How has the Bank helped with the recovery?


          The Bank’s remit includes assisting in promoting sensible growth, after ensuring price stability.  In 2008 Gross Domestic Product fell by 7%. It recovered a little in 2009-10, but has recently been hovering around zero growth. On current Bank projections it will not be back to the 2007 peak levels until 2014.

           The Coalition government forecast better growth in its first plans in the summer of 2010. Since then it has revised these down sharply for the first three years of the period, but reckons with the Bank that growth should be at much better levels in 2014 and 2015.

             The Bank’s main way of trying to assist recovery is to inject more money into the economy by creating it and buying government bonds. When it buys a government bond from the private sector, that frees cash for the private sector to spend or invest in something  more risky than a government loan. That should, according to the Bank, stimulate more activity.

                  It has certainly kept down the interest rate on government borrowing. This has been most helpful to the public sector, where additional  borrowing remains at high but reducing  levels. It allows more of the extra cash spending by government to go on goods and services rather than on additional debt interest.

                   It has not been so successful in keeping down private sector interest rates. The market in money between banks remains damaged. The leading banks all have to raise more capital or curtail their loans to comply with the much stricter cash and capital rules now in place, and to position themseleves for the even stricter ones coming in later.

                          The approach of the Bank of England is different from that of the European Central Bank. That has made much more money available to the commercial banks, to stimulate them and their lending capability directly. The Bank of England was keen to avoid lending to businesses through the corporate bond market, doing very little in its first programme of Quantitative Easing, and ruling it out in subsequent programmes. 

                            Some now think the Bank should intervene more firmly in the inter bank markets, to get private sector interest rates down closer to official rates to enforce its will for easier money. Others think the QE programme will in due course prove inflationary, and are concerned about the continuing run of inflation numbers well above target. The Review should ask why GDP has behaved so erratically, why it is now so low, and why it is taking so long to get it back above previous peak levels. The Reviewers need to answer why such a huge QE programme has had so little effect on the private sector.  It should ask if banking regulaiton is offsetting much of the QE impact outside the public sector.


  1. Mike Stallard
    May 31, 2012

    I must admit that I am totally out of my depth.

    But are you fiddling while Rome burns? I mean, if the debt and the deficit and the paper work and regulations keep roaring away, does’t that mean that running a business gets harder and harder as taxes rise, there is less and less reward and the dangers of being taken to the cleaners by a lawyer increase?

    Hence the GDP not coming up with the strength to carry the State expenditure?

    So it doesn’t really matter what the poor old bank does.

    1. ian wragg
      May 31, 2012

      We agonise about GDP but as there is net immigration of 250,000 each year, we must be all getting progressively poorer. The cake is the same with more mouths to feed.
      In a few years we will all be on benefits.

  2. colliemum
    May 31, 2012

    Dear John, I apologise for the awful formatting – I didn’t close the bold-tag properly.
    Here is the same post in proper format – please delete the horrible original post, thank you! —–

    The first sentence says it all:

    “The Bank’s remit includes assisting in promoting sensible growth, after ensuring price stability.“
    [My bold]

    So IMV, the Reviewers should ask why inflation was running so high in the last few years, and how this can be prevented.

    Let me be clear: I am talking about inflation in food prices, energy and fuel costs which affect especially households on limited incomes, and which are of course outweighed by other items in the ‘basket’ the government uses: how many people do you know who buy an iPad every month?

    While it is interesting to hear and read about the lofty thoughts of those who ‘govern’ our economy, like the BoE, I do wonder if all those people have forgotten that, in the end, it is what reaches us at the economic grass roots that matters.
    With a huge tax burden, microscopic interest rates on savings accounts, curbing inflation is the most important task for the BoE to get the economy going.
    Many economic journalists and readers scoff at the Germans for fearing inflation. Many of those seem to have no recollection of what inflation did here in this country in the 1970s.

    I recommend the book “When Money Dies”, by A. Fergusson – that might be enlightening.

    1. Denis Cooper
      May 31, 2012

      Because under pressure from successive Chancellors the Monetary Policy Committee has abandoned its statutory duty to put price stability first and unlawfully reversed the order of priorities.

      Doing that could have been made lawful if a Chancellor had invoked the reserve powers provided for in Section 19 of the Bank of England Act 1998.

  3. ian wragg
    May 31, 2012

    What happens when interest rates rise as they inevitably will considering the record borrowing of Osborne and Co.
    Without proper public spending cuts it will be a case of calling in the IMF or printing more cash.
    It’s only a matter of timebefore the bod markets discover the Chancellor has no clothes on.
    Then what???

  4. lifelogic
    May 31, 2012

    Low “official” interest rates are having little effect on the private sector because the banks are not lending, are pulling back loans or are charging very large margins and fees. Only old variable rate loans agreed before say 2008 are cheap. Government owned RBS is leading the way. In companies I know of about over ten jobs have gone as a result of cash being sucked back by the banks (for no reason related to risk the bank just want the money back). New absurd and artificial restrictions have been put in place to enable them to refuse or restrict loans all over the place.

