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Mervyn's message to the unions

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Stephanie Flanders | 14:45 UK time, Wednesday, 15 September 2010

"You can (partly) blame me for the recession - but don't blame me for spending cuts."

In effect, that was Mervyn King's message today for the TUC. "Before the crisis", he said, "steady growth with low inflation and high employment was in our grasp. We let it slip - we, that is, in the financial sector and as policy-makers - not your members nor the many businesses and organisations around the country which employ them."

Mervyn King

 

Perhaps his aides will correct me, but this is the first time I can remember the Bank governor taking some responsibility for the crisis. When he went on to outline the key causes of the crisis, we didn't hear anything that he thought our central bank had done wrong. But it's a nice line. And it was probably wise to start with some humility, given that other parts of his speech were not going appeal to the people assembled in the hall.

"Although a large budget deficit is inevitable for a period after a crisis, it is also clearly unsustainable - our national debt, even relative to GDP, is rising sharply and will continue to do so for several years. It is vital for any government to set out and commit to a clear and credible plan for reducing the deficit. I would be shirking my responsibilities if I did not explain to you the risks of failing to do so."

There was little new in Mr King's argument, but he was even more keen than usual to distance himself from the details of the government's deficit plans, stressing that there was a "perfectly reasonable debate" to be had about the precise speed at which to cut the deficit, and the balance between tax rises and spending cuts. "That is not for me to say; that is for you and the politicians to debate," he said. He did this again in the question and answer, repeatedly dodging questions about spending cuts and their impact on different groups.

This is understandable - and, again, wise, given the audience. But Mr King cannot wash his hands of the coalition's decisions entirely.

For months, leading up to the election, he suggested that Labour had not put forward a "credible plan" for cutting borrowing. Then, days after the election, when the coalition agreement was published, he said publicly that its deficit reduction plan was "strong and powerful", and that £6bn in spending cuts this year were a "sensible" start.

The Governor justified his statement at the time, saying that the coalition had asked him to comment, to reassure the financial markets. That may all be right and true. But it was still a highly political intervention, which many took as further evidence that he had been on Mr Osborne's side of the argument all along. If so, his speech today suggests that he still is.

He states baldly that "monetary policy is the best tool for managing the economy in the short run". There is no reference to the possibility - much discussed by the likes of Paul Krugman - that monetary policy could be a less reliable tool today, in the aftermath of a financial crisis (see my posts last week on the case for and against austerity). He also suggested that the government's plan to reduce the deficit is a "more gradual fiscal tightening than in some other countries". That is factually accurate but a little disingenuous.

In fact, there is no major economy planning to cut its deficit by as much as the coalition over the next five years. Naturally, that is because there is no major economy starting out with a deficit as large as ours. But that doesn't make the government's schedule any more gradual.

True, Greece and Ireland plan to cut their deficits more quickly. But these are countries that have been forced - as Mr King admits - into faster cuts by pressure from the financial markets. Perhaps we would have been forced to do the same thing, if Mr Osborne had not stepped up to the plate. But if so, that is a judgment which Mr King shares with the Chancellor. It is not a statement of fact.

Mr King spoke clearly and passionately about the wrongs of the banks and how the financial sector needs to be fixed. He also mentioned several times that the crisis - and the response to it - had not been fair. Perhaps that is why fewer than expected walked out of the hall.

In the circumstances, he was clearly right to accept the invitation to become only the second Bank of England Governor to address the TUC in nearly 150 years. But I wonder whether they will invite him again.

Comments

Page 1 of 3

  • Comment number 1.

    Stephanie,

    Monetary policy has been somewhat of a disaster to date so why should it be the solution now? More QE is bound to create inflation because it is simply masking the fact that both publicly and privately we continue to live unsustainably and beyond our means. I suspect this is on Mr Kings agenda again for very soon.

    Unlike the trade unions and Mervyn King, who I'm sure was saying what he has just said to just get heard at the TUC conference, I believe the current economic situation is not just the fault of greedy financiers, it's our collective fault.

