Sep 29 2009
What’s the point of Quantitative Easing?
Apparently the Bank and government do not have enough economists of their own – being down to their last thousand or so. Today to make up for the shortage they are inviting in more for a meeting to give them a hand with QE. Let’s try to help them.
Has QE led to more bank lending to the private sector, the original stated aim? No.
Nor will it all the time the banking Regulator is demanding the banks hold more cash and capital.
Has QE led to lower interest rates for private sector loans? No
Nor will it all the time the banks are constrained.
Has QE led to more money in the money supply? Yes.
Has QE got short term LIBOR down? (money market interest rates for banks) Yes, it has helped to do that.
Can the private sector borrow around LIBOR? No.
Has QE helped push down the value of the pound? Yes.
Is QE inflationary? Yes, because it has weakened the pound, and helped fuel commodity price speculation
Has QE allowed the government to borrow huge sums of money without difficulty? Yes.
Has QE kept down the interest rates on government borrowing? Yes.
Has QE led to rises in other asset prices? Yes.
As people have sold gilts so they have bid up the prices of shares and other investments, reinvesting their money.
Summary:
QE has been great for a government wishing to hog all the available cash in a pre election year without driving up its own borrowing rate too much. When we stop QE we will find out the true cost of government borrowing. It has done nothing to ease credit for the cash starved private sector. Banks offer very different deposit and loan rates for the private sector, divorced from the artificial money and government bond market rates. QE has helped push up share and bond prices which helps confidence in assets amongst investors.
QE is helping drive down the pound, which might in due course assist in correcting the balance of payments deficit. The absence of action to tackle the government deficit, coupled with the amount of money being created is bad for overall confidence and bad for the value of the currency.
What should they do?
For a recovery they need to stop QE , cut the deficit, and relax the banking capital requirements for the short term.
63 Responses to “What’s the point of Quantitative Easing?”
John Redwood has been the Member of Parliament for Wokingham since 1987. First attending Kent College, Canterbury, he graduated from Magdalen College...
Very clearly set out. Let’s hope this message gets to George Osborne before the Conservative party conference so he can make the point in a way that will be picked up by the media. At the moment the weight of media opinion – esp. the BBC – is that the continued squandering of public money by the Labour govt together with QE is the reason we are coming out of recession. This nonsense must be exposed and explained.
james harries Reply:
September 29th, 2009 at 12:32 pm
QE has two advantages. It stops the pound in your pocket disappearing (we were facing a meltdown in liquidity) and it devalues / debases the currency so that our exports are cheaper, thus boosting production and demand.
The first should be a quick one-off. If continued, it’s a run on the bank.
In a less integrated world, where each country is at a different stage of the cycle, devaluation is a useful boost. It helps the laggard without hurting the leaders much.
Unfortunately, we are in a globalised and integrated system where we’re all at the same point of the cycle (the pits). So one country’s devaluation is another country’s trade barrier.
The solution does not lie in monetary tools like QE; that’s just for emergencies. What is required for the future is productivity improvement, and that can only be delivered by a MUCH smaller state.
Will Osborne dare to say that we need to cull 1,000,000 civil servants?
Nor me either.
Mike Stallard Reply:
September 30th, 2009 at 3:33 am
I read Boris Johnson yesterday. It will take a really bold and thick skinned minister to take on the very clever civil servants fighting for their jobs. People who face dismissal will need all sorts of pay offs and compensation and many of them are on long contracts with pension rights to boot. There will be legal cases. It will seem much more expensive to sack them than to keep them.
What will be relatively easy will be to slash important projects like Crossrail, building the transport and internet infrastructure, paying for soldiers’ equipment and living conditions, Trident, and suchlike.
Stronghold Barricades Reply:
September 30th, 2009 at 8:00 am
Interesting point on exports being cheaper
Could you explain what we can export now that our financial operations have been zombiefied?
reply: Cars, pharmacueticals, business services, etc
Sandy Reply:
September 30th, 2009 at 11:11 am
Where the heck do we export our right hand drive cars to ?
As for pharmaceuticals many of them are made abroad under license because labour and costs are cheaper.
That leaves … services.
Not exactly a stunning portfolio of exports is it ?
james harries Reply:
September 30th, 2009 at 7:34 pm
another boring and pedantic point. (I’m getting to be a bit of a one for these) Actually, the manufacturing sector is larger today than it was in 1979 when Mrs Thatcher was famously about to destroy it… (or so they say).
The ogre is inflation.
To me, as a person who is living on family capital, that is disastrous. But for the country is could be just what we need.
First of all, as welfare benefits sink down with inflation, constant efforts will have to be made to raise the income of layabouts (sorry, the workless and those desperately looking for a job). This might have a very beneficial effect on immigration too. I say this as someone who spent almost ten years on the dole.
Secondly, it will soon become obvious that the many, many civil servants of the Brown years will have to take to the streets to get more pay to keep up with the standard of living. They will be on the defensive and some of the lesser players may go as the people who actually earn the country money will object to their standard of living being higher than their own.