    Clearly we have a lack of demand in the economy, a lack of confidence and a lack of banking. A state sector parasite that is still growing and killing its host. We need state sector austerity and a huge easing of the burdens on the private sector and confidence in the sense of direction from Cameron

    So far we have had, from Cameron, the no retirement laws, gender neutral insurance laws, new maternity nonsense, new forced pension regulations, more health and safely, more taxation, bank lending restrictions, more VAT, more NI, more expensive “new religion” energy, a lack of confidence, a lack of demand. Also the expectation of the county being run by a Unison puppet in just under three years time.

    Only actual “business friendly actions” will work not more of Cameron’s “weasel words”.
    The only positives I have seen was the (then only part) abolition of Hips and the M4 bus lane all the rest has been hugely negative.

    Cameron thinks and acts like a, command economy, pro EU, socialist. Just occasionally saying the right things but never ever doing any of them. Were labour in government now we might, at least, have had the prospect of a sensible government in 3 years time. Could it have been much worse?

    1. lifelogic
      May 31, 2012

      So now I see we have the over paid (and quite often useless and incompetent in my experience) GP’s with one of the best pensions around going on strike.

      Can no one explain to them that most in the private sector have no pension pot at all or less than one year of a GP’s pension to last for the whole of their retirement.

      Of course were MPs not to insist on continuing with their hugely (even more) generous scheme it might help the argument somewhat. Does anyone in this government represent the 80% worker bees who have to pay for all this. Or even have any understanding of their real position.

      1. lifelogic
        May 31, 2012

        So now after the pasties the caravans we have the “u” turn on charity tax relief restrictions – still the unworkable child benefit nonsense and a few other things to be addressed. Not even good PR.

        Perhaps next time the treasury could run any proposals past me. I picked out that all these were daft in a few minutes after they were announced. I would not make any charge for the service not wishing to add to the deficit.

        Does anyone at the treasury, from Osborn down, have any common sense or any understanding of the real world. Where people just grab a pasty for lunch rather than go the the £100 a day subsided HoC restaurant?

        Any action on charities should be to ensure they are doing good works. Many are simply not and just act as unfairly subsidised competition to the private sector.

        1. lifelogic
          May 31, 2012

          They could perhaps have run the pigis and IMF soft “loans” past me or someone sensible too before they tipped it all down the drain. How much have we lost so far on these “investments” Osborne?

        2. Bazman
          May 31, 2012

          What are these three posts of crap supposed to mean? Just meaningless rants and prayers for the free market gods who are supposed to save us? Do you actually do any real work lifelogic?

          1. lifelogic
            May 31, 2012

            I get some real work done sometimes, in between dealing with all the endless government admin the state throws on me. In order to handicap me and my businesses. The free market, with light but sensible regulation, is the only thing that ever will save us – if they ever let it.

          2. Bazman
            June 1, 2012

            I suspect that you live on some sort of private income from inheritance or the like. Your simplistic Northern Grammar school world views are telling and not unique. It amazes me that many on this site hold down a job with their simplistic view that if the state would suddenly just wrap itself up the private sector would just fill in all the gaps and everything would be just dandy. In lifelogics case he believes this to be true in everything except banking. Which he did not believe should have any regulation until recently. Now theres a thing…

          3. lifelogic
            June 1, 2012

            No I started with nothing at all.

            I do not want the state “to wrap itself up” just to be a sensible size (with pay and pensions similar to the private sector). Say 20-30% of GDP and do just what is actually needed. Defence, law and order, and a basic safety net for those truly unable to look after themselves – that is all we need.

        3. Bob
          May 31, 2012


          George Osborne should stand down, asap.
          We need someone with some real life experience in the job. Our host Mr. Redwood comes to mind, but I doubt that U-Turn Dave would agree to live next door to a real conservative.

          1. APL
            June 2, 2012

            Bob: “We need someone with some real life experience in the job.”

            Still thinking in terms of the (not)Tory party, a fatal flaw.

      2. uanime5
        May 31, 2012

        The Government has tried to fix the lack of private sector pensions using the ‘new forced pension regulations’ which you criticise in your previous post.

        It seems those preaching the politics of envy are trying to drag down public sector pensions, rather than raise private pensions.

        1. lifelogic
          May 31, 2012

          The only way to raise private pensions is to stop burdening the private sector with a nearly 50% state sector plus all the nonsense regulations. Then they might have something left to save for a pension rather than just paying for the state sector ones.

          The forced pension saving are just in effect a pay increase forced onto the private sector by law and will addition paper work for them too. One many business will only be able to afford by cutting pay, cutting jobs or just having no pay increases at all for a few years.

          1. Bazman
            June 1, 2012

            You seem to be under the impression that cutting the state sector will somehow help the private sector? All evidence seems to prove otherwise. You constantly whine about employment laws health and safety etc, but when pressed to give specific examples are unable to do so. Your basic ideas seem to be to pay cash in hand on a daily basis with no accounting or responsibility to the employer for anything. The employee is supposed to be responsible in return? The cash paid should be as low as possible and below minimum wage should be allowed despite payments as low as this being of only use to the employer. The way round this to make a section of the population desperate enough to take this money.
            In a nutshell all costs should be externalised onto the the employee who should be grateful for the work and not charge a living wage, with the state in one form or another such as health and law and order, picking up the ultimate tab. Who should not pick up the tab as this is the responsibility of the individual. At the centre of the nut is the race to the bottom. A race that people like yourself should be shielded from by the state and the middle class social security system that we have established by your silence does not exist. Would you agree with this summary lifelogic?