    We have abused abundant cheap energy for over a century and squandered it on a growth chasing economic model.

    We have allowed a build up of debt publicly and privately which has been used to consume much more than invest in our future prosperity.

    We have never given more than lip-service to sustainability and developing new sources of energy and sustainable manufacturing materials.

    We have to accept that we should be spending more than 10% of average income on food, we should be sourcing and manufacturing locally and sustainably where possible, and we should be borrowing only for a profitable investment in our future quality of life.

    We need leaders who will be strong and point this out to the population and carry them with them in making radical economic changes.

    We need commentators who will put these big issues in front of the politicians and make them face up to the task in hand

  • Comment number 2.

    Simple truth is that a decade of unjustifiably low base rates and unjustifiably excessive public borrowing and spending are to blame for the extent of the cuts required post recession.

    Whilst the Inancial Sector shoudl take a large majority of the blame for the Recission happening, its past governments and central bankers fault the fiscal tightening has to be as tight as it does.

    If rates had risen in 2004 to combat true inflation (not this ridiculous CPI nonsense which conveniently omitted house prices) and the government had balanced their budgets, let alone paied down debt during the boom years, we would only be looking at a deficit half as bad and a national debt £billions less.

    Putting your fingers in your ears, closing yoru eyes and screaming "la la la i'm not listening" when an inconvenient truth is told seems to be happening a hell of a lot in the media AND the public at large.

  • Comment number 3.

    "You can (partly) blame me for the recession - but don't blame me for spending cuts."

    So by this logic the spending cuts have nothing to do with the recession?

    Perhaps one of our esteemed irreplaceable bankers would accept partial blame for the credit crunch but not for any spending cuts, also?

    May I also take some blame for not getting into debt but saving; however I am also not to blame for the spending cuts.

    And here we have the heart of UK. Let's find who's to blame. No "fair" solution, just finger pointing. Right, left, private, public. We need balance, personal and professional integrity. I see bits of it from left, right, private and public, just not enough.

    True humility is not admitting guilt, but trying to redress the negative effects your action/inaction has caused.

  • Comment number 4.

    Clearly the UNCTAD disagree with such a credible plan for fiscal consolidation as indicated by this quote:

    "Following Germany’s lead in committing to unconditional fiscal consolidation to regain market confidence, fiscal austerity is set to spread across Europe in 2011. The prospect of a premature exit from stimulus in Europe has heightened the risk of a double-dip recession in that region, or even worldwide. In the eagerness to embark on fiscal consolidation, it is often overlooked that a double-dip recession, through its negative impact on public revenues, could pose a greater threat to public finances than continued fiscal expansion, which, by supporting growth of taxable income, would itself augment public revenues."

    Their report is available at:
    http://www.unctad.org/Templates/webflyer.asp?docid=13740&intItemID=2068&lang=1&mode=downloads

    Kind Regards
    Charlie

  • Comment number 5.

    "Before the crisis", he said, "steady growth with low inflation and high employment was in our grasp.

    Not true.

    There was no steady growth - it was an illusion.

    We had an economy based on selling houses to each other, high street spending and rampant consumerism all funded from a credit bubble - which burst.

    Giving the impression everything was nice and stable until 2008 is complete fallacy.

    If he couldn't see this then he is not fit to be Governor of the Bank of England.
    If he did- and said nothing, then he lacks integrity and is not fit to be Governor of the Bank of England.

  • Comment number 6.

    It seems that what Mervyn King is really saying is that although he admits it was the bankers' fault, they will carry on giving themselves huge bonuses on top of their inflated salaries while everyone else (except the very wealthy) pays for their mistakes for generations to come. No wonder he says we have a right to be angry!

  • Comment number 7.

    While I can appreciate the frustration and sentiment regarding the forthcoming cuts, I fail to see how the Unions speak of industrial action and the need for Mervyn King to listen to "the people" will actually present any solution whatsoever.

