Monetary easing coming our way?

It is possible something important happened last week at the Bank of England. Parliament, of course, has not been told of any change of policy and has held no debate. The media have largely ignored it. The Sunday press did pick some of it up. Some of the change was in the Mansion House speeches of the Chancellor and the Governor, which attracted some brief attention the next day.

I have long supported the government’s stated aim of tight fiscal policy and loose monetary policy to generate a private sector recovery and to bring public and private into better balance. I have also long argued that for the first two years of the Coalition money policy was too tight, and public spending kept on going up, in real terms as well as in cash terms.

Last week the government and the Bank at last acknowledged that money policy had been much tighter than planned. The use of Quantitative easing has meant artifically low interest rates for the public sector, but not for the private sector. It has meant plenty of credit for the government, but not enough for the rest of the economy. Banks have been prevented from lending it on to the private sector by tough banking regulations. I have argued against QE, and in favour of allowing banks to lend more against their current stronger balance sheets, whilst we generate some growth to restart the cycle. I have also argued for more banks, to introduce competition and to have some banks willing and able to lend to individuals and smaller busiensses.

We heard at the Mansion House the Governor and Chancelllor announce two schemes to put some more mmoney into the banks. One was just to lend them more cash as they need it to make sure they are liquid in illiquid times. That is the minimum a Central Bank should do against good security, and is welcome. The second was a scheme to help banks finance new lending for good projects.We still need to see the details of how this will work.

In a way the more important potential change is the one that was not mentioned that night, but which appeared over the week-end. The Bank now thinks commercial banks are being made to hold too much cash and to keep too much in government bonds, and will allow them to use more of this cash. We need to see the details of how they intend this to happen. They will need to change the regulatory requirements. They will need to reassure the banks that the permissions will not be suddenly removed. They also need to reassure taxpayers that proper checks and balances for all these schemes will not leave taxpayers losing money.

It is good news there is some new thinking. We will need to study the detail before being able to decide if the balance is right. It needs to be cooked for Goldilocks. There needs to be enough real relaxation to allow sensible levels of lending to good projects, without overdoing it and leaving bad debts or inflation in the system. I have always thought it is more a question of how the banks are regulated, than a need to inject loads of newly printed money into the banks. There’s plenty of high powered money, but there has been a broken transmission mechanism domestically limiting its impact on activity.

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  1. lifelogic
    Posted June 20, 2012 at 5:37 am | Permalink

    Certainly something is stopping the banks lending and even making them pull back or reduce perfectly safe loans with huge consequential damage to real businesses. They are able to charge huge fees and margins, when they do actually lend, due to a total lack of supply and competition in the market.

    Something certainly needs to be done, alas it is years too late and the government has still have not started cutting back the state sector, reducing regulations, dealing with the absurd employments laws or getting sensible cheap energy. What exactly is the point of Cameron and Osborne? The have even made matters worse with the insane, no retirement, and the gender insurance rules not to mention calling good highly moral people, doing their best with an absurd tax system, “morally repugnant”.

    What is particularly galling is the claim by the banks and their PR organisations that the lack of lending is due to a lack or demand from good customers, also the Natwest’s “Helpful Banking” adverts – can the ASA not intervene perhaps. They are certainly not helpful to borrowers. The banks are putting people off even applying, by saying they have no appetite for lending in particular areas. Development capital is absurdly restricted and very expensive, just look at the decline in the construction activity figures. The latest ONS figures, released last month, indicated that the sector contracted by 4.8% in the first three months of the year. So lots of builders doing nothing and claiming benefits.

    • lifelogic
      Posted June 20, 2012 at 6:22 am | Permalink

      I watched Barroso at the summit – Frankly, we are not coming here to receive lessons in terms of democracy or in terms of how to handle the economy because the European Union has a model that we may be very proud of – saying they do not need lessons in Democracy and that the Euro problems started in North America!

      Has he taken total leave of his senses? The Euro problems started when the largely the unelected EU bureaucrats, decided to set up an unworkable mechanism for a single currency without a single government having sufficient financial controls.