          2. lifelogic
            June 1, 2012

            I am not “under the impression that cutting the state sector will somehow help the private sector” I am absolutely certain that it will – as all sensible people surely are.

            How could reducing the burden of taxation, over regulation, other obstacles and similar not help it?

        2. Bob
          June 1, 2012


          Actually, we had very good private sector pensions before Gordon Brown wrecked them!

          1. lifelogic
            June 1, 2012

            Indeed we did until the Gorden Brown, Sottish Genius, private sector pension mugging tax and share price destruction policies all started.

    2. Tad Davison
      May 31, 2012

      I get a funny feeling I’m not the only one who is disillusioned with this government and it’s slow progress. Even a Conservative MP friend of mine told me in an e-mail a few days ago that he shared my sense of frustration.

      Some will point to the coalition partners, and say the Tories would like to do all these good and necessary things to stimulate the economy, but are held back by the Lib Dems. I would counter that by pointing out that the Commons is a debating chamber, where all the good arguments can be put forward. Those that do not withstand close scrutiny, can be dismissed, or the proponents of such bilge will be held to account by the electorate. By extension, apart from a handful of really good Tory MPs, the looney left-leaning Lib Dems are not being challenged anywhere near strongly enough. That makes me wonder just how committed to the cause some Tories really are, and if they might be better suited to a different party altogether?

      I can think of lots of very senior ‘Conservatives’ who are so out of touch with their grass-root supporters, they have no damned business masquerading as true-blues, and for them it’s merely a sham!

      Britain’s public sector is far larger than it needs to be. Is is a drain upon our resources. It is unfettered and not properly managed because it isn’t subjected to the same competitiveness that is present in the private sector. If a private company offers a service, they have to remain competitive, or someone else with lower overheads and a more efficient way of doing things will take their place. That is the way of things in the real world, and benefits consumers and tax-payers alike.

      The public sector must be subjected to those same rules of efficiency. Presently, there is little incentive for them to do better. The right-thinking, right-minded people have to stand up and make themselves heard far more loudly than at present, because given what is looming on the horizon, there is no alternative to shrinking public spending, however much nanny-state socialists and liberals may argue to the contrary.

      The bottom line is, the Utopian EU dream has turned into a nightmare, and these people need to wake up and face the reality.

      Tad Davison


      1. Mick Anderson
        May 31, 2012

        We need a better way to regulate the size of Government than competition. The problem is that using competition assumes that all functions provided by Government are necessary, just that some of them could be done more cost-effectively if they were subject to the rigours of private sector management.

        The real problem is that there is too much Government, and they spend money on things we do not need as well as too much on what we might. It’s the classic mission-creep thing.

        We need someone to apply Occams Razor effectively. They need to simplify things like tax, welfare and the NHS, but also to be bold enough to abolish things that are not needed. DFID, Scottish Office, Welsh Office, and Mr Hunts department all spring immediately to mind. Basic competition just isn’t enough.

        Mr Cameron and Mr Osborne made some of the right noises before the election, but I struggle to believe that they ever really meant what they were saying.

        1. Tad Davison
          May 31, 2012

          I’m right with you Mick.


        2. lifelogic
          May 31, 2012

          Indeed the state not only “spend money on things we do not need” they also spend it on things that clearly destroy wealth and just inconvenience, tax, licence and fine the public.

      2. uanime5
        May 31, 2012

        Not all the private sector is subject to competition. The banks, water, rail, and energy companies don’t have to remain competitive.

        1. lifelogic
          May 31, 2012

          Real competition in these areas is indeed lacking and needs to be address. Also in the dreadful UK legal system.

    3. Bert Young
      May 31, 2012

      Very sensible response .

    4. lifelogic
      May 31, 2012

      I also see that Quota plan for woman executives has been scrapped. “Ministers claim the move is a sign of their commitment to slash red tape”. Red tape only existed in the minds of some mad people.

      I assume they will now be thinking up other madcap schemes so they can abandon them and claim to be “cutting” red tape. Only a complete idiot could ever have suggested such an insane additional burden on business. It would be like having a “no retirement” rule or a “gender neutral insurance law” or something equally loony.
      Only someone convinced they are God would be so inclined.

      One wonders if they would have extended it to the top levels of Chess where I understand there is only one woman in 100. Perhaps they would insist on lighter chess pieces?

      It is nearly always only men, who are daft enough, to devote their lives, so single mindedly to such a silly game I find.

  5. norman
    May 31, 2012

    My opinion, for what it’s worth – nothing.

    Countries that print money to sustain themselves tend to be desperate, out of ideas and it never seems to end well. There is only so much wealth that can be stolen before disaster hits. Can we trust politicians and bankers to know where that point is and stop stealing from the citizenry?

    That’s why we should try everything to avoid that situation, we’ve recovered from recessions before without needing to print such incomprehensible sums (and the numbers involved really are way beyond the understanding of all of us, including politicians and central bankers, no matter how clever they think they are) so why do we need to do it now?