Thirdly, although raw materials will increase in price, exports must be encouraged. So this might help industry.
Fourthly, the massive debt which the Brown incompetence has thrust upon us, without asking, will reduce in size, just as it once did in Weimar.
It will also mean that any pretence of GB being a world player evaporates. This, I think, is a bad thing because I reckon that we are excellent people to run the world because we are straight, sensible, experienced and just.
Aren’t we? (Weren’t we?)
james harries Reply:
September 29th, 2009 at 12:21 pm
A boring and pedantic point: Weimar’s debts were NOT wiped out by inflation. The allies had seen them coming and had denominated the debt in gold. At the rate Germany was paying off the debt, they would have been debt free in…. 1986.
So far we have managed to raise debt finance in sterling. For how much longer, I wonder?
Mike Stallard Reply:
September 30th, 2009 at 4:18 am
I have just spent a happy hour researching this. Thank you for suggesting it! I think I am now a bit better informed……
Mark Parker Reply:
September 29th, 2009 at 12:51 pm
Inflation may seem like a national panacea, but really it isn’t. First, benefits and state pensions are indexed-linked, and a fair amount of the gilts sold to finance the public debt are also index-linked. So inflating out of our national liabilities is only possible to a limited extent; far less so than during the near hyper-inflation of the 1970s when we were more self-sufficient and our currency had value to lose.
Second inflation will raise the cost of borrowing, even if the base rate isn’t increased. The government is running a heavy year-on-year deficit and (for example) raising the current typical gilt yield from 3% to 6% would shoot giant holes in its budget. And don’t forget we are continually rolling over existing debt as well as acquiring new debt. It’s not just the new money that will be more expensive.
Lastly, if inflation gets embedded in the economy the BoE can either ignore it in which case it will go hyper, or fight it, which would mean raising the base rate (not so much to choke spending as to raise the value of sterling) and the housing market recovery is far too fragile to survive that.
My (contrarian) view is that deflation is the lesser evil.
We have an ecomomy configured to feed off debt. Many of our businesses are non-viable in a debt-free economy. That must change. The process will be painful, but ultimately worthwhile.
Eeyore Reply:
September 30th, 2009 at 11:42 am
I can’t share your positive view of inflation. Yes, it will have the benefits you suggest but at an enormous cost. The savings of the thrifty will be eroded frighteningly (all govt action seems to penalise the thrifty sooner or later!).
Sound money has a cost, too, but its cost is out in the open, not concealed by sleight-of-hand.
G Eagle Esq Reply:
October 1st, 2009 at 7:20 am
Dear Eeyore
I agree = I would echo your most apposite observation in Winnie the Pooh :
I don’t care who you blame,
as long as you don’t blame me
How many little people are going to be hurt by all this shambles
I remain your obedient servant & sympathizer etc
G Eagle
The question you left out before the first paragraph of your summary. Has the BoE cornered the credit market? Answer, yes. This link is about the US FED but the same is happening at the BoE.
http://www.dollardaze.org/blog/?post_id=00695
Acorn Reply:
September 29th, 2009 at 10:51 am
I am aware that JR is a bit cautious about links to YouTube type sites but this link is a real eye opener. We now know what happened to the seller in this trade. There is no way that any government regulator can get one over these guys.
http://www.youtube.com/user/khanacademy#play/user/BE233FA3D593154E/11/eZZkhSl8lMA
Then have a look at the “Geithner Plan” series. The way these guys are screwing the taxpayer are simply ******* unbelievable. The same thing is happening in a country near you; only we don’t have the transparency in our system or sufficiently capable commentators to expose it.
http://www.youtube.com/user/khanacademy#play/user/4EF8BA0ADAAA1B05/0/ervHbKa7R5g
The more economists you have the less each of them will be listened to.
As has been said many times in the past the only beneficiary of forgery is the forger. Who gains: the forger, who loses: the man in the street who finds his money depreciated as the quantity of money in circulation increases.
They say that they understand this and when the velocity of circulation of money returns to normal then they will reverse the process.
We know that is most unlikely. The Treasury will be hard put to fund the growing deficit and the Bank of England would have to sell even more debt instruments on top of that to provide the necessary impact
Of course the printing of such quantities of money will make a difference. How could it not?The forger is buying stuff with it.
So, we have the inevitabiity of monetary policy out of control and rampant inflation along the road.
What the hell can you do when the forger has spent the loot?
The irony is that if Brown continues to be leader of the Labour Party after the next election we know who he will hold to account.
Perhaps you should also add: “Does anybody have the faintest idea when and how to reverse QE so that what little good it has done does not unravel, and in a manner that will not be highly inflationary?
(P.S. the answer is, of course, “No”.)
The inflationary aspects of this Labour regime wil haunt whichever Party takes power in the coming months. Interest rates will have to soar to the 8% per cent levels, unemployment in overall terms will hit ten million. If Labour are in Office next year they will drop the pound and blame our ills on the euro entry, whilst losing the ability to set monetary policy. Heaven help us.