    Listen to what? If the policy makers and people that have the tools and wherewithal to resolve it, cannot do it any other way, then what good is it listening to a bunch of people who will just state the obvious but not present a sensible solution, other than "you need to find another way".

    The Unions continue to live somewhere on the outer edges of reality if they believe that any form of industrial action will in anyway enhance or resolve the issue and not actually add to the problems.

    And by the way it's a very naïve view of the Unions to think that its the politicians that are coming up with the ideas. ITS YOUR OWN MEMBERS i.e. civil servants. Politicians are just the mouth pieces.

  • Comment number 8.

    1. At 2:59pm on 15 Sep 2010, Sage_of_Cromerarrh wrote:
    'We need leaders who will be strong and point this out to the population and carry them with them in making radical economic changes'

    And they could make a start on changing this debt based monetary system.
    At the current growth levels of debt we'll be spending more on interest payments than on the NHS in around six years.

    Which in turn means we will be giving more money to banks in interest, than we are spending on healing people.

    Remember when the Treasury sells new gilts to the commercial banks, the banks create new money to pay for new debt.

    By virtue of their banking licence they create money out of thin air which they then lend to the government by buying its gilts. The taxpayers then have to pay the banks interest for years to come.

    It is the most ridiculously unfair monetary con trick in existence and 99.9% of people don't even know of its existence.

  • Comment number 9.

    Mervyn King's biggest fault was that he listened to Gordon Brown and didn't argue with him over not taking into account house price inflation.

    If he had and the BoE had raised interest rates accordingly we may have avoided a large part of the mess we have now and houses might just still be affordable.

  • Comment number 10.

    It is interesting that Mervin King feels the need to go to the TUC.

    Courtesy of the former Labour Government and appalling mismanagement of the UK financial institutions overseen by the Bank of England and FSA we see Equitable Life - utter failure to pay out and others where people doing the right thing have lost out.

    Besides this the forthcoming inflation figures aimed at inflating away our financial problems will create a heavy cost. The very high interest rates the bank - lead by Mr King will force on the country will be a disgrace. King will drive the country to the wall by failing to grab the nettle of inflation.

  • Comment number 11.

    Mr King and the government have a joint interest in persuading ordinary people to accept a lower standard of living for the forseeable future to repair the damage wrought by excess national, company and personal debt.

    Inevitably, the poorest will suffer more than the richest.

  • Comment number 12.

    Nice of Merv to take one for the team, wonder whats in it for him ;-)

  • Comment number 13.

    I put this on the last blog, and I’m sorry for repeating it, but it needs repeating, as Mr King platitudes hide a more sinister side of the monetary system.

    When the Treasury sells new gilts to the commercial banks, new money is created.

    Assume that the treasury sells £100 billion of gilts to the commercial banks:
    The banks create £100 billion of new money to pay for the gilts.

    By virtue of their banking licence they create money out of thin air which they then lend to the government by buying its gilts. The taxpayers then have to pay the banks interest for years to come.

    So if the people have deposited say £5 billion in the banks, which they are currently receiving a derisory 0.1% in interest, and the fractional reserve limit is 5%, the banks can create £100 billion to buy the gilts, which they then charge interest on at say 4%.

    Sound far fetched, surely this can’t be true? I’m afraid so.

    A question can then arise;
    What if banks are already fully loaned up to their fractional reserve limit, how do they get the initial demand deposit to create the new money necessary to purchase the gilts.

    This is where Mr Mervyn King of The Bank of England steps in.
    With a reserve requirement of say 5% and with the BOE wishing to create enough demand deposits in the commercial banks to enable them to buy £100 billion of gilts, it simply creates money out of thin air, buys existing gilts off commercial banks, and they in turn by virtue of the fractional reserve requirement purchase an increased number off the government.

    Now it doesn’t need to create £100 billion out of thin air, it does in fact only need to create £5.263 billion (X).

