Politicians should add a nought or two

Most of the economic and spending debates at Westminster are about sums of money that will not make much difference to a £1.5 trillion economy.

I wrote during the election that arguing about £6 billion more or less was debating a rounding error in the National Accounts. The real money was being moved by the banks and the government in tens of billions.

Of course a few million here and a few billion here can be important for a public service or individual groups of people or for a part of the country. We do need to have those debates and try to get the detail right.

We also need sometimes to have a big picture debate. We need to discuss the forthcoming £390 billion of bank refinancing and roll over in 2011, the odd £400 billion of bank refinancing the following year, to talk about the £60 billion withdrawal of business credit, to keep in mind the £200 billion of quantitative easing and to understand the impact of a £150 billion deficit on our credit rating and interest rates.

There are mutterings from near Threadneedle Street that we might need more of the same money printing medicine as we had last year. I don’t think so. The question the Bank should be asking is why didn’t more of that money find its way into the private sector to finance a recovery? The answer is because the banks were under regulatory control to lend less and save more. QE was a device of the last Labour government to keep the costs of government borrowing low. It had some inflationary consequences along with the exchange rate decline. Banks were made to lend it to the government in the name of strengthening their liquidity, with government loans rated highly for their balance sheets.

The refinancing of the banks is large but can be done. The banks are in much better shape now. RBS after all has been on a compulsory slimming diet which will almost halve its balance sheet in a couple of years, cutting the amount of capital it needs.

Instead of worrying about printing more money the Bank should be concentrating on its forthcoming duties to regulate the banking system. It should have a plan now to ensure sufficiently capitalised banks are able to pass on an appropriate amount of the extra money that has been created to private sector uses. The challenge is not to debauch the currency more, but to fire up the private sector Quattro. At the moment the public sector Audi is taking most of the fuel.


  1. Javelin
    July 22, 2010

    TARP and QE were both designed by investment bankers as a mutt beneficial means -as you say (and I looked after Credit Derivatives IT at the one big global bank who didt lose money).

    It was all a bit of a Ponzi scheme. Banks who auction government bonds to the markets were offerred cheap bonds by the Government. The Government borrowed more but paid by selling the bonds cheap (and when the price is low of a fixed income product the interest rate is higher). It's just that other bonds become less attractive -a bit like driving your FX rate down relative to other countries.

    So where is the payback you ask? Simple – the Government lost money – an opportunity cost – a bit like scrapping a huge project. The money was wasted by the tax payer with nothing to show for it, but more stable banks and more borrowing.

    The question is whether the Government can get away with more QE now the banks are more stable and they SHOULD have cut their costs enough not to need to borrow. This time though it is the Government that is unstable and not the banks. The tax payer should say NO to this.

    1. StevenL
      July 22, 2010

      I think you're taking a bank-centric view on all this. It strikes me that the whole point of QE and CGS was to pin interest rates down. SLS was the one that looked more 'balance sheet correction' to me.

      It's not so much a case of taxpayers bailing out the banks, but savers and investors bailing out borrowers and bankers.

    2. Mark
      July 22, 2010

      QE was simply a three card trick swapping new gilts for old at artificial inflated prices and handing over freshly minted electronic cash for the Treasury to spend. In reality, government didn't borrow a penny – that will only happen when the QE APF gilts are sold. The printed cash was then paid to businesses who used it to pay down loans, and government employees and benefits claimants who spent a large chunk on imports and paid down some higher cost unsecured borrowing. It failed to pump prime the economy or bank lending (not even the special incentives designed to boost house prices ahead of the election managed to boost mortgage lending which has risen just £12bn or 1% since November 2008). QE stopped bank customers from defaulting (and in turn the banks from doing likewise): in reality it was mainly just another route to pump funds into bank balance sheets.

  2. Alan Jutson
    July 22, 2010

    With all this talk of Billions and Trillions, is it any wonder that most of the General Public feel completely and totally disconnected from what is going on with our Public finances.

    Most houshold budgets recognise just tens of pounds as making a big difference (to some its just a few pounds) to them.

    The problem we seem to have, is that most Politicians do not understand big finance, Government Spending (JR excepted) how it works, or what it costs the average taxpayer.

    If only they were to add up all the percentages of Tax taken in:

    Income Tax, National insurance, VAT, Savings/Investment Tax, Capital Gains Tax, Inheritance Tax, Insurance surcharges, Fuel Duty, Vehicle Excise Duty and the like, they would see that we all work (those who are working), the majority of the time, to simply fund the Government and its spending programmes.