BillyB Reply:
September 29th, 2009 at 3:31 pm
Drop the pound for the Euro? – sorry I missed that announcement – where did that come from?
or are you making it all up?
When QE stops, interest rates will rsie sharply and Labour will blame the evil new Tory government. This is all part of the scorched earth policy to leave us with an appalling economic legacy.
QE has been only a small part of the stimulus and has largely been used to fund the Government’s own borrowing needs. reduced interest rates have liberated far more spending power at household level. That too is threatened by rising rates as QE is withdrawn.
We need to watch out for Labour announcing the end of QE as a way of kicking thi soff as they near defeat. We need to withdraw it, slowly, then reduce state spending over four years – a cash freeze on existing programmed spend, plus reductions consequent on changes we make – and increase growth by cutting taxes, especially business taxes.
One of the problems with quantitative easing is that it only pushes credit to the big institutions selling gilts (and ,according to the BoE,
corporate bonds).
If the Guv is going to create credit ,it would be more effective to spend it into circulation by beginning huge and numerous public works, building affordable housing ,high speed railways etc which will put money in people’s pockets and avoid inflation by simultaneously levying LVT on the excessive inflation of land values that spending on infrastructure invariably brings.
The heavily deflationary emphasis in the conclusion that John Redwood appends to his previously even-handed presentation of the issues around QE only serves to deepen the impression of the Conservative Party as some kind of Death Cult only happy when bleeding the economy of its circulating medium.
Reply: On the contrary. Labour is ignoring the recessionary impact of higher rates and starved credit in the private sector, which will be the result of current policy
Mark Parker Reply:
September 29th, 2009 at 1:04 pm
I agree. If you must spray printed money into the economy, at least spend it on something of solid worth, eg a dam across the Severn estuary would take years to build, mop up tens of thousands of unemployed workers (especially if it were done “green”) and provide 5% of our national electricity requirement at negligable cost forever more.
The Wash could also be dammed; a lot of roads need mending, we need more prisons, etc.
BillyB Reply:
September 29th, 2009 at 4:14 pm
The Severn barrage gets my vote… ticks all the right boxes. I really can’t see why Gordon has missed that one – even Korea have got the idea ($40Bn stimulus to green energy projects). I don’t think its Tory policy either (is it?). Why not?
Credit remains tight as I found out at the Nat West branch in Botley Oxford this morning. I took out a Nat West Credit Card and over the phone cut the credit limit down to a more sensible level.
Offering a credit limit that is roughly four times a persons monthly salary is mad so I cut it down to about 60% instead and was told that my limit could not be increased for another six months. I made it clear that I did not want them increasing it without my say so – in the past they have increased by over-draft limit without my say so.
Apparently now a days Nat West seem more careful and only increase a persons credit limit or overdraft limit only if the person asks for it and is really credit worthy. So the fact that they are not just going around thrusting the prospect of excess personal debt at people is a good thing. I told them firmly over the phone – that I only spend what I have so a big overdraft limit and a big limit on a credit card where of no help at all.
I am a responsible person who only wants to spend what he has and only spend modestly on credit cards and am now a days always in credit at my bank. So it is good that Nat West have learned their lesson and indeed will be repaying the government all the financial bail-out money plus interest within seven years with interest. In total that is enough to run the NHS for a whole year- should help bring the PSBR down a bit I hope !
So if QE was designed to get greater personal lending to responsible types like me then it has not worked – repayment of personal,corporate and government debt will hit living standards as the never never has become the now now. The VAT reduction has not worked as it has only been passed on selectively by the retailers and when it has been passed on it has not saved people much money off of regular purchases such as washing up liquid , DVD’s and bunches of flowers. It was a waste of £12.5 billion – for £1.5 billion less the Treasury could have given all basic rate taxpayers a cheque for £500. That would have got money straight to the lower paid , pensioners and the hard-pressed middle classes. People could have either spent it and helped the retail trade or paid off their personal debts a bit more & thus avoided going bust financially. The VAT reduction only worked if you where very rich and could afford a spending binge at Harrods or Fortnums & Masons – but those rich folks facing a 10p in the £ tax hike might be leaving the UK for tax reasons or be spending less in view of the threat of higher taxes.
I have saved a few pounds from the VAT cut on DVD’s,CD’s , household cleaning stuff and pricey chocolates but a £500 cheque would have stimulated my retail spending a lot more. Especially if excise duty on booze had been frozen meaning that lower VAT meant cheaper fine wine…..
As ever John Redwood is quite right in his criticism of the government. John has been right in the past over the VAT cut being wrong inasmuch as it did not get money into peoples pay-cheques etc . He is right now that QE has been a flop to disguise the impact of mounting public debt prior to a general election.
John Redwood’s conservative outlook is common-sense as it grounded in ones experience of daily life – my experiences prove that !
BillyB Reply:
September 29th, 2009 at 4:09 pm
Are these “hard-pressed middle classes” the same people who have benefitted from huge windfall decreases in their mortgage repayments over the last few years?
