Tight money and excess public borrowing

The last government’s recipe for recovery was wrong. It combined excess public spending and borrowing with monetary tightness for everyone else.

The new government needs to change this formula – we need better controlled public borrowing combined with easier money to allow a private sector recovery. The latest money supply figures show money is still too tight. Business surveys show too many firms still cannot get credit, and those who can are paying more than 5% for the money they do borrow.

We need to change bank regulation and monetary policy urgently. The government has started to move on excessive puiblic borrowing. It also needs to move on the feeble private sector recovery, which is the result of current money policies.

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  1. nonny mouse
    Posted June 11, 2010 at 9:05 am | Permalink

    I totally agree.

    I would suggest also setting a temporary target range for the money supply figures to detect if the looser money goes too high (inflationary) or too low (presumably deflationary). Note that this would be temporary policy aide (five years?), not a return to full blown monetarism.

  2. Libertarian Radical
    Posted June 11, 2010 at 9:20 am | Permalink

    In a response to your maiden speech in 1987, Ron Leighton said:

    ''We have just heard an extremely elegant speech from the hon. Member for Wokingham (Mr. Redwood). His reputation preceded him to the House. We all know of him as one of the major thinkers of the Conservative party. I believe that he invented monetarism. I believe that he is a true believer and a high priest of the monetarism theory.''

    If you are a true monetarist, surely you would support QE which is designed to increase the money supply. Japan tried it for 10 years without stimulating any inflation whatsoever. Although I believe inflation is a problem, I don't believe there are many core inflationary pressures within the British economy. Friedmanite monetarist theory showed a 33% drop in M3 contributed to the Great Depression. The Bank of England needs to do everything to stimulate M4 growth now beceause if it dosen't, the British economy will collapse as we financially starve to death through lack of money and credit

    • Norman
      Posted June 11, 2010 at 8:22 pm | Permalink

      I should probably read more about it but I don't understand this M3 and M4 stuff so my judgement may be clouded but I look at QE as a 'share issue' where the shares are British Pounds and the company is British GDP. It may be a shot in the arm for a short term fix but you couldn't do something like this more than once surely?

      As for Milton Friedman, I'd absolutely love it if the government adopted his suggestion to cap government spending as a limit of GDP, say 30% (even that seems an obscene figure). Whether they raise that through taxation or borrowing I don't care, just don't spend more than that and I'll be (somewhat) happy.

  3. Nick
    Posted June 11, 2010 at 10:24 am | Permalink

    The problem is to make the banks safe, you have to get them to increase their capital.

    Since RBS and Lloyds shareholders have been screwed over, you aren't going to get it from shareholders.

    That leaves the customer. It means charging more in fees, paying less in interest and charging more in borrowing. It means avoiding risk.

    So when you say, lets increase lending/borrowing, you need to be clear that you are running a risk. Namely more bank failures.

    I don't think that's acceptable.

    As an alternative approach, why not divert all NI into personal accounts for pensions? That diverts money from the state to investment? It worked in Argentina until the government stole the lot.

  4. Demetrius
    Posted June 11, 2010 at 10:53 am | Permalink

    Private firms finding it difficult to obtain credit? I recall the late 1940's and 1950's when there were all sorts of investment controls and tight credit for much of private industry. The long term damage this did we all saw in the 60's and 70's. Moreover now as then it has become so much more difficult for new firms and new entrants to begin or progress.

  5. Ex Liverpool Rioter
    Posted June 11, 2010 at 11:23 am | Permalink


    When in God's name are we going to see Savers rewarded for saving?

    I can't get more then a few % on my saving & I HAVE TO PAY TAX on what little i get!

    When will we return to the REAL WORLD!

    • StevenL
      Posted June 11, 2010 at 4:24 pm | Permalink

      When you vote with your feet and stop lending it to them!