      They very clearly do need lessons in both democracy and economics. The disaster was very predictable when they set it up – was this their grand plan? Thank goodness Major was unable to take the UK in too as he clearly wanted to.

      • Denis Cooper
        Posted June 20, 2012 at 7:55 am | Permalink

        Barroso was just sticking to the standard line that the EU likes to tell the world:

        “The European Union is based on the rule of law. This means that every action taken by the EU is founded on treaties that have been approved voluntarily and democratically by all EU member countries.”

        He’s hardly going to undermine the credibility of the EU around the world by telling the truth, which is that the EU can’t be trusted even to obey its own treaties and laws.

        • zorro
          Posted June 20, 2012 at 10:27 am | Permalink

          Which of course they don’t…….particularly the one banning bailouts!


        • Tad Davison
          Posted June 20, 2012 at 11:01 am | Permalink


          Those of us who know what liars these people are, won’t be at all surprised by this, but some people still lap it up. Mr. and Mrs. Thicko can at least be excused, as it isn’t their fault they haven’t the capacity to see through it, although their collective voice in the form of votes for the wrong party has been very damaging.

          Yet what does this say about those in the media who should be of a higher calibre, particularly the lefties at the BBC?

          I haven’t yet heard anyone from the BBC take Barroso to task. Not Paul Mason, Robert Peston, Stephanie Flanders, Gavin Esler, Kirsty Wark, and a whole host of others, but they have a duty to do so. Anything else is political bias, and therein lies the danger.

          We really do have to stop them!


          • Derek Buxton
            Posted June 21, 2012 at 12:05 pm | Permalink

            They are on the payroll, didn’t you notice?

          • APL
            Posted June 23, 2012 at 5:47 pm | Permalink

            Derek Buxton: “They are on the payroll, didn’t you notice?”

            Which this ‘Tory’ administration refuses to cull.

      • Jeremy Poynton
        Posted June 20, 2012 at 10:54 am | Permalink

        Barroso was (is?) a Maoist. As such, his grip on such notions as “sense” and “democracy” will be feeble at best. The man is a menace. The EU is a menace, and a nascent tyranny just starting to crawl out of its nest. As Greec has found out, as it writhes on the ground with Barroso and Von Rompuy strangling it.

    • Bazman
      Posted June 20, 2012 at 6:01 pm | Permalink

      Or doing something more useful? How where these builders sacked with all the absurd employments laws? Thats right many where and are ‘self employed’ by large construction firms. You are lucky the housing market is just stagnant. In the real world it would have crashed. Leading to the self- adjustment that no doubt you are in favour of. A recession without a housing price crash. How so? Anyone with any sensed would not be chucking money at housing at least for a while.

  2. Mick Anderson
    Posted June 20, 2012 at 5:53 am | Permalink

    It is good news there is some new thinking

    Apart from the suggestion on the News last night that next month they hoped to reduce the interest rates to 0.25% and print another £50bn for the Government to waste.

    When presented with two possible courses of action, the Treasury and the BoE can be relied upon to take the most expensive, least effective option.

    • norman
      Posted June 20, 2012 at 7:06 am | Permalink

      They’ve only printed £75bn so far this year. Government borrowing is £125bn. That money has to come from somewhere, the markets understandably want nothing to do with it at Osborne’s oft boasted of ‘historically low rates’ (the imbecile still hasn’t realised this is part of the problem and makes himself look idiotic when boasting about it), taxes are already beyond saturation point, spending is sacred and can’t be cut so what else for it?

      I initially thought that the extra £50bn would come from the £140bn being printed for the banks but seems the banks are in worse shape than we thought.

      • Denis Cooper
        Posted June 20, 2012 at 9:33 am | Permalink

        As QE has been practised in the UK so far the Bank has been rigging the gilts market by creating new money and using it to buy up previously issued gilts from private investors, so that the Treasury can continue to sell new gilts to private investors who otherwise wouldn’t want to buy them at the low yields being offered.