The VAT reduction has either been passed on (and we taxpayers have benefitted) or it hasn’t (and the retailer has taken it as easy credit). I can’t see how this hasn’t “worked” in creating more spending power. If 2.5% had been added to VAT I can’t believe anyone would say they wouldn’t feel it.
Matthew Reynolds Reply:
September 29th, 2009 at 5:51 pm
But the trouble with lower interest rates is that there is no incentive to save meaning that there will not be the pool of funds for banks to lend to business.So interest rate cuts just intensify the credit crunch and hurt pensioners who rely on a savings income to supplement the poor basic state pension which is less generous than in many other EU countries.
Retailers would think about their profit margins – should VAT go up the shops just pass it on to customers and blame the government.
The VAT reduction has not been uniformly passed on and raising it to 17.5% on New Years day will make things pretty complex for business as they will have to adjust their prices upward when they should be trying to cut them during the sales to shift goods off of their shelves. It is a busy time and having tax complexity thrust upon our struggling high-street at that time is mad.
Also a lot of the money from QE going to the financial institutions is being spent on overseas assets.
http://ftalphaville.ft.com/blog/2009/09/28/74276/gotcha-qe-and-devaluation/
In some regards you can’t blame them for doing it but it rather makes a mockery of fiscal stimulus to benefit the UK.
Good thinking, I will skip the jokes about numbers of economists, but QE is not the way to go. My Keynes road map is saying it has all gone too far too fast, and some delicacy of judgement is needed on quality and the reality of structural investment. The problem is that there are no mathematical equations that work on this, and that is all that these economists will have to offer, sums based on duff data.
I should add that the Americans are already starting preliminary work at reversing their QE. See here:
http://www.bloomberg.com/apps/news?pid=newsarchive&sid=ax.FBWNLB5_o
Shouldn’t the BofE be making similar plans?
JR: “Has QE led to more bank lending to the private sector, the original stated aim? No. ”
JR: “Has QE led to more money in the money supply? Yes.”
JR: “Is QE inflationary? Yes, because it has weakened the pound, and helped fuel commodity price speculation”
I agree, under normal circumstances QE would be inflationary. My question is, yes you might expect QE to be inflationary BUT given that by your own assertions the banks are not lending into the economy what is the mechanism by which QE is acting in an inflationary manner?
I would say that the weakened pound is a result of the insane borrowing and actually the obviously insane people in charge of the economy.
Reply: Our inflation rate is higher than other economies thanks to import price increases
APL Reply:
September 29th, 2009 at 6:40 pm
JR: “Our inflation rate is higher than other economies thanks to import price increases.
Fair enough. But I would like to understand what you think is the relationship between Quantative Easing AKA printing money and inflation in the domestic context.
For QE to have an inflationary impact OF ITSELF, the money thus brought into existence needs to be available to the ordinary man or woman in the street for him or her to spend. That is through credit or simple hard cash. But the banks themselves are in dire straights that usual mechanism is not working.
I agree, import price increases can be accounted for by the insane attempt to borrow money to fund unproductive public spending when the tax revenue must be plunging.
RBS & HBOS & Lloyds together were the largest contributors to tax revenue in the British economy, they are now net recipients of government funds.
To be increasing public spending when your tax base is contracting dramatically is madness and, I think that is largely contributing to the weakness of sterling. The insanity of the policies being pursued by the government.
reply: the inflationary impact so far has come from lower sterling, partly brought about by creating too many pounds. There is spare capacity, so according to the Bank there will be no general inflationary problem. However, lots of Uk companies are using the protection of lower sterling to keep their prices up or even to raise them.
Jeremy Poynton Reply:
September 30th, 2009 at 9:59 am
I believe that the banks are using the money for mortgage lending, rather than to business. House prices on the rise again, and more will for sure follow so that by the election, people will again be thinking to mortgage their futures through their houses.
This is the only economic growth that Brown knows, or can affect. Did he not say, just after the crash, that his intention was to get lending back to April 2007 levels – ille est, repeat the whole “economic boom” sham all over again.
Certainly, he couldn’t give a toss for the country, and will happily leave the most appalling mess for the Tories to deal with in the hope of a quick return to power by his National Socialists.
Treason, to my mind. No wonder they removed capital punishment as the ultimate sentence for treason.
Has the Tory party discussed a Land Value Tax? Wasn’t Churchill in favour?
Meanwhile where is the evidence for the inflationary effects of all this QE? If not now, then when should we expect to see it? And why can’t HMG easily reverse what they have done with QE?
Michael Lewis Reply:
September 29th, 2009 at 3:41 pm
Billy, if you look back in history, every time central banks have printed money its led to severe problems. Inflation will arrive, that’s what priniting money is intended to do – history shows that its very difficult to control precisely. It is defaulting on debt in a less obvious way. That we don’t have any right now, is no comfort to the fact that the central bankers are busy creating lots of it. The trouble is as we’ve seen, central bankers get addicted to printing money, I’ve seen in the press talk of not switching off the taps until “recovery” is “secure”.