    X = D / (MM – 1)
    X = 100 / (20 – 1)
    X = £5.263 billion

    D = Deficit
    MM = Money multiplier (inverse of the fractional reserve 5%)

    Therefore by the central bank creating £5.263 billion from thin air and purchasing old gilts, from the commercial banks, the commercial banks can then pyramid this up to purchase the £100 billion of debt issued by the government.

    And for the avoidance of doubt we (the taxpayer) now have the joy of paying interest on it. And the payment of interest is the prior call on the taxpayers money, it comes before the NHS, public sector jobs, or anything else for that matter.

    As regards a rather interesting comment on austerity see the link below:
    http://www.youtube.com/watch?v=jUmQbf1AyA8&feature=related

    And if you want to know of a group of people who are against this, see links below:
    http://www.bankofenglandact.co.uk/act/
    http://www.prosperityuk.com/prosperity/prosperity.html

  • Comment number 14.

    So Mervyn King agrees that its unfair and that the financial sector are largely responsible - so what has happened - job losses for those who did nothing wrong whereas the financial sector continues with its state subsidy.

    As Martin Wolf writes in the FT today on the triumph of banks over the rest of society re:Basel 3

    "To celebrate the second anniversary of the fall of Lehman, the mountain of Basel has laboured mightily and brought forth a mouse. Needless to say, the banking industry will insist the mouse is a tiger about to gobble up the world economy. Such special pleading – of which this pampered industry is a master – should be ignored: withdrawing incentives for reckless behaviour is not a cost to society; it is costly to the beneficiaries. The latter must not be confused with the former. The world needs a smaller and safer banking industry. The defect of the new rules is that they will fail to deliver this"


    PS. You mention Ireland in this article - what has been the result of these cuts?
    Have they worked? Has the 'crowded out' private sector come in as the engine of growth? Answer: NO

    Ireland has no options really as it doesn't control its own currency - George Osbourne and Mervyn King don't have that excuse!

  • Comment number 15.

    The inference from the commentary is that the Governor has allowed his impartiality and crucially "independence" from government to be challenged.

    The willingness to stand up and criticise the previous government for the lack of a plan and promptly effusively sing the praises of the current one immediately post election - for little more than a short term current year expenditure cut seems careless at best, lacking in judgement at worst.

    It speaks volumes about the perception of confidence that the markets have in Messrs Cameron and Osborne, if they felt the need to compel the Governor to speak out strongly in their support on election.

    The failure of any stock market jitters during the transition to coalition shows just how much scaremongering was going on about that before polling day.

    Any jitters on the markets in the City arising now or any time in the future will fall firmly at the feet of Messrs Osborne & Cameron. Theirs is the mantra of "cut fast and cut furiously"! Nothing will destroy the coalition faster than a fragile economic recovery completely undermined by government policy.

  • Comment number 16.

    Afternoon Stephanie,
    surely that nice Mr King never said "and that £6bn in spending cuts this year WERE a "sensible" start"?
    Brave man going to speak directly to the TUC, shame our politicians don't have the same integrity.
    Meanwhile back at the ranch, I was disgusted to hear the BBC explain why wheat prices have risen and will continue to rise. These statements by the BBC on the 10 o'clock news are nor bourne out by the FACTS!
    The global wheat production is only slightly down on estimates due to other countries (apart from Russia) having a better harvest. Global wheat reserves will be needed to balance supply and demand but that was always planned for. No, the real reason that wheat futures have risen is our old friend SPECULATORS who cannot make a decent return from bond and equity markets. The BBC should clarify the situation with some facts rather than reporters and editors opinions.
    Also in the real world we have a trade war going on in Japan (weakening currency by state intervention).This will start a race to the bottom!
    We have the USA planning another 2-3 Trillion dollars in QE.
    Do you not think that these global events deserve your analysis and comment Stephanie rather than some old man making political speeches?

  • Comment number 17.