        Because the Bank is buying previously issued gilts on the secondary market, rather than buying new gilts direct from the Treasury, on the face of it this UK scheme does not contravene Article 123 TFEU in the EU treaties, just as when the ECB does the same thing for bonds issued by distressed governments in the eurozone.

        However I wonder how it stands with respect to the next prohibition in the treaties, Article 124:

        “Any measure, not based on prudential considerations, establishing privileged access by Union institutions, bodies, offices or agencies, central governments, regional, local or other public authorities, other bodies governed by public law, or public undertakings of Member States to financial institutions, shall be prohibited.”

        Does a scheme for the Bank to rig the gilts market constitute a “measure … establishing privileged access” by the Treasury to “financial institutions” which otherwise would not want to buy its bonds?

        Although the UK is not in the euro its “opt-out” protocol does not give it an exemption from Article 124 TFEU, or indeed from other treaty articles under which the EU member states have committed themselves to “the principle of an open market economy with free competition”, as in Articles 119, 120 and 127 TFEU and elsewhere.

        It would be open to the sovereign UK Parliament to authorise the UK scheme for rigging the gilts market notwithstanding these EU treaty provisions, but I’m not sure that Parliament has ever been asked to authorise it, or indeed on what UK legal basis two Chancellors have authorised the Bank to do it.

      • zorro
        Posted June 20, 2012 at 10:29 am | Permalink

        They are dissembling, they will print more….


      • zorro
        Posted June 20, 2012 at 10:32 am | Permalink

        Yes Norman, didn’t you know? Cameron and Osborne have boasted that their successful economic policies have allowed us to keep record low interest rates!…..hahahaha….Economics fail Gideon – D minus – pay more attention in class.


  3. alan jutson
    Posted June 20, 2012 at 6:12 am | Permalink


    Rather than lending (if that is the right word) Banks large sums (£140 Billion) of money that the government will now print, at low interest rates, which in turn the Banks can then lend (or not) to some borrowers, if they meet certain criteria.

    Why not simply cut personal and business taxes by £140 Billion, thus allowing everyone to share the benefit, with no overhead cost.

    This would of course mean that if the Banks are by passed, then they will not make their normal 5-10% margin on that money, or £7-14 Billion in extra profits.
    But then why should the Banks make any money on taxpayer funded cash in the first place.

    Why trust the Banks to enact this Government give away policy, which may or may not be fully implemented.

    Why not let the money go where it needs to go, direct to businesses or the general public where they can do as they like with it.

    Simply cut corporation tax, and raise the personal tax allowance. and to pay for it freeze all Benefits (they did get a 5.2% rise last year) and reduce government spending.
    Thus business and the public get additional money at no extra cost, as there would be no interest charges.

    At the moment we (the government) are still spending more and more each year, and this so called investment (a wonderful Gordon Brown word for borrowing) increases our overall debt.

    Once again we have the Government acting in the most expensive and complicated manner, and trusting the Banks with a policy, when they do not really have a good past track record of success of lending to either business, or personal clients.

    • lifelogic
      Posted June 20, 2012 at 6:28 am | Permalink

      Certainly bypassing some of the problem, huge margin, stressed and hardly lending banks would be good. Cuts in employers NI, perhaps just for smaller companies, would seems to be the best way to target help and increase employment.

      • lifelogic
        Posted June 20, 2012 at 8:10 am | Permalink

        Allow directors use their own pension funds in their business too – to bypass the banks.

      • sm
        Posted June 20, 2012 at 9:20 am | Permalink

        Bypassing the current broken banks sounds good. Setup some new unencumbered banks and normalise interest rates. Would that apply some commercial pressure to the high cost quasi nationalised banking industry.

        On the fiscal side.
        How about removing NI completely or temporarily until it can be merged with PAYE?

        Its just a really a 12% effective top up tax to push the basic rate to 32% (20+12) , then 42% (40+2%) until your earnings exceed £150k.

        Or why not 35% flat tax with no tax deductions, other than a larger personal allowance? A general anti avoidance rule.

        Remember we need to domestic demand to buy the stuff the SME’s make or service.