BillyB Reply:
September 29th, 2009 at 10:37 pm
AIUI inflation happens when the money supply grows faster than the growth in real wealth. It seems to me that as much of the growth in our wealth recently has been overstated/fictional (bubbles) AND we have had large injections of QE, then inflation should be raging madly… but it aint. … yet.
Surely there is a case to be made that any inflation that happens is due to us selling houses to ourselves at ever-increasing prices, and producing “financial services” products which turn out to toxic. This aint real wealth is it? And it is this which is devaluing our currency.
This country used to make things.
Tim Coates Reply:
September 30th, 2009 at 12:10 pm
Completely agree BillyB. Yes a shift from taxation of production (companies’ captial and personal wages) to a taxation of the economic rents from increasing land values as they rise would both balance the deficit and allow a more competitive and attractive economy.
Churchill, back when he was a Liberal (people seem to forget he’d go with any party that would give him power) did see the light and was in favour of supporting LLoyd George’s 1909 people’s budget that would have introduced Land Value Taxation.
Sadly, the Conservatives think this is politically unviable (I’ve been in correspondance with their Economic Advisers). Their point was sort of proved by Vince Cable’s basterdisation of LVT with his Mansion tax which is what happens when you let socialists get their hands on a good idea. (New Labour have shown that with their attempt to run a free market economy).
LVT would work, it is 100% fair, it is almost completely un-evadable, encourages production, prevents the huge bubbles we get in the housing market and would control the level or government debt – the problem is that every englishman’s home is his castle. The point is that LVT needs to be introduced with severe cuts to productive taxations (i’d propose a 40% tax on site values with a 5 per cent tax on corporations, 2.5 on SMEs and 5 per cent on incomes above a personal allowance of say £40000).
Don’t forget that MPs are all landowners at the taxpayers expense – that is why the issue never comes up.
Michael Lewis Reply:
September 29th, 2009 at 3:45 pm
http://en.wikipedia.org/wiki/Hyperinflation_in_Zimbabwe
I wonder if Mervyn King has telephoned Gideon Gono for some QE advice
Tactics feel like strategy close up.
Strategically we need to go back to the state of the world economy pre-oil price boom in July 2008. Then oil pump prices were above £1, they are now even higher. The real price of oil has dropped drastically but the pump price can be sustained at a higher level – even in the UK.
The real danager is coming out of recession – NOT going into it. Look at the ERM debacle and we’re not at that point in the cycle yet.
Tell me there are no global aspirations, demand and inflation left in the BRIC countries and I’ll show you the same myopia that didn’t see the credit crunch coming, that saw the end of the world last year and today sees QE as it’s saviour.
For my part I just look after Credit Derivatives at a Big Boring Bank that didnt get burnt – so what do I know?
QE was never going to do anything useful for the wider economy. Many of us have noted on this blog that the Government has connived to create money in such a way that it is only available for its own use. By definition, that means it’s not available to improve on the limited availability of credit, even if the general public wanted to take on new debt.
This was always the Government trying to buy favours prior to an imminent election (not with any realistic hope of winning the election, but to reduce the number of seats lost), with the added piquancy of a scorched earth policy.
In the event of an emergency, break some glass. Any glass.
“… and helped fuel commodity price speculation”
I’m not sure I’d agree with the term “speculation”. I own some commodity ETFs as part of my SIPP and pension investing.
I wouldn’t regard it is as speculative buying. Any idiot can debase a currency (and I can think of at least two) but these people can’t debase Gold, Sugar or Cocoa, they’re governed by fundamentals.
These commodities are still broadly worth the same (sugar may be a bit of an exception) in real terms. Denominated in poor currencies (dollar, sterling) they seem a bit more “expensive”.
It is no suprise that the very way the ordinary man on the street can protect himself from idiots: buying commodity ETFs etc… is the very thing that UK and US governments now want to restrict. I couldn’t believe it when Brown recently warned of ‘oil price speculation’. Laughable. There is no speculation. Because people know that their wealth is being debased by central bankers printing money.
Hear hear! But this presupposes a slightly looser hand on the tiller, which would require major gene therapy for Labour’s DNA!
Just seen the time-stamp at the top of your post – you were up and at it early!
Hi JR,
QE simply postpones the central problems to another day and makes the cost much more unbearable. It means governments can go on sending for a while longer to try to hold up the sinking ship – all the while – clearing prices for assets are distorted. In fact the premise for QE is to try to make it so unattractive for banks to hoard cash that they decide to lend to gain return. This is at odds with the policy of tight capital ratios as JR has said. It is in fact also a double whammy as the taxpayer has already poured hundreds of billions into the banking sector via stakes and guarantees. We own a significant chunk of the banking sector to date. Surely a cheaper way would be to mandate banks to hit lending targets within predefined risk targets. Its our money and our risk in any case. Why double up and allow the real culprits – the government – to fund utterly unwarranted and ineffective spending proposals, to put fuel on the fire that may ultimately burn our ability to exist as an independent economic entity. This will only become apparent when interest rates start to rise, driven not by inflation worries, but by worries about credibility.