    It has to change, as the incentive to work harder and do better is now being challenged, by the "is it really worth it" lifestyle.

    1. EJT
      July 22, 2010

      Agree. Can I also make the point that in the private sector, the decision for the individual whether to work the extra few hours or not, is logically based on the much higher marginal rate they incur, not the mean rate. I.e. the top income tax rate, punitive rates on "luxury" items like the overseas holiday flights…

  3. MikeG
    July 22, 2010


    How can conventional credit-based (1.e.debt-based) expansion be re-started when Western private debt exceeds the limit of serviceability? Debt was serviceable only by taking on more debt – a true Ponzi scheme.

    The credit-expansion asset-inflation machine that has driven Western economies for thirty years has broken, and cannot be restarted. If it could be restarted it would break again to cause an even bigger disaster (but the central bankers are trying hard).

    Credit in the US is falling sharply for the first time ever. We have entered a dififerent world. Agregate demand will be only two-thirds of previous levels.

    The finance industry is a bloated parasite on the real world economy. It should be drastically pruned by a thirty year reversion, but it won't be until it starves the host close to death. Only a few years to go!


  4. Nick
    July 22, 2010

    Instead of worrying about printing more money the Bank should be concentrating on its forthcoming duties to regulate the banking system.


    No. It should be getting out of regulation completely.

    Here is an alternative solution that is cheap and will work.

    1. All banks to publish their credit positions.

    2. Law of bankruptcy changed. The first 50K of deposits have priority in a wind up.

    That's it.

    The first means banks can avoid systemic risk and not rely on the regulator.

    The second means that the cost of insuring deposits as far as the tax payer is concerned is zero.

    Now all that is needed is QE to be unwound as a tool to control inflation, and allow the private sector to compete for loans against the government.

    However, its all moot. Whilst you are shovelling more debt on the the public and borrowing more, firms won't get the cash.

    Cut spending.

    1. Colin
      July 22, 2010

      I think point 2 is a very good one.

      The other thing that needs to be in place is a system where the first 5k of deposits continues to be available through the normal banking systems during a bank bankruptcy. There needs to be something to prevent a run on a bank from being an issue for a normal person who just has a current account, after if a major bank ( like RBS ) went into bankruptcy today a large number of normal people would be cashless until their next pay cheque.

    2. waramess
      July 22, 2010

      Exactly. This is not rocket science and I have a copy of an open letter signed by some of the most prominent right wing economists some years back , an excerpt of which is as follows:

      "● Making bank depositors prior creditors. This will provide better incentives for prudent behaviour and make a call on deposit insurance funds less likely.

      ● Provisions to ensure an orderly winding up, recapitalisation or sale of systemic financial institutions in difficulty. Banks must be allowed to fail.

      ● Enhancing market disclosure by ensuring that banks report relevant information to shareholders.

      This should be reinforced with central bank action to ensure that:

      ● Proper use is made of lender-of-last-resort facilities to deal with illiquid banks."

      So why are our right wing politicians being so coy? Maybe their credentials are not as clear as one might wish

  5. Lola
    July 22, 2010

    "The challenge is not to debauch the currency more, but to fire up the private sector Quattro. At the moment the public sector Audi is taking most of the fuel. " Or more accurately "Time to fire up the private sector Mondeo. At the moment the pulic sector Zil(s) is(are) taking all the fuel"

  6. Simon2
    July 22, 2010

    The bank should also ask itself why interest rates have been at an all time low for over a year, despite inflation being well over target, house price rises in double digits and we're not even in recession. Not only this they're talking of more reckless QE.

    I hoped the unelievable favouring of borrowers over savers would end with the demise of New Labour. Looks like it won't be.

    1. waramess
      July 22, 2010

      Looks like the Conservative party are now led by left wing liberals or, where not, have been effectively silenced by the left wing liberals.

      So far I have seen absolutely nothing emerge that differentiates this lot from the last lot. Lets hope that will change over the months ahead

  7. Acorn
    July 22, 2010

    JR, it is time for you to come clean and explain how this "special relationship" thing works. Please could you explain which UK Treasury or BoE bank account this transaction(s) is detailed? ENGLAND BUYS $170B USTBONDS FROM SAVINGS ??? The Chinese dump US Treasurys and England accumulates them. Or more accurately, the USFed hides its vast monetization efforts in the United Kingdom account ledger item. No way to the reasonable man can Britain purchase $170 billion in USTreasurys in five months from legitimate sources of savings!! http://www.marketoracle.co.uk/Article21285.html

    1. StevenL
      July 22, 2010

      Great piece – I've long suspected that UK monetary policy is as coordinated with the Yanks as our defence policy is.