    Chloe-in-france - Merv tells people what they want to hear. The deficit is government spending led, not banker bonus led. The cuts are for the deficit, not the debt (which was also caused by the government).

    newblogger - spot on. And the thing nobody gets is that the money has already gone out the door. It's gone and we have to work harder to rebuild. We can't get back to normal because the bubble wasn't normal.

    ps come on mods - stop watching telly tubbies!

  • Comment number 18.


    Actually, I'm starting to feel optimistic. As the brown stuff has hit the fan and no one can actually deny it, maybe we're finally getting there.

    People are crawling out of the woodwork and starting to acknowledge that we're drowning (however they spin their part in the whole drama).

  • Comment number 19.

    "monetary policy is the best tool for managing the economy in the short run". OK what has he got for managing the economy in the medium and long term? Monetary policy seems ideal for living in a fantasy make believe house of credit cards until it crashes down.

  • Comment number 20.

    Perhaps there should have been a Referendum on these Budget cuts ?

    And a Referendum on Tax rises ?

    Asking how much of each the people would back.

    Such a thing would have been a strong support to any Budget cuts.

    But People will not approve of Cuts, when they perceive that the reason is the bail out of the Investment bankers profiteering.

    Fixing the bank bailout damaged public accounts by cutting services is just a bad idea.

    Raising a Stamp duty on all trades, thro exchanges would be seen as taxing the source of the problem, rather than the victims.

    Raising the higher rate of Income Tax and removing some of the so called business incentives would also be fairer.

    After all, these people pay themselves High Salaries as they claim to Captains of Industry, the City , etc.

    With the Leadership of an organisation or a country, comes responsibility for its success or failures.

    Thus an increase in the Higher rate of Tax would be an incentive for the Leaders to do more and do it better!

    The Failures of the banking system have made it quite ridiculous that Bonuses should still be paid. These people have played a game that has caused much pain and grief, and huge losses to both their Employers and the Taxman.

    It is quite outrageous that they should receive Bonuses before both the Taxpayers (via the treasury) AND the Shareholders have been reimbursed.

  • Comment number 21.

    PS. Good on Mervyn King for actually admiting mistakes. I know it doesn't mean much but it is a start to changing things.

    or maybe I'm being naive!

    PPS. Mervyn King should have been telling Gordon Brown to reduce the deficit in the boom years. That is the time for a government to reduce its debts - in the boom years. Not in the middle of the recession when there is no private sector demand.

    PPPS. Mervyn - keeping interest rates low isn't working - are the public spending or saving at the moment? - answer - saving. In fact having rates low levels means that consumers and businesses are scared - 0.5% gives all of us the feeling we are in an economic emergency - so we are not going to borrow and invest. Plus when interest rates are low we know there is only one way for them to go - up - so it makes people nervous of borrowing as the costs will only go up in the future.

  • Comment number 22.

    #5: We did have growth before the recession, in fact it was massive. Growth of debt that is.

  • Comment number 23.

    What a pitiful excuse for governor of the BoE this little man is. Sucking up to these overweight ranting old idiots of the TUC who like our politicians are too busy lining their own pockets to care what happens to the people who pay their inflated wages. King should be ashamed at the idea of grovelling to these useless self seeking union leaders. They are in no sense the answer to the country's problems, they are in fact one of the prime reasons for the problem. Since Thatcher thrashed and humiliated them they have striven, with the overt assistance of the Labour party to regain and misuse power by fear and blackmail of the nation.

  • Comment number 24.

    "Before the crisis", he said, "steady growth with low inflation and high employment was in our grasp"

    Does anyone still doubt that Mervyn King is unfit to be governor of the Bank of England?

    Before the crisis was the gross mismanagement of the economy HE presided over. Rampant property inflation was simply ignored, and that was what caused the crisis.

  • Comment number 25.

    Stephanie:

    You rightly identify the extent to which this supposedly independent civil servant has displayed political bias but we haven’t really explored why this might be.

    Charitably leaving aside the unworthy thought of political patronage as a motive, I understand he is an academic monetarist: a believer in the thesis that the monetary base is a decisive determinant of economic activity etc etc.

