land  adjacent to stations and rail yards for commercial purposes.

Nationalised HS 2 was a spectacular  failure at building the original northern rail scheme to something like budget and timetable . It is ending up building  us a ridiculously costly additional London to Birmingham line  when improved signalling and by pass track would have been a much cheaper answer to any capacity issues.

The two best arguments against nationalisation today are the Post Office and the nationalised rail companies Network Rail and HS 2.

Both of these  have lost taxpayers a fortune. Both have failed to deliver good service and to achieve the aims set for them by governments.

The Post Office under Labour and Lib Dem Ministers bungled putting in an expensive new computer system. It then blamed its sub postmasters demanding money from them they did not owe and putting many into court and prison. Under Conservative Ministers since 2015 the Post Office has delayed and diluted efforts to correct the record and compensate those falsely accused.

In recent years the Post Office has racked up losses of £1400 million plunging the balance sheet into the red . The Post Office is only allowed to trade by its auditors with a Treasury guarantee to pay all the continuing losses. Without a taxpayer guarantee the PO is now bankrupt.

HS2 Ltd has presided  over a massive escalation of costs to build a railway line, and allowed long delays in building the track and ordering the trains. So bad has it been it has resulted in deleting important parts of the original plan whilst we await a new track between Birmingham  and London for a train which was meant to improve connections for the north. If they had stuck to the original budget and timetable we would at least have got a new railway to the north.

Network Rail has presided over colossal losses. It regularly shuts sections of railway down for maintenance at holiday periods when more people might need a train. They do not resurface the main runways  at Heathrow over a bank holiday. It is often the reason for train delays and cancellations with points and signals failures, and with flooded and undermined track.

Network Rail has been slow to introduce digital signalling that would allow more trains to run safely on the same track, knowing exactly where all the other trains are. Its vast rambling property estate is poorly kept, and underdeveloped with often a negative response to ideas to develop station property better.

All 3 of these nationalised companies have paid large salaries and bonuses to senior executives  regardless of the losses and poor performance. There have been many changes of Minister and 3 different governing party governments ( Lab/Coalition/Conservative)  presiding over these companies. How can you argue this has been a good way to run things? Don’t private sector companies like Amazon and Microsoft do things better?

There are 3 ways forward for a company like Thames Water. There can be a deal between Regulator and the current shareholders and management agreeing an affordable investment programme and realistic customer charges  for the task. There could be a move to force a sale to new shareholders by undermining the current company, with a possible period of management by a government Administrator. There could be nationalisation.

Nationalisation is a particularly bad idea. Existing shareholders would need to be compensated for the enforced sale of their shares. State confiscation of the assets of the UK Universities Pension Scheme and the Ontario Municipal Pension Scheme would be contentious. To do so could  put off the many investors and supporters of private finance activities that the UK relies on. University teachers in the UK might  demand compensation for their pension scheme.

After deciding what to pay for the assets the state would then need to find additional money to increase the investment spend. It would all add up to a very large bill for taxpayers. In the past nationalised industries have also been good at running up large losses taxpayers have to pay. Current state enterprises, the Post Office  and HS  2 have shown just how huge the losses and cost overruns can be.

Tipping a water company into Administration also comes with considerable  costs as well as reputational damage to the UK as a good place to invest. The special Administration of an electricity company was costly for taxpayers.

To those who think the company should be bankrupted and the debts written off and not met, I remind you that the government and Labour rely heavily in their forward plans on harnessing large sums of private capital to provide the extra homes, energy capacity, broadband and the rest we need. If the country got a reputation for stealing assets off investors and undermining businesses by unrealistic price controls and regulations that would get a lot dearer and more difficult to pull off.

The best way forward is a negotiated settlement between the company  and the Regulator. As most want faster progress with expanding capacity of our dirty water pipes there needs to be an increase in spend and in customer contribution. If we want more and better sewers then either customers or taxpayers have to pay more. As it is  the  same people paying VAT, Income tax and water bills I prefer it to be on water bills. There needs to be a clear link and financial discipline on water companies between revenue and renewal expenditure.

There is the added complication that Thames Water is owned by a holding company that now  says it has run out of money. Uk taxpayers and water customers should not bail that company out. It is not itself a highly regulated water monopoly serving UK customers. If they need to tell the shareholders they need to get more money from them or undermine their investment further then that is a matter for them which should not affect the UK state.

Great news. The Bank of England has reviewed its money policy over lockdown and the period 2020 to 2022. It has concluded it worked well against a very difficult background. It thinks it can repeat its successful Quantitative easing operations in the future. Meanwhile  it’s best to sell lots of bonds and lose lots of money. They think

1.The big inflation had nothing to do with the creation of £450 bn to buy bonds at very high prices and the suppression of interest rates. It was the Ukraine war that gave us inflation. It is irrelevant that Japan, Switzerland and China who all import a lot of energy did not have the same high inflation.

They think

2 It is crucial that the Monetary Policy Committee does not consider the quantity of money. It is right to ignore it and not to monitor it or report on it.

They think

3. The big sell off in government bonds under Liz Truss had  nothing  to do with the Bank’s decision to sell £80 bn of bonds or with the decision to increase interest rates .

They think

4.The current recession is necessary to  complete  the task of bringing inflation down. Later this year it will be necessary to  lower rates  to provide stimulus to get some growth back, but there is no need to hurry.

So there we have it. A Bank whose main task is to keep inflation to 2% is blameless when it goes  to 11%. A money policy committee is right to ignore money and believe they can print as much as they like without causing inflation. A Bank can sell lots of bonds at huge losses and send the bill to the taxpayer but that has no bearing on recession or government finances. April 1 is a great day to remind people of these findings.