        On the political side.
        Exit the EU and effectively manage our immigration along with our population, employment, training and resource needs.

        If the education industry want to teach they can setup in the target market and sell their service without the socialised cost of the perks (UK residency). Similarly other industry.

      • David John Wilson
        Posted June 20, 2012 at 9:46 am | Permalink

        I strongly support the idea of bypassing the banks and putting the money directly into the hands of the small companies that need it. Employers’ NI contributions are a much better target than for example reducing corporation tax, reducing VAT or income tax. This is because it applies much earlier in the cash flow cycle of companies and potentially increases employment, reduces the cost of exports and encourages import replacement.

    • Mike Stallard
      Posted June 20, 2012 at 6:42 am | Permalink

      I like it! Get the government out of banking as far as possible, I say!

      Charles Moore said that just as the TUs had got into the hands of a few dictatorial barons in the 1970s, so the banks today have got into the hands of people who are not really accountable to the public, whether as borrowers or shareholders.

      Where the government could really help is by getting power to the people again. The comment above gives some very good ideas on how to do this. We have got far too used to accepting the drift towards government control in everything.

      • Alte Fritz
        Posted June 20, 2012 at 11:05 am | Permalink

        Quite so, and, what is more, competition was reduced by the apparently enforced rescue of HBOS by LBG. Four megabanks do not a competitive market make.

      • Tad Davison
        Posted June 20, 2012 at 11:19 am | Permalink

        I’ll second that, but all governments like more government. What was it Oscar Wilde said, bureaucracy is expanding to meet the needs of the bureaucracy. It’s just the tax-payer always has to put their hand in their pockets to pay for it!

        We must realistically ask ourselves, how much of it is strictly necessary?


    • stred
      Posted June 20, 2012 at 9:21 am | Permalink

      It is particularly sad to see good skilled local businesses being harrassed by bank charges and extortionate interest rates. While all the officials and other overpaid state workers are almost untouched.

      Policemen retire at young middle age on pensions 2-3 times average earnings, the BMA is on strike because their similar pensions don’t match those of functionaries, and the salaries of the higher grades of town hall administrators are 2-3 times that of many engineers, designers, scientists and university lecturers- some of whom combine the same job.

      But then the whole deficit will be paid for by printing and the banks are ‘owned’ by the Treasury, which likes them to build reserves, especially as they have to pay for mega pay, mis-selling insurance and (next) interest rate swaps.

      And the latest news is that the ‘care’ homes paid £150k pa for letting teenage girls stay out at night keeping Pakinstanis happy- are owned by private equity city boys, one of which was run by the person who advised HMG on the benefits of PFI. And who should Cameron ask to advise on deregulation but a payday loan entrepreneur.

      Well, having got that off my chest, I have to call and move the phone of my 82 year old friend who has just been discharged from a very expensive PFI hospital after being found helpless on the floor at home and receiving excellent care for 2 weeks. To be fair, he has been given a walking frame as he also fell on the floor in hospital too, a day before being turfed out. Perhaps his age brought his QUALI score down too far to support overheads.

      • stred
        Posted June 20, 2012 at 9:26 am | Permalink

        Second bankers ‘pay’ should read ‘salaries and bonuses’. I never see mistakes until the re-format comes up. Why?

    • Jeremy Poynton
      Posted June 20, 2012 at 10:55 am | Permalink

      Why not give the taxpayer the money? After all, they have screwed us blind – especially savers and the elderly. I want it back. And I’ll spend it.

  4. Gary
    Posted June 20, 2012 at 6:50 am | Permalink

    What a tangled web of central planning. This is the stuff of the Politburo. Guaranteed to fail because Economic Calculation is impossible. Unintended consequences and cockups will abound.

    Here is a better plan, get out of the way.

  5. Colin D.
    Posted June 20, 2012 at 7:13 am | Permalink

    It is to be hoped that the “something important” is also indicative of Sir Mervyn King’s waning influence before he leaves the BOE. His legacy of missed inflation targets and money ‘printed’ via quantitative easing is a disaster. He should have been awarded the order of the boot and his P45 a long time ago.