    2. nonny mouse
      July 23, 2010

      Beware of madmen claiming to be oracles.

      That article is the insane ranting of someone trying to talk up a gold price bubble.

  8. Brian Tomkinson
    July 22, 2010

    Perhaps the plan is in fact "to debauch the currency more" and stoke up more inflation.

  9. Norman
    July 22, 2010

    If there are mutterings in Threadneedle St., and the government don't agree with them then the Chancellor should be on the phone post haste to stop any such mutterings. We won't accept BoE 'neutrality' on this – the buck stops with Parliament.

    That a Conservative MP serving in a (I'm in a quandry here, what type of government do we have – conservative? liberal? progressive? Bassets all-sorts? Cameroonian?) government could even be talking seriously about the possibility of the government printing money to help fund government spending is mind-boggling.

    I realise it could be argued that the money will be used for private sector (we heard that one already from Labour, once bitten twice shy) but a pound spent is a pound spent regardless of where. We need to spend less. What's fundamentally wrong with this country is the size of the government. Things can't be done overnight but printing money should be the nuclear option when all else has failed.

    Get government spending down to 25% of GDP then come back and complain about money problems. Until then get the red pen out.

    July 22, 2010

    We wonder and worry about how much of this money ended up as bonuses to bank employees? We recall reading of some very fancy commission rates on straightforward, rock solid transactions.
    Is this not at the heart of the banking bonus scandal and the 'profits' of (named Investment Bank-ed) et al…much of it has not been risky at all but in fact money for old rope!

    1. Mark
      July 22, 2010

      A good chunk of bank bonus was being recycled as taxes though! That must make it look preferable to welfare.

  11. Steve
    July 22, 2010

    John, you're completely right about the odd billion or so not being the issue, in the UK finances it's just noise. But very few people seem to be able to comprehend large amounts of money, and instead focus on petty amounts that they feel familiar with. Of course, this all depends on your background. I think this was evidenced by the howls of outrage from all quarters at the MPs' expenses scandal. I'm not trying to defend the giant digital flat screen TV's (and porno to watch on them!) incorrectly claimed by certain MP's, only to point out that the level of general public outrage among supporters of all parties was somewhat unprecedented. This, I believe, was because Joe Sixpack can relate to a large TV costing a few thousand quid being "stolen" from the taxpayer, whereas NuLab's atrocious and astounding waste of tens of billions and hundreds of billions of pounds, all squandered for party-political advantage, is beyond poor old Joe's comprehension. Perhaps a new way of framing public sector waste should be invented? Given Mervyn King's trashing of his own currency, perhaps we should invent a new one, let's call it the DigiTV. One DigiTV = £1000 of old Merv's rubbishy paper pounds. So now a billion quid chucked away equals a million DigiTV's lost, surely something much more comprehensible to the average Lottery player than the old way of reckoning things?

    1. Alan Jutson
      July 22, 2010


      Think you are absolutely correct in that the size of the numbers are probably beyond comprehension for most people.

      That is the reason why most, do not understand the dire mess we are in.

      How else would Labour have got the number of votes they did.

  12. T French
    July 22, 2010

    Another reason that the private sector is not getting enough investment is that local councils are still borrowing via the government loans agency at cheap rates and then lending this money on to non-commercial groups like local sports clubs. Thus the money supply is being diverted by politicians, in the case of Woking Borough Council it is Conservative politicians. The amounts add up to over a 100 million smackers. If other councils are doing the same then it is no wonder the cash for real investment is drying up.
    Please John Redwood can you raise this issue for us.

    1. Mark
      July 24, 2010

      Try asking Jonathan Lord MP for Woking

  13. Mark
    July 22, 2010

    Bank Adder: "We're up the Swannee Baldrick! We've lent £1,238bn on mortgages and now we have to find £800bn of refinancing in two years! The Bank of England wants us to pay back our SLS and CGS."
    Baldrick: "I have a cunning plan. We swap all the mortgage assets we pledged under SLS and CGS for loans to business instead: then the BoE can call it something else and renew the facilities."
    BankAdder: "Baldrick, that genius! Wait a moment… Baldrick you oaf! We haven't lent more than sixpence to business, so we've nothing to swap!"