    Let’s just make the tough decisions and sort the economy out. Yes, it will be unpleasant, but it has to happen at some point so try and control it now rather than wait for the next crisis to hit and chaos to reign, as happened in 2008.

  6. Pete the Bike
    May 31, 2012

    Assuming that the Bank of England has to be here at all the best they could have done is raise interest rates to a reasonable market level to encourage savings. Savings which can then be invested in productive enterprise. Despite all the left wing propaganda productive enterprise is what pays for everything else. No business means no money for anyone. Higher interest rates would have also forced the government to cut back on it’s ruinous spending and forced people that borrowed unwisely to deal with it. A large reduction in house prices would have resulted which would be of benefit to the whole country.
    In short a return to sound money.

  7. Lord Blagger
    May 31, 2012

    On current Bank projections it will not be back to the 2007 peak levels until 2014


    The historical average for any banking crisis is 8 years to recover. 2014 is being optimistic. Given that the 8 years is for isolated country banking crisis, and this being widespread, I would say longer.

    On top the chickens have come home to roost on the real issue. Government debt. People like you borrowed trillions. Run up debts of trillions. Hidden most of them off the books, which is evidence for a Bernie Maddoff fraud. With the debts becoming due, and income too low, even with growth to pay, its going to go tits up.

    That’s why the Tories are advocating stealing state second pensions. Defaulting on them in practice.

  8. James Reade
    May 31, 2012

    I hate to always sound antagonistic John – particularly I wouldn’t want to be seen to be defending the Bank to the hilt either.

    On QE being inflationary – irrelevant. It won’t be inflationary while nobody is spending the money pumped in. If and when it becomes inflationary, the Bank has means to reverse QE – sell the assets it bought, raise the interest rate. The fact it might be inflationary is irrelevant to whether it might help the economy now. It’s a bit like not starting a fire in a fire place for worry that it might burn the house down.

    On private interest rates, a bugbear of yours. I’ve plotted a range of interest rates here: Of them all (Bank Rate, average of 4 banks’ base rates and three interbank rates – overnight, 1 month and 1 year), only the 1-year interbank rate stands out – the rest are all about 0.75%. But even the 1-year rate is only at about 1.8% – that’s hardly particularly damaging – and the gap is no higher than it was for most of 1994 and 1995, interestingly.

    And if the banks are facing tighter regulations on their capital bases making things tougher for them, well isn’t that kind of precisely what you’ve previously argued for? And don’t you also argue that the US is looking better because it sorted out its banks? Shouldn’t we be “sorting out our banks” then if we’re going to get growth any time soon?

    1. stred
      May 31, 2012

      to James Reade.

      The BoE can buy back the assets it bought (by creating money from nowhere) in order to reduce inflation. So the new owner of the asset, say a bank, then has the created asset and the interest it produces. While the bank has paid for it with the money that is already in the system, that it created earlier. Result: same amount and no deflation.

      Or raise interest rates. Obviously deflationary as usual and rewarding to the banks, while damaging to industry.

    2. Mark
      June 2, 2012

      In order for the BoE to be a seller of gilts we have to have all government deficit financing also being sold to genuine third parties, or a PSDR. The macroeconomic stance would cause massive contraction, diverting large sums into debt financing, whatever was happening to prices. In fact, because such a deflationary stance is not likely to be credible, the idea that QE can be unwound is also not credible one it has escalated.

      It is precisely this threat that has given the BoE pause over further extending QE. The only issue becomes the timing on which the slow fuse ignites the bomb.

  9. Mick Anderson
    May 31, 2012

    It looks more as though the BofE is simply helping the Governement keep the cost of Public Sector debt down, rather than helping the Private Sector. There is a better way of doing this – spend less money.

    Keeping such a low base rate does nothing for individuals or small businesses because they can’t borrow at such low levels. All it does is destroy savings interest and income, and compromise all of our private pensions for the future. There were a few people with tracker mortgages who were helped in the short term, but those deals have largely all expired and you certainly can’t borrow on those terms now.

    Diluting the money supply (whatever technical name you give it) is always going to be inflationary, even if the only group who benefit are those in SW1.

    It doesn’t help confidence, either. The BofE took interest rates to the floor to try and make things better. Keeping things as they are merely tells us that there is no propect of resolution. Why would we be confident with that message?

    So, if growth in the Private Sector is going to be the engine to pull us out of recession, the Bank of England has not really helped fix the economy.

  10. oldtimer
    May 31, 2012

    It seems to me that the purpose of QE has been twofold. It was, and remains, firstly to finance government spending in excess of tax revenues; this was needed to replace the hot money that fled the UK after the post Lehmann financial collapse. Secondly it provides easy profits to the banks to help them rebuild their equity and improve their borrowing ratios. The effect on the wider economy was and remains incidental to these primary aims. QE will feed inflation thus damaging recovery in the wider economy.

    It is unsurprising that the private sector is sluggish. It is overtaxed, it is overborrowed, the savings ratio remains low and household incomes are squeezed by inflation running at a higher rate that pay increases. That is unlikely to change any time soon unless and until there is imaginative reform of the tax system. In short, it is unlikely to happen any time soon.