    • alan jutson
      Posted June 20, 2012 at 7:40 am | Permalink


      Is “The Order of the Boot” something like a Knighthood, which he already has ?

    • Denis Cooper
      Posted June 20, 2012 at 9:50 am | Permalink

      You forget that two successive Chancellors have publicly endorsed King’s actions, and it can be assumed have privately encouraged them and maybe sometimes instigated them.

      If you want to sack somebody without giving them a case for unfair dismissal then it’s best to give them written warnings that their performance is not up to scratch, not send them Open Letters saying that they’re doing fine even though they keep missing targets they’ve been set.

    • Tad Davison
      Posted June 20, 2012 at 11:22 am | Permalink

      Reward for failure no less!


    • lifelogic
      Posted June 20, 2012 at 11:24 am | Permalink

      I see that it is reported that Mervyn King’s pension pot costs would be well over £5M which, unlike everyone with a money purchase scheme (and usually limited to £1.5M), will not be devalued hugely as his policies have done to theirs.

      The people with devalued pensions will be doubtless also largely be the ones picking up his huge pension bill.

  6. Brian Tomkinson
    Posted June 20, 2012 at 7:36 am | Permalink

    What strikes me most in today’s blog is the point that none of this has been explained in detail to anyone, and Parliament in particular, as I mentioned in a previous post, has been ignored. Rather reminiscent of the behaviour of their masters in Brussels. When are you MPs going to stand up against this or are you all happy to just collect your salaries and undertake the role of community advisers and social engineers?

  7. Paul Rivers
    Posted June 20, 2012 at 8:17 am | Permalink

    One of the most interesting developments is that the new on line non regulated lenders are also being included in the scheme to encourage lending. With their small business focus this will have an impact . My opinion is that most of the high street banks are now institutionally incapable of increasing lending where it is most needed -they just don’t have the culture or people on the ground. Rather than talking of forming new banking institutions we should be encouraging these new channels as a 21st century equivalent to the wider sources of non bank finance (eg bonds) available in the US.

  8. Acorn
    Posted June 20, 2012 at 8:43 am | Permalink

    Looking at the BoE Balance Sheet you can certainly see when Merv the Pawn Broker, closed the shop on the £325 billion that had quantitatively eased its way into the Asset Purchase Facility.

    The Pawn broker is now pulling another couple of wheezes, with different names, but fundamentally doing the keyboard QE money printing job just the same as all the other wheezes. Merv likes to think he can direct the brand new out of the ether money, with cruise missile precision; but he can’t. Another winner for the banksters coming up!

  9. JimF
    Posted June 20, 2012 at 9:02 am | Permalink

    Cue more property-lending-inspired so-called “recovery”.

    Without FIRST doing the supply side reforms, small companies such as our own will remain cautious in hiring and borrowing.

    Again this government is taking the easy choices. Print money- inflate- devalue.

  10. Pete the Bike
    Posted June 20, 2012 at 10:53 am | Permalink

    Why does everyone think it’s surprising that banks aren’t lending? Even ignoring the contradictory government policy that talks big on lending yet regulates to prevent it, the time is not right for more debt. You can’t expect people and business to take on debt in the middle of an unresolved debt crisis. More funny money from Merv is not the answer. Cutting taxation and regulation and raising interest rates would go some way to boost the economy but the present socialist witches brew will do the opposite.

  11. zorro
    Posted June 20, 2012 at 10:59 am | Permalink

    Don’t we need a looser fiscal policy (tax cuts) and tighter monetary policy (higher interest rates) to attract capital, knock out the bad debts, and stimulate sustainable growth….


    • zorro
      Posted June 20, 2012 at 11:01 am | Permalink

      And get rid of those silly capital requirements which are counter-intuitive and out of date.


  12. Lindsay McDougall
    Posted June 20, 2012 at 1:12 pm | Permalink

    You are being too subtle. Ultra-low interest rates and QE have created monetary demand and inflation, not real growth. Set interest rates at realistic levels and let the bad banks fail or have their share values reduced. The private sector will then know that they are dealing in an honest market and confidence will return.