The real question is however, are we going to allow prices to clear and allow a necessary deflation of asset prices and a necessary reallocation of resources in the economy (hopefully mitigated by a large nationalised banking sector with public support – surrounded by a coherent economic plan). These should be the priorities – not trying to fight gravity with lunacy – each time things get worse chopping a bit more trunk to throw on the bonfire. If you will forgive my milking of this analogy, QE destroys the roots of the tree, i am convinced higher rates will demonstrate this. We must stop this madness now.
If we must spend money on something – lets get energy neutral – as our oil runs out we will have to import more energy resources – we shouldn’t want to afford that when we can create jobs locally and we have wind, water to do so. The Pickens Plan didnt fly in the USA because of the cost of installing new grids from midwest to urban areas where power is needed. Why dont we invest in our very capable scientists and allow them to provide a solution – the technology exists. Fighting costly (predominantly human, but also financial) wars overseas to secure resources we may not even need is not the way. This is just one example, im sure there are many other schemes that we could implement. Its not simply about cost-cutting, its about doing things, better, faster, cheaper in a more temporally coherent manner. This is what government needs to be.
We need to import less and produce more locally. Why cant we produce British designed and manufactured electric vehicles? They do it India and export them to the UK. This is madness. We now have a nationalised banking system – it should be the role of the government to guide investment into targeted areas. We don’t have an industrial policy to mention anymore. This is clearly wrong. And it should also be the duty of British people to buy British wherever possible. Britain needs to change from being a nation dependent on hand outs to a nation dependent of hand ups. There is plenty of work to be done for idle hands. Why pay people to sit at home. Tie handouts to some form of service – cleaning, caring etc. Very soon the unemployment figures will drop as will the bill to keep those in such a degraded predicament – esp the long term. The Benefits Culture must be changed around to Who Benefits Culture. If taxpayers are funding this gig – we had all (and by this I mean society) better benefit. Building more jails to house people because they turn to crime due to economic malaise is the result of failed thinking and action on the part of all of us. And if we want it to change we must start by changing incentives. It is clear that the labour government is happy to see the underclass expand at massive rates – try to passify them and buy their votes with empty promises of help which will only lead us all to financial ruin. Deep down they know this. They are frightened. The conservatives need to give them a vision and they will vote for you.
OK this has run on more than intended and veered way off the subject of QE. But it seems to me all the desperate actions being taken now stem from a lack of coherent policy and no idea about the way forward. We are just digging ourselves a deeper hole. We need a coherent strategy, funded, costed and executed to perfection. But borne from a philosophy that gives us a fighting chance, not one borne of a defeatist paradigm.
I think the point missed by the commentators who think that Quantative Easing is inflationery is that this is not new money, its just replacing monies borrowed short term that are now being repaid.
Without the BOE stepping in the only way banks would be able to repay these monies is by calling in the loans of businesses and individuals.
Quantative easing if anything hasn’t gone far enough, 700 billion will need to be repaid to banks and QE has only provided 170 billion to replace it. Hence why it hasn’t helped private individuals and small businesses.
Perhaps if you where to argue that the BOE should buy assets other than government bonds then I would probably be more interested in your argument.
QE failing to increase lending. So Governor King’s solution is more QE. Doh!
http://ftalphaville.ft.com/blog/2009/09/29/74571/penny-for-your-thoughts-bofe/
How bad does it have to be before the IMF get involved?
reply When the Uk cannot borrow from the markets we might need to ask for an IMF loan. If the government wants to start to prop the pound we might need IMF help to do so.
Brown’s speech to the Labour Conference gave the game away. He promised to halve the deficit, when half of it is cyclical anyway. And he promised a list of new spending commitments.
Astonishingly, it is now clear that Brown has no intention of cutting at all, either now or in the future.
So far this year the governement has borrowed
The Bank of England has created £175Bn through quantative easing, which has been used to buy up gilts (governemnet debt).
Government debt has incresed £172Bn this financial year.
Am I correct in thinking that without QE the governement would of needed to borrow £342Bn?
No. It would still have needed to borrow £172bn. Buying up the bonds just makes it easier to finance the deficit for a bit, at the price of it being more difficult when they stop the policy.
Great article John. The idiots in power should be told this constantly but a compliant cosy vested interest media is still giving the worst government in living history an easy time.
Nu Liebore = New Weimar republic – invest in wheelbarrows now!
What does GDP look like once borrowed money is removed, ( be it QE money, or Gilt sales?)
Can we have these figures at the conference?
Reply: I estimated the true trend rate of growth at 1.5% instead of 2.75% in the Economic Policy review
Effectively the government action has put capitalism on hold for the banks, whilst still allowing the banks to force other companies to abide by those same rules
This was always going to be so when the banks had to try to squeeze more profits from a lower turnover to pay back the “loans” from the tax payer
On top of which the banks have had imposed far stricter rules, which on their own would have restricted credit
The best example of this is Northern Rock who’s initial mandate was to reduce the profitable clients…pushing them out onto other lenders, and keeping only those who couldn’t move. What kind of business model is this?