    The corporate sector is similarly cautious, excepting a few examples able to benefit from growth in export markets. The European outlook is poor. That too is unlikely to change any time soon unless and until there is imaginative reform of the EZ system. In short, it is unlikely to happen any time soon. Sensible businesses will be conserving financial reserves for the expected shocks to come; they can be sure they will not find much help from the banks when they look for bridging finance. The UK remains hostile to business investment (just listen to many politicians), the government remains committed to an uncertain, inefficient and expensive energy regime, the regulatory environment is unhelpful at the very least and the government has yet to demonstrate control over a voracious public sector which consumes c50% of GDP. Public debt continues to grow at an alarming rate. These are not the conditions to encourage business investment in new capacity.

    Personal anecdotal evidence suggests that cash is tight at the banks. Towards the end of the last financial year I decided to consolidate my ISA accounts. As of yesterday, two months on from intiating this transfer, the cash element of my self select stock ISA with NatWest (part of RBS) had still not been transferred to my ISA account with another bank. This is despite chasing by myself and by my receiving bank. When it finally turns up I will writing a letter of complaint to Mr Hester and asking my MP to look into the matter.

  11. Brian Tomkinson
    May 31, 2012

    JR: ” The Bank’s remit includes assisting in promoting sensible growth, after ensuring price stability”
    Since it has failed lamentably for years to achieve the latter what hope is there that they will be any use at all in achieving the former?

  12. Acorn
    May 31, 2012

    As I understand it, the BoE is still paying 0.5% interest on overnight “excess reserves” deposits held at the BoE by the commercial banks – £230 billion according to the BoE balance sheet. I think this is supposed to put a floor under the interbank overnight lending market rate, after the daily interbank settlement is fixed (?). Without that floor, the rate would go to zero, supply being greater than demand. Either the commercial banks don’t want to lend those reserves and are sitting on them as an asset; or, nobody wants to borrow it; or, the banks can’t find anybody who looks as if they could make the payments on any loan; or, the BoE is doing something to stop them lending it; reverse repos etc, frightened of pushing inflation up if there is no unused capacity left in the economy.

    As a sovereign currency country we have the government treasury “spending” money into creation and the BoE “lending” money into creation taking treasury IOUs as collateral. The ECB will be doing the same job; but, where is the one EU treasury – the deficit spender of the first resort – that can spend Euro into creation? The EU budget in total will spend Euro 130 billion and that comes from twenty seven nations that are borrowing it from someone else including the ECB. That has got to be the mother and father of the smoke and mirrors game!

    PS. JR, if you look at the current BoE balance sheet, 95% of its assets are described as “other assets”. Not exactly public sector transparency. Imagine a company balance sheet that said that. Please can you make a noise at your end and get Merv to make things a bit clearer for us amateurs; like the ECB and the FED.

  13. Ralph Musgrave
    May 31, 2012

    We have a credit crunch caused by excessive and irresponsible lending. And the reaction of the authorities? They cut interest rates and implement QE so as to encourage more lending.

    The words stark, staring and bonkers spring to mind.

    The purpose of economic activity (amazing revelation this) is to produce what the consumer wants. That is, to produce what the consumer wants both as expressed by the consumer’s credit card and as expressed at election time when the consumer / voter votes to have a proportion of GDP allocated to public spending.

    Thus, assuming inflation permits, we need to channel additional funds into the consumer’s pocket and increase public spending. As to lending by banks, there is nothing a bank manager likes more than a business with a full order book. Artificial inducements to banks to lend, like QE, are a waste of time.

    1. Denis Cooper
      May 31, 2012

      Almost all of the £325 billion of QE money has gone into the consumer’s pocket through public spending; without that new money lent by the Bank of England to the Treasury sooner or later the government would have found itself running out of money to pay its bills, like the Greek government, and it would have been forced to make drastic cuts in public spending.

      1. stred
        May 31, 2012

        Presumably the consumers who channel the money into the economy are those with government jobs and pensions, the state owned bankers and employees of companies with lucrative government contracts. The rest of us have to collect the money that falls through their fingers, assuming there is any left after investment in housing or inflation proofed government savings.

        1. Denis Cooper
          June 1, 2012

          The government has to make some overseas payments, including EU contributions and foreign aid, but mostly when a UK public body makes a payment it’s paying an individual or company or other body within the UK; if it’s an individual then they spend that money to meet their living costs etc; if it’s a private company, a supplier or contractor to the public sector, then the company pays its employees and those individuals spend that money, and the company also pays its own suppliers and contractors, etc; as well as all of them paying taxes which recycle money back to the Treasury or local council or other public body. So the QE money will very quickly get spread very widely throughout the economy. Which would be more obvious if we still mainly used cash for transactions and creating new money still involved actually printing new banknotes, when those paid by public bodies would start to notice an unusually high proportion of crisp new banknotes in their wage packets, which would then get spread around the shops when they bought their groceries etc.

      2. waramess
        May 31, 2012

        Yes, let’s be thankful that it has gone that way and not properly through the banking system where the multiplying effect of FRB would have been punishingly awful.

        Eventually it will, but until then we should enjoy.