    Under this theory it becomes logical to stimulate private sector investment by, say, creating a few billions for use by the banking sector rather than a few million just setting up a steel works or whatever.

    When he says monetary policy can make up for any slowdown in growth that might arise as a result of following the cult of fiscal rectitude perhaps he really believes it.

    The rest of us might think monetary and fiscal policy should always work together. Also that in the current climate its aim should be to stimulate growth (and target inflation sensibly). If public sector cuts reduce growth, increase unemployment, slow consumption and reduce private investment still further (more or less guaranteed) and monetary policy fails to stimulate investment in the real economy (and why should it in the above scenario?) then the attempt to cut the deficit becomes self-defeating (vide Ireland, Greece and Spain).

    Still, this is what you get when you appoint someone to Government and make them 'independent' rather than electing them. They lose sight of the commonweal and impose their fantasy beliefs on the governed. Perhaps we should blame Gordon after all.

  • Comment number 26.

    does anybody else remember those chaps standing with sandwich boards strapped around them we used to see in the high street back in the day- you know - the ones who were saying 'the end is nigh'

    wonder where all those guys went...? don't see 'em about much...

  • Comment number 27.

    Mr King is stating what some of us have been stating all along. Most importantly and above all, it is down to changing the behaviours and habits of the leadership in the banks from the "unacceptable" to the "acceptable" and getting the balance right between spending cuts and taxation and at what speed to reduce the deficit. If it is done too soon and too much, public services will be put at risk. At the same time, the Public Sector that has bloated over the years have got to be trimmed to reduce wastage and achieve the necessary efficiencies while the private sector needs to be encouraged and propped up to grow and provide jobs for the unemployed and those to be made redundant in the Public Sector. All of these factors have to happen almost simultaneously for the economy to continue to grow and not go into a second dip recession! A 50:50 Private/Public sector status-quo is unsustainable. It has got be more like a 70/30 or 60/40 ratio to state the least.

  • Comment number 28.

    It is not sufficient to say mea culpa we have aright to demand his scalp.

    At times it has seemed that I have been running a one person campaign for a rational approach to the role of the Bank of England in the negligent running of the price of money that substantially caused the bubble economy that nearly killed a number of British banks, but now even Mervyn King finds that he cannot weasel out of his responsibilities!

    He did this to the country - he admits it. His ability to understand basic economics, courtesy of his Harvard education is totally suspect - will we let him continue to do the wrong things and saying sorry? We cannot afford the luxury of Mervyn King.

  • Comment number 29.

    Interesting how the problems in banking and financial services have been identified. Yet little has been done to correct them. A collusion of the greedy to generate personal wealth, facilitated by elected bodies of the West. Funding mortgages with an empty box, was just too complicated for the over-seers to figure out, I guess.
    Not one bank or CEO or Board of Directors has been held accountable and they were rewarded, at taxpayer expense, for their misdeeds. What rubbish. They continue to shield the bankers from any accountability for their robbery of personal wealth, national treasuries and increased taxation. Front man for the criminal class. It will all happen again. Tell your children to bury their money in a box in the backyard where it may retain some value and can't be stolen, directly, by the bankers.

  • Comment number 30.

    @16

    nice comments, agreed

  • Comment number 31.

    Dempster and other debt free money boggers,

    Debt if it was used for investment in new technologies and productivity gains wouldn't have been a problem. Unfortunately it has been abused by a lot of society to a greater or lesser degree to consume beyond their means in the belief of exponential and eternal growth to pay it off in the future.

    If I was a would-be entrepreneur with a great idea for example, I don't think we would get progress by having to go to comrade whomever in big brother government to give me some debt-free money to develop my idea.

    Free market responsible bank lending would work if proper safeguards were put in place to stop debt for consumption, housing bubbles, and ponzi credit default swap and derivitive trading. Thus directing funds to wealth producing potential which unfortunately history shows governments are not good at running.