By doing both policies at the same time you effectively have a double whammy
The banks are doing their best, but the government doesn’t want to recognise what they have done
To be fair, however, I don’t think Cameron has any of the answers either, and the BoE is struggling but will have a cast iron pension by the time the rest of the economy has to reap the whirlwind of the end of quantitative easing, because all it has done is put off judgement day.
Double dip is guaranteed then?
Equity markets have suspected for some time that UK and US banks are buying equities with cheap QE money from the government as their core business earnings decline see http://ftalphaville.ft.com/blog/2009/09/24/73736/this-bank-engineered-equity-rally/.
Like Japan, if interest rates are kept too low for too long, banks have no incentive to lend to each other and will just speculate for themselves without taking on credit risk.
As the equity markets are a key indicator of economic strength, the Gordon Brown cannot be too upset with this supportive tactic.
David Miles of the Bank of England has just said that QE is working having boosted bonds and stocks.
A clear government admission that banks are using QE to invest in the stock market, not to improve the lives of the population
QE is being carried out by the Bank of England. Not the govt.
Are they following govt instructions?
Does the Bank know what it is doing? It wants to boost the economy it says – because interest rates are already at ‘zero’, so it prints money. But that money is being hoarded by the banks so
how is it boosting the economy?
All the bank is doing is fulfilling its traditional role of ensuring the govt can pay its debts. The Bank no more wants the IMF in than the govt.
QE is just a stupid term for more ficticious money.
It’s like adding more water to the whisky, soon there’s no taste left.
Just sustitute Whiskey for Wealth and Water for debt
As far as I understand it, we have QEed the equivalent of the annual GDP of both Wales and Scotland.
If, rather than give the money to the money markets, they had spent it by giving everyone in Scotland and Wales a cheque equal to their annual wage – would we not have had a better use of this mickey mouse money? – not that I would recommend it – printing money always devalues everything it touches.
The problem as I see it, is the system will never be fixed in any meaningful way. The next bust will happen in the early part of 2020’s if not sooner – it will revolve around problems being created today to fix the problems of the last boom.
We need a government with enough brains between them to realise that when you look at past crashes, its not the cause of the crash that is important, but the cause of the boom that preceded it.
Does anyone think that Dave Blair has any ability to actually fix a problem rather than just spin it and blame 12 years of Labour?
Waramess Reply:
October 1st, 2009 at 8:12 am
The authorities would respond that by passing the money through the banking system they multiply the effect on the economy. They did not.
Better maybe to pass a bill giving immunity from prosecution to anyone forging banknotes between certain dates. Think of the boost it would give to the business of the makers of printing machines, simply as a spin off.
Willem Buiter seems to agree with you, John, about the failure of QE. However, he advocates that the BofE change to credit easing- the purchase of private securities. (see Maverecon 27 Sep). Is this something you would support?
Reply: No, not now, after all the buying of government ones.
The purpose of quantatitive easing?
Well………………
Long story
First of all, only a central banker could contrive a phrase like quantatitive easing to describe THEFT, because that’s what it is.
It’s second only to ECONOMIC DOWNTURN, the Orwellian Nulabour doublespeak for RECESSION…(or the approaching DEPRESSION)
Your savings, your pension and your asset wealth denominated in our joke currency Sterling will be rendered worthless by QE and by decades of mismanagment and fraud on an epic scale. Brown is a sociopath, a madman, but the blame for our nations predicament is much deeper than just NuLabour.
More fundamentally, the entire monetary system has been usurped by the (banker -ed) controlled central banking system. In 1950, about 50% of the UK money supply was debt free cash. Today virtually all money, certainly over 95% of everything in circulation is interest bearing debt.
Our entire monetary system has been hijacked.
Instead of money being backed by something tangible, we are trapped in a system of ‘pledging.’ It’s been tried before and it has always ended in catastrophe because the outcome is ALWAYS ECONOMIC SLAVERY and SERFDOM.
Instead of money being a store of wealth, debt based money is a futures contract. The only thing that gives money value is the presumption that you the reader and everyone else will crawl out of their pit tomorrow morning, go to work and pay taxes to our parasitic, corrupt government and interest to bankers who create money as interest bearing debt out of thin air. But a debt based monetary system is by its nature always inflationary. Debts cannot be repaid without the creation of new debt. So we are trapped in a vicious circle of ever increasing debt and infinite monetary debasement. The conclusion of Keynesian economic will be hyperinflation because the only way the debts can be serviced (not repaid) is to constantly devalue our money. This is an absolute certainty.
To give you an example, the US dollar is worth about 4% of its value In 1913, when the Federal Reserve Act was signed into law by Woodrow Wilson
£1 Sterling used to be redeemable for 1 pound of Sterling silver. Today, £1 wouldn’t buy you more than a little speck of silver.