    • HJBbradders
      Posted June 11, 2010 at 6:20 pm | Permalink

      I totally agree. If you have a mortgage and still have a job, you are laughing about this debacle. What about indeed the savers? Don't they say that there are 6 or 7 savers for every borrower. Perhaps we should have 2 separate interest rates: one for the big boys and one for the mortgage-savings. It is time we savers had a fair crack of the wip.

    • DBC Reed
      Posted June 11, 2010 at 7:30 pm | Permalink

      Well exactly. 0.5% interest rates have been around for well over a year now.The last government propped up the private banking system with public money and in the banks they part-owned left things to commercial management rather than having the State direct credit which would not have suited business.The low interest rates meant many people's mortgage repayments were reduced by hundreds of pounds a month.Meanwhile the private sector had many lucrative contracts with the public sector which paid reliably. There was very little more that Labour could have done by orthodox means (and unorthodox means like quantitative easing ) to stimulate the Private Sector but private business has not come through. The Conservatives will be flogging a dead horse trying to get the Private Sector to make good on its vague promises and put its endless whining behind it.What exactly in orthodox terms is stopping the Private Sector steaming ahead now?

  6. Sally C.
    Posted June 11, 2010 at 2:23 pm | Permalink

    JR, I think you are on much safer ground when you talk about cutting taxes to encourage business and hence employment growth. Making credit cheaper and more easily available is a dangerous combination. I completely understand why you think this should be so, but it would be sowing the seeds of yet another bubble. As far as I can see, house prices in my local area are still far too high and are rising. That is the problem with cheap credit, it doesn't necessarily end up in new business creation but in the housing market. When interest rates are artificially low, they give out false signals of growth. They encourage ordinary people and businesses to invest when they probably shouldn't.

  7. David
    Posted June 11, 2010 at 4:22 pm | Permalink

    Is there any merit in the so-called "Robin Hood" tax which would charge a levy on the banks rather than industry and individuals? Or is this too facile?

  8. StevenL
    Posted June 11, 2010 at 4:28 pm | Permalink

    "We need to change bank regulation and monetary policy urgently." (JR)

    The thing is, we don't seem to view bank capital ratios as anything to do with 'monetary policy', or money supply figures and asset price inflation as anything to do with inflation (well officially anyway).

    I would be very interested if you to set out your views in detail at some point on exactly how we should calculate inflation and exactly how we should manage money policy.

  9. Mark
    Posted June 12, 2010 at 10:41 am | Permalink

    As far as I am able to decipher the lending data collected by the BoE, the largest single chunk is the £1,237bn of outstanding mortgages on residential homes, and there is a further large sum tied up in commercial property, land banks etc.. Something in the order of a further £900bn is lending to financial institutions (the definitions and classifications are altered often in an act of seeming obfuscation). Consumer borrowing on credit cards and personal loans (about £220bn) far exceeds borrowing by manufacturing industry (about £50bn).

    The health of banks depends on property prices, which remain at over-inflated bubble levels. Lending to the productive economy ought to be trivial alongside the vast sums tied up in property. The real problem is how to deleverage the property portfolio that threatens to add greatly to government borrowing if the BoE's special schemes can't be wound down. Only when banks manage to cull their property books will they be safe again.

    Posted June 12, 2010 at 2:08 pm | Permalink

    Doesn't it add insult to grievous injury to learn this week that £128,000 of that excess borrowing was used to buy 28 special-design velvet sofas for stressed council tax officials?

    And to discover that the BBC is flying a documentary team to Cyprus at huge public expense to film an alcoholic female thug as she roams the island?
    A crassly irresponsible use of our £145.50 pa license fee – especially as the program is to be shown on BBC3 for a no-doubt tiny audience – but a nice sunshine break for the crew!

  11. christina sarginson
    Posted June 15, 2010 at 12:27 pm | Permalink

    I think the new government have got a big job on their hands and the sooner it stops blaming the old government and starts to get the UK back onto a path of recovery the better. Let us hope it is soon, I cant wait.

  • 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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