  14. manicbeancounter
    July 22, 2010

    The problem with understanding bank re-financing and QE is not just the huge size of the figures. It is also that they are balance sheet items. Most prople comprehend revenues and expenditure – the P&L account in business. They may understand fixed assets, inventory and the cash balance. But mention provisions for potential liabilities and their eyes just glaze over.

    The bank re-financing, as I understand it, is getting the banks balance sheets in better shape, by UK plc worsening its own balance sheet. If this risky portfolio (mostly problem loans) all goes sour. the national debt increases by 30% of GDP.
    QE is the Bank of England buying government debt in exchange for money. the BofE now has £200bn on its balance sheet. There are two questions I have on this.
    1. How to measure the effectiveness of a move equivalent to nearly 15% of GDP? The answer I get is either "lots" or "not much", with no order of magnitude being estimated.
    2. If QE was so effective, will not the BofE offloading its balance sheet be hugely contractionary? It certainly could not release it whilst globally there is so much new debt being issued by governments.

    1. Mark
      July 23, 2010

      QE is not a purchase of debt for money. It is a swap of one debt for another (old gilts for new), followed by a donation of free money to government to spend.

  15. Lindsay McDougall
    July 23, 2010

    If the Bank of England is even talking about more QE, it is high time to get a new Govenor. They should ever so slowly and cautiously move base rate back up to somewhere near 3%.

    The banks are in much better shape now. Good. The time has come to force the break up of RBS and Lloyds, to provide greater competition and to be able to proclaim that there is no such thing as a bank that is too big to fail. And when can we sell our shares in them?

    1. Norman
      July 23, 2010

      I firmly believe when it is time to sell the shares (the sooner the better) then they should be offered to British Citizens at a discount, £x,000 worth per person.

      The left will squeal that the government is enriching the rich further at the cost of the poor and that the money should go into the pot but these shares were propped up and bought with our money in the first place! Not a penny of government money was spent on these, it was 100 our taxes.

      The richer a person is the more tax he is paying and so the more he already has invested in these banks.

      If this doesn't happen (and with the current leadership I am very doubtful such a policy will get off the ground – encouraging individuals to own shares in nationalised companies, too much like the 80's) I will be disappointed.

    2. Steve
      July 23, 2010

      I agree, and for some years now I have been saying that Mervyn King is an utterly useless academic, just like his counterpart across the Atlantic. With their stupid ideas of printing banknotes and throwing them out of helicopters, they should both get the same treatment! Isn't King a bit bored with writing apologies to the Chancellor about how they have yet again missed the inflation target? And why doesn't the Chancellor do anything about it? In any job I have had, if I was set a clear target and missed it so badly and so consistently, even when the goalposts have been conveniently changed, I would have been chucked out without a penny of severance. How about we do the same from now on for the MPC and Governor? Three strikes and you're out, Merv (and pathetic pals), with no payoff. You're a far worse catastrophe for the UK than BP could ever be for the GOM, so let's shake things up and get rid of you, because you're clearly NOT doing what we taxpayers are paying you vast oodles of money to do – i.e. control inflation, in case you had forgotten!

  16. Iain Gill
    July 23, 2010


    Pass my thanks onto the govt for pulling the plug on the Raytheon eBorders over runs

    Hurray hurray hurray

    And may all govt contractors be encouraged to bid realistic estimates from the folk who know what they are talking about rather than use low numbers from their sales bullshitters

    I told Raytheon they were under estimating and couldnt remotely deliver, shame they didnt listen to people like me

    Now if you could dish out the same medicine to BT and friends for their NHS non deliveries?

  17. Iain Gill
    July 23, 2010

    Re "concentrating on its forthcoming duties to regulate the banking system" it should also worry about the fact that many uk banks are becomming ever more shells which superficially look like uk banks but where most of the workers are in india working for the outsourcers or indian nationals here working for the outsorucers and contracted into the banks

    you see there is quite a big national risk when our key national banks are actually "in practise" being run substantially by foreign nationals

    and this will only get worse as most of the junior intake are indian nationals there will be no brits available to grow into senior posts

    why are we allowing key strategic businesses on which the uk depends to be run by foreign powers? and especially when they are being underwritten by hm govt?

    banks will never ever operate in the ways you desire when the underlying motivation of their workers isnt even in the same geo political mindset as you, and where the underlying culture and morale compass is so vastly different

  18. Lindsay McDougall
    July 23, 2010

    While I am on the subject of RBS, that glittering array of insurance brands owned by RBS is still there:
    direct line
    direct line for business
    RBS Finsure
    Green Flag

    And there is no scope for rationalisation?
    And no scope for sell offs?

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