      3. Ralph Musgrave
        May 31, 2012

        I’m baffled by the suggestion that QE funds public spending. QE consists of the central bank buying securities (almost all Gilts in the case of the UK) and paying for them with newly printed money. What the recipients do with that money is moot: the idea is that it funds slightly less safe investments. It certainly does not fund public spending.

        1. Thomas E
          May 31, 2012

          Erm, the government has a huge deficit. To fund that deficit they need to sell that debt. This would be a problem if they still had the same number of buyers as in 2007 since supply and demand means more supply with the same demand means prices fall (in the bond market that means you have to pay higher interest).

          QE means that you are increasing the demand for bonds, because the government is creating cash to buy them. In effect, it directly manipulates the market to reduce the interest the government pays for debt.

          There is a reason that gilts have been below inflation since qe was announced. Think about it, at current interest rates every year you are losing money by owning gilts. That is not a normal thing.

        2. Denis Cooper
          June 1, 2012

          I’m baffled that after three years you still don’t understand that as it has been practised in the UK so far QE drives a “money-go-round” to make sure that the government can pay its bills.

          1. Bank creates new money.
          2. Uses it to buy previously issued gilts from private investors.
          3. Private investors buy new gilts from Treasury.
          4. Treasury has sales proceeds available to pay government’s bills.

          How many times in 2009 was it pointed out that the Bank was holding reverse auctions to buy previously issued gilts from private investors on two days that week, while the Treasury’s Debt Management Office was holding auctions to sell new gilts to private investors on two other days that week?

          That in effect the Bank and the Treasury were using the gilts market to swap IOU’s, the Bank’s IOU’s being money and the Treasury’s IOU’s being gilts?

          So the Bank has ended up with a £325 billion portfolio of gilts, so far, while government has had all that money minus transmission losses, and spent it.

          1. stred
            June 1, 2012

            It seems that the deficit is deliberately matched to the amount of QE, so that the government machine is able continue with cuts restricted to the most painfully obvious at lower paid rankings.This way the entrenched public services keep their numbers and perks at top levels.

            I would prefer that serious closures of excessive goverment departments and quangos were made, with salary and bonus cuts, and then public money creation, which replaces that lost by bank creation, could be used to cut taxes and raise interest rates. Workers in the private sector and savers would not be expected to take all of the strain if this were the case.

  14. NickW
    May 31, 2012

    If you give money to a Bank it will use it in the most profitable (and therefore least regulated) way possible; that rules out lending to the private and corporate sector.

    This is what banks do with the money they have been given (cites an unchecked source making allegations about a US investment bank)
    Who is responsible for regulating the London activities of American Banks? Nobody apparently.

    Our Banks are rotten to the core and need to be left to rot on their own. The Government needs to concentrate on seeding new financial institutions, nurturing them, and ensuring that they lend money at rates commensurate with their borrowing rate.

    The Coop Bank and the few remaining mutual Building Societies might be possible starting points.

  15. Gerry Dorrian
    May 31, 2012

    There’s certainly something not happening somewhere, isn’t there? Thanks for this intelligent analysis.

  16. Brian Taylor
    May 31, 2012

    Lending is restricted, if the have to hold more capital,but small companies want to keep there borrowing down as low as possible, who can blame them when you see overdraft rates in the high teens.

    In April it is reported that credit card repayments out weighed purchases by £118m,that shows a lack of confidence,it’s only us old pensioners who are busily spending the kids inheretence.

    1. lifelogic
      May 31, 2012

      Even the credit card companies and reducing credit limits out of the blue even to good customers. The banks seem more desperate than their customers to me.

      1. Bazman
        June 1, 2012

        I blacklisted credit card companies years ago. Anyone who pays them interest is a fool. I have one card and the full amount owed is taken every month in the rare cases I use it. They will be sued and pursued for non delivery, faulty products and holiday companies going bust etc. I use them they do not use me.

        1. lifelogic
          June 2, 2012

          It depends on what rate of interest you are paying and what you are doing with the money that you borrow – in general you are probably right though with rates at 15% -35%+ unless you muck about with cheap 0% balance transfer rates.

          Mind you the bank are robbing many sound businesses at nearly these rates anyway.

          1. Bazman
            June 2, 2012

            Could also apply to government borrowing then? Depending on what interest rate it borrows at and what they do with the money? Borrowing money to fund tax cuts being a good thing?

          2. lifelogic
            June 3, 2012

            Bazman, I agree with you for once. Borrowing to fund, well chosen, tax cuts might be sensible.

            It is just that the state has such an appalling record, it is not their money so they almost always tend waste it – when they “invest”. They usually find ways of giving to consultant/quango friends, buying votes in selected areas, gimmicks in the green religion or counter productive/pointless wars.

  17. waramess
    May 31, 2012

    We live in a Keynesian world where burglars are to be lauded, for they take wealth from others that would not otherwise be spent and they convert their loot into cash and consume. What’s not to like?

    Forgers produce banknote lookalikes and in this way they not only provide liquidity to the markets they also stimulate consumption. Has to be perfectly sensible to support forgers then.

    As Jeremy Warner observed in todays Telegraph, everything is beginning to look like Alice Through the Looking Glass where the Mad Hatter, when asked why it was not working , would shout Krugman style “just print faster”.