    It’s regulation that has failed. As long as you say – and mean – that you won’t be bailing anyone out, all that needs to be done is to ensure that it is shareholders who bear the brunt of bank failure or under performance. That’s classic capitalism; what is your objection to it?

  13. Muddyman
    Posted June 20, 2012 at 3:32 pm | Permalink

    Would not all be cured if we changed some of the basics. Banks should only lend moneys they have earned or borrowed from the BoE , they should not be permitted to create ‘money’.

    • zorro
      Posted June 20, 2012 at 7:29 pm | Permalink

      That’s exactly what they do with loans and mortgages – create money (debt) out of nothing……


  14. JimF
    Posted June 20, 2012 at 9:26 pm | Permalink

    In the morality play that is currently Mr Cameron’s chosen line of attack on taxpayers who choose to make use of legal loopholes, you should be banging the drum on where morals have really gone adrift:

    -stealing from savers by quantitative easing
    -banks ratcheting up the cost of practically free taxpayers’ money to those very taxpayers
    – allowing multinational Companies to transfer profits overseas to lower tax jurisdictions via loan agreements etc whilst trashing people who do the same

    This petty minded attack on albeit well known celebrities over their tax arrangements on a few million obscures the billions which go uncollected from multinationals.

  15. BobE
    Posted June 20, 2012 at 10:30 pm | Permalink

    2 years 10 months to the next labour government

  16. REPay
    Posted June 20, 2012 at 11:01 pm | Permalink

    John, I am afraid that the Balls/Brown boom and bust team have ensured the public sector is so large the Labour Party vote bank is unassailable. In this environment QE is always likley to be popular in Whitehall/BoE as people there have little skin in the game and public sector salaries at some point (when Labour is elected in 2015) will be raised to meet inflation in return for zero reform.

  17. Derek Emery
    Posted June 21, 2012 at 12:33 pm | Permalink

    High Street Banks will take some convincing to lend money to SMEs that do not have the collateral to 100% guarantee the bank cannot lose money. Rapidly growing small companies tend to have difficulties funding expansion. I would have thought it would be better to create totally separate bodies to do this as banks can only wear one hat (the low risk hat) and this hat does not suit loans to small risky companies and never will.
    In the private US investors buy shares in SMEs and startups. Nine out of ten may fail but the one winner creates enough return to more than cover losses. High street Banks would never do this.
    The UK economy is massively skewed and dependent on dead-as-a-doornail private borrowing and public spending so only 30% is capable of growth.
    The EU is going to be low growth so Government needs to focus to aid SMEs and others to build their businesses with the rest of the world more quickly by such as helping them with new markets investment etc.

  18. Tony Houghton
    Posted June 23, 2012 at 11:44 am | Permalink

    I notice a nine year old has managed to get her views and photos of her school lunches read and seen by a sizeable portion of the world and has raised £100,00 for useful investment in Africa, by writing her blog – if we believe what we read in the press.

    So as an ex-serviceman, may I ask where is John’s erudite blog and all our erudite comments taking us? Are they to be left hanging in the air, from which the Government pluck the ripest idea or comment and perhaps turn them one day into useful action. Or are they mainly to make the writer feel better by getting it off his chest, have a useful (?) exchange of ideas and thus form the basis of a common man’s manifesto?

    I ask as, in the Military organisation in which I held the Queen’s commission – it is still hanging on my office wall even now in my retirement – we were taught to write an ‘appreciation’ in which there was an introduction, an aim, a discussion and a conclusion, but most important of all some firm recommendations, based on which we hoped our senior officers would instigate further action to make progress.

    Perhaps, may I respectively ask John to respond first and I shall hope we shall all read with interest what our own views are starting first, of course, with lifelogic.

    Reply: This blog is designed to influence and contribute to the public debate, and to give voice to campaigns for improvements or changes to public policy. Sometimes it gets taken up by other media, sometimes the government does agree to the proposals or analysis put forward here. People contribute to it and read it in that spirit – the views on this blog do sometimes take off and become common currency.

  • 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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