Banking is the ultimate criminal cartel. The central bankers are masters of the universe. Politicians are servants of the bankers, not the people. Politcians exist to create the illusion of choice where none exists. This is why David Cameron will not stop the approaching destruction of our country.
Thomas Jefferson famously said that if the American people ever allowed private banks to monopolize the creation of money as debt, it would eventually reduce the people to serfdom.
Well here we are nearly 200 years after he made that claim and we are rapidly approaching precisely this conclusion.
BillyB Reply:
October 1st, 2009 at 8:51 am
Interesting ideas. So you are disagreeing with all the good people here saying that our problems are down to Gordon and Alastair’s mismanagement? And your solution is … what? – a return to the Gold Standard?
QE is only helping the banks rebuild their balance sheets. By forcing the banks to hold more cash the BoE is ensuring that all the printed money will be used to first replace the bad debt with printed £ and then rebuild the banks cash position None of this money will ever leak into the economy.
QE will not cause inflation itself unless it is allowed to continue beyond the point where it is needed (quite possible of course). The inflation was already caused by the relase of so much debt in the first place (house prices rising to mop up all available income of the people). QE just bakes this previous inflation into the cake.
The big danger of QE is that just at the time when we are trying to raise debt on international markets the BoE is demonstrating that they will repay this debt by simply printing more cash. Once the international markets click on to the realities of this the £ will be about as popular as the Zimbabwean $. Then we will need the IMF, and quick.
John Redwood is a highly intelligent and knowledgeable man. Unfortunately this seems to have given him the impression he can lecture on QE without having studied the matter. His article contains so many mistakes that I would need 5,000 words to demolish it all. So I won’t bother.
I don’t vote Labour plus I’m very definitely on the political right rather than the political left (BNP member actually). But Labour politicians have been right to point out that the Tories have made all the wrong calls on the credit crunch. Johann Hari had an article in the Independent some time ago in which he described Cameron’s ideas on economics as “Voodoo economics”. I didn’t agree with every detail of Hari’s article, but the phrase “Voodoo economics” is a good description of Cameron’s ideas on economics and Redwood’s ideas on QE.
Reply: You need to offer us your best shot at a couple of alleged errors to make this worth reading. My analysis makes a clear assessment of QE which no-one else has picked holes in.
I agree with all of John’s analysis, but we still have to define what sort of institutions banks should be in the long term. If we take the government line that the savings of depositors must be 100% safe at all times, then two routes are possible:
(1) Implement a UK version of the American Glass-Steagall Act that Bill Clinton repealed in 1999. This placed a firewall between normal commercial banking and high risk activities linked with derivatives etc. These must be undertaken in separate companies; Chinese walls are not enough. This has been consistently advocated by Liam Halligan in Telegraph newspapers.
(2) Allow banks to mix normal commercial banking and high risk activities but insist on high liquid assets to deposits ratios, and a high level of disclosure about the risky activities.
I think I prefer (1), but I would not have been in this position. Had it been my decision, I would have let RBS crash and burn. It was very clearly under reckless management ever since it used borrowed money to outbid the then BOS to take over Natwest, in about 2001. Caveat emptor, caveat investor, caveat depositor.
The causes of the credit-crash are quite simple. It’s the same every time there is a boom and crash in house prices.
The cause are salespeople who sell mortgages to people who can’t afford them, and estate agents to pump irresponsible journalists to enthuse the public to buy houses they cannot afford.
The only difference between this crash and the early 1990s crash is that Lehmans (amongst other banks) was brought down by portfolios of liar loans, high risk etc – which they believed were low risk. Investment banks were nailed this time because they were caught holding the bad loans. In the early 1990s the public and the retail banks shared the pain.
It’s the same bunch of salespeople who over sold endowment mortgages etc, back in the 1980s who over sold mortgages today. US politicians encouraged it because they wanted poor people to become home owners. The sales people were more than happy to sell an expensive product to people who couldn’t really afford it.
Think of the people you went to school with – went to the sixth form and ended up with 3 bad A-levels. Used to play on the slot machines down the pub. They wanted a respectable job because Mum and Dad expected it. So they went to work for a retail bank or life assurance or pension company. The salary wasn’t high enough to feed their aspirations – so they got into sales. Then they sold and sold. Commission driven sales meant that they over sold. Their company masters turned a blind eye because of the competition and that the sales arm of these companies often holds power because they are the revenue drivers. It is this group of people who are responsible for our economic woes. Investment bankers trade FX, fixed income, equities etc – very differently and take calculated risks. They invest heavily in this area. I work in one of the respected investment banks and manage risk. Down at the branch level in retail banks risky mortages pour in and nobody ever manages them.
On the Radio 4 this morning (about 6.15) a question was asked – “Why do banks sell mortgages they know are high risk ” – The answer is simple banks do not sell mortgages – salespeople sell mortgages. Banks take on the risk. Regulators allow it.
What has the FSA done about this – very little. They ask for more forensic accounting, which does very little. They do not set an upper limit on loans. Unless transparent and solid limits are placed on bank loans tt will happen again and again – and I will be digging this post up in 10 years to say told you so.