    No longer do any of them look as though they know what they are doing other than peering through their Keynes tomes to find an answer.

    Smith ans Mises told them a long time ago but they refused to listen

  18. Javelin
    May 31, 2012

    Greek man hangs himself in despair. Very sad. But his message is to us all

    “The police does not know me. I have never touched a drink in my life. Of women and drugs I have never even dreamed of. I have never been to a kafenio (coffee house), I just worked all day! But I commited one horrendous crime: I became a professional at age 40 and I plunged myself in debt. Now, I’m an idiot of 61 years and I have to pay. I hope my grandchildren are not born in Greece, seeing as there will be no Greeks here from now on. Let them at least know another language, because Greek will be wiped off the map! Unless of course there was a politician with Thatcher’s balls so as to put us and our state in line.
    Signed, Alexandros 29/5/2012”

    1. A Different Simon
      May 31, 2012

      Yes it is tragic .

      I dread the phone going in case one of my unemployed friends or relatives has done the same thing .

      What do the people you come across in the City of London think about this ?

      Do they care ?

      1. Bazman
        June 1, 2012

        They have been freed to do more useful work as the previous work they were doing was pointless.

  19. sm
    May 31, 2012

    The BOE has preserved the status quo, allowing failures to continue.

    Is unlimited liability for banks appropriate for the magnitude of risktaking being undertaken.

    At what point is this considered fraud, which would get others into serious trouble?

    Still no discussion of why private banks are allowed to create money via interest bearing debt. Why have fractional reserve banking at all?

    Why cant QE be directed at individuals first, with the proviso it is spent or used to pay down debt. Perhaps even direct infrastructure spend on roads, resovoirs, pumped energy storage alternatives, proper border controls, reducing imports, facilitating exports, driving the basics cost of living down, housing being the main issue.

    Otherwise start facilitating a barter economy.

  20. Denis Cooper
    May 31, 2012

    “The Bank’s main way of trying to assist recovery is to inject more money into the economy by creating it and buying government bonds. When it buys a government bond from the private sector, that frees cash for the private sector to spend or invest in something more risky than a government loan. That should, according to the Bank, stimulate more activity.”

    But the Bank knows perfectly well that the Treasury’s Debt Management Office is selling new gilts to the private sector at the same time as the Bank is buying previously gilts from the private sector.

    In fact in his letter to King of March 3rd 2009, now in the National Archives (!) :

    through which he authorised the Bank to start using “Central Bank money” to buy previously issued gilts, Darling explicitly stated:

    “However the Government will not alter its issuance strategy as a result of the asset transactions undertaken by the Bank of England for monetary policy purposes.”

    If the Bank had been buying private sector assets, as originally envisaged in Darling’s letter of January 19th 2009:

    that would have been a different matter, because the government does not sell eg corporate bonds to cover its budget deficit.

    But hardly any of the QE money has been used to buy private sector assets; as it now stands:

    the Bank owns gilts valued at £324.8 billion and corporate bonds valued at £0.2 billion.

    In effect the Bank has created £325 billion and lent it to the Treasury, minus transmission losses as it passed through the gilts market; the same purpose and effect could have been accomplished if the Bank had simply bought new bonds direct from the Treasury, but not only would that have been too transparent it would also have been illlegal under the present Article 123 TFEU carried over from the Maastricht Treaty.

    Whether this has achieved the ostensible purpose of positively stimulating the economy is a moot point, but it has certainly prevented the collapse which would have occurred when the government ran out of money to pay its bills.

  21. Neil Craig
    May 31, 2012

    The basic cause of the recession & of our obvious failure to achieve recovery, has nothing to do with the banks.

    It is the Luddism & regulatory parasitism enforced by Britain’s political class.

    Economic Freedom + Cheap Energy = Fast Growth

    Playing around with the money supply can do no permanent good and only a limited amount of harm. If we had a feree market in electricity production and unlimited electricity produced at 7% of the current price we would definitely not be in revession!!!

    One can even say that had the economy been growing at 10%+ the bank’s laons would never have gone sour and we would not have had a banking crash. What happened is that the politicians kept tweaking the regulations to build up a financial bubble because that produced the short term illusion of growth to conceal the fact that they were stifling the reality.

    Personally I would much prefer the Treasury to be in the hands of an idiot than the Energy “& Climate Change” Ministry, as is currently the case.

    1. waramess
      May 31, 2012

      Playing around with the money supply gives the government more money to spend. Quite the wrong thing to be doing just now.

  22. Roy Grainger
    May 31, 2012

    It is indeed very curious that given their stated aims the BOE have spent the QE money exclusively on government debt, one could imagine all sorts of alternative uses such as buying corporate debt or directly funding infrastructure projects through state bank loans that would have had an immediate impact – it is almost as if they have deliberately chosen the route which will have the slowest and smallest impact on anything at all. The conclusion that the real aim is to make it easier to finance government debt through lower interest rates is inescapable.

  23. StevenL
    May 31, 2012

    Price stability? Nonsense, the BofE is just about trying to make house prices go up. This is because the MPC is made up of ignorant people. In 2005, they reduced rates as the house price bubble was stalling. The justification was that without house price growth there would be less spending on white goods and fitted kitchens etc, acting as a deflationary force on the economy.

    They are incapable of seeing house prices rocketing (because they were letting the money supply rocket) as ‘inflation’. But then they are all probably blinded by their own greed. There should be a register of interests for all MPC members so we can see how much property they own and how much debt they have against it.

    1. Denis Cooper
      May 31, 2012

      But house prices rocketing isn’t “inflation” as defined by the Chancellor when setting his inflation target for the MPC …

      1. waramess
        May 31, 2012

        Just goes to show how meaningless government stats are then.

    2. waramess
      May 31, 2012

      You are right, they are ignorant and to assume that pushing house prices up when demand was low would stimulate anything is clear evidence. maybe if they let interest rates rise then declining house prices resulting from re-posessions would do so and just maybe there might be some growth in the econoomy by now.

      A few banks would have gone bust in the meantime, but then all actions have consequences

  24. Norman Dee
    May 31, 2012

    Growth will become a meter on this governments chances of staying in office, growth genuinely climbing gives them a chance, anything less then forget it. Of course growth on it’s own will not be enough but it’s going to be one of the vital factors.

  25. Barbara Stevens
    May 31, 2012

    How banks are working is a mystery to many, including me. All I know is unemployment is increasing and and things are getting worse. Busineses are falling because of banking support, and that increases the chances of more unemployment overall.
    We now see doctor’s asking for protection of their pensions while they claim they work less. I’d dispute that for my former GP, who refused to come out to my disabled husband who cannot walk for long distances, although the situation was explained they still refused to come out. So I don’t think asking for special treatment in many cases will go down particularly well. Yes, we cannot do without them and yes, the do a good job, but they are well paid and respected. When they don’t do the job they too should be sacked or repremanded severely, at the moment they are a law unto themselves. It seems bankers are doing the same thing, as with many sections of our socieity, including politicians its sad to have to think and say.

  26. David Hearnshaw
    May 31, 2012

    I am an angry ex Conservative – as someone who has worked in the productive private sector, worked hard and paid my taxes – `Done the right thing’ as Cameron would say, I now being screwed royally on derisory returns on savings and have just had my draw-down pension reduced by 10% due to then new rules brought about, in part, by the effects of QE. The bloated public sector sails on regardless, doctors being the most recent example!
    One can only despair!

    1. APL
      June 2, 2012

      David Hearnshaw: “One can only despair!”

      Or we could learn our lesson and make sure to vote independent Conservative at the next opportunity.

  27. uanime5
    May 31, 2012

    “The Coalition government forecast better growth in its first plans in the summer of 2010. Since then it has revised these down sharply for the first three years of the period, but reckons with the Bank that growth should be at much better levels in 2014 and 2015.”

    Given that the Government’s predictions have been wildly optimistic about growth for the past 3 years the predicted growth in 2014-15 is likely to be incorrect as well. Growth isn’t going to suddenly return in time for the next election.

    “The approach of the Bank of England is different from that of the European Central Bank. That has made much more money available to the commercial banks, to stimulate them and their lending capability directly.”

    How effective has this been? Has it helped reduce the problems in the eurozone?

  28. BobE
    May 31, 2012

    John, I often wonder if you read your own site. Can’t you see that Cameron has already lost the next election, and with it 100’s of your fellow MPs. Isn’t it obvious?

  29. Adam5x5
    May 31, 2012

    “It allows more of the extra cash spending by government to go on goods and services rather than on additional debt interest.”

    How about not spending the extra at all, or using the extra spending to pay down the debt?

    Not sure how the BoE has helped the recovery. If at all.
    Printing lots of money has helped the government, but squashed the private sector and it is the private sector which has to bring us out of recession – the government cannot.
    Keeping the interest rates low has only helped the people with overly large mortgages, but crushed first time buyers as it has maintained the property bubble.

    The regulator/govt is also not helping. Criticising banks for not lending and then demanding that more is lent to SMEs would be fine were they not also demanding large increases in bank balance sheets to lower the liklihood of a collapse.
    You can’t have it both ways…

  30. Derek Emery
    June 1, 2012

    The IMF predict doubling of oil price by about 2020 which corresponds to 7% pa. Sometimes it will be higher and sometimes lower as demand for oil depends on the state of the world economy. Gas prices have doubled over the last 8 years.

    I suspect future increases must have a large impact because the UK GPD growth is far lower than this meaning prices here will rise. The cost of most things is very dependent on energy prices.

    Half the homes in the UK could turn off their heating by 2016 due to rising costs see

    These rising prices will not help the UK achieve decent GDP growth.

  31. Steven Whitfield
    June 2, 2012

    Id be interested to hear John Redwood’s views in response to those of Professor Klugman who’s been doing the rounds. He is a noble award winning economist who believes that we should ‘stop the austerity’ and allow spending and inflation to rise.
    Frighteningly, the views of those like Professor Klugman seem to carry alot of weight with the political establishment – how can someone with such impeccable credentials get it so badly wrong?

    Nobody as yet seems to have challenged him to explain why spending increases can be described as an ‘austerity program’.

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