  • Comment number 32.

    "You can (partly) blame me for the recession - but don't blame me for spending cuts."
    This Statement doesn’t seem logical to me.Surely if you had a part in causing the recession, you also have a part in resolving it, including spending cuts. Are we supposed to cheer because a Bank governor has assumed some responsibility for the crisis?
    As you so rightly point out, Mr. King does not go as far as sharing his thoughts on what the central bank had done wrong.
    As you also so rightly point out, Mr. King was even more keen than usual to distance himself from the details of the government's deficit plans.
    Okay, let’s get down to the nitty-gritty.
    First who is Mervyn King?
    King is a member of the influential WASHINGTON-based financial advisory body, the Group of Thirty. He is also an ex-officio member of the Bank's interest-rate setting Monetary Policy Committee. He is (in)famous for refusing funding to Northern Rock, which precipitated a run on that bank; this, in turn, resulted not only in nationalisation for Northern, but further runs on other British banks and further nationalisation.
    Despite his refusal to give funding to the retail banks, he retained his job because he was able to convince a Treasury Select Committee that The Bank of England should be the 'lender of last resort'.
    Yet subsequently, he supported all moves to provide funding to those banks which had been nationalised at a cost of hundreds of billions of pounds to the UK treasury and taxpayer. This led to an erosion of sterling against major world currencies such as the Euro and the US dollar. How much?
    As much as 30%.
    Now for the banks:
    King on "the role of banks in financing the recovery - they are not in good shape….That is not anyone's fault but their own. The fact is that the banking balance sheets are not in tremendously robust state.”
    (Note - no mention of derivatives, or credit default swaps, or bets against sovereign debt, or any other exotic instrument that originated with the Wall Street Boys out of the United States.)
    King offered no immediate solution to the problem, saying "we have to be sure we don't allow the banks ever again to get into a state where they can damange the prospects for recovery." (Is this brilliant stuff or what?)
    The BOE Governor was asked about high levels of bank bonuses. He said that while it was hard to understand the justification for such bonuses, "I don't think the answer is to rely on direct controls or even an arbitrary ratio." (So upon what does he believe banks should rely?)
    King said banks were "using the implicit guarantee of the taxpayer to take large risks and hence they feel that they can encourage, and want to pay people, to take excessive risk." (Wasn’t it excessive risk and the collapse related thereto that got the UK and some other countries into this mess in the first place?)
    The BOE head said if people addressed the "fundamental question of what banks are for, and why they at present have an excessive incentive to take risks, then I would hope that the symptom of that, which is these excessive bonuses, would disappear." (I can’t believe that Mr. King actually said this - in front of witnesses.)
    King stressed that the social fairness of the deficit cuts was a political question and not one for the BOE. But the pace of deficit reduction was open to debate. Further he said:
    "No-one can claim that one speed is obviously right and every other speed is obviously wrong...We have to find a way over a number of years to reduce the deficit and it's no good making just vague statements that at some point in the future we'll get round to it". (You couldn't get much more vague than the statements of Mervyn King.)
    If you can handle more, there is more. Mr. King: "If you want to oppose what is being done, I think the onus is on those to come up with an alternative, credible and convincing plan for reducing the deficit." (So does Mr. King have no recommendations?)
    King insisted that the private sector is capable of generating the jobs which are likely to be lost as a result of the budget cuts:
    "Of course the OBR (Office for Budget Responsibility) has talked about a large number of jobs disappearing over a 5-6 year period in the public sector. (I thought the public sector was supposed to be reduced.) If you simply ask the question, have we seen in the past episodes where the private sector has generated an equivalent or even larger number of jobs? The answer is yes. (Not without the ability to lend!) It would not be unprecedented for the private sector to create these jobs. Indeed, one of the roles of monetary policy and the Bank of England is to ensure there is enough demand in the economy in the whole to make sure that happens."
    It's a wonder that anyone was left in the room!

  • Comment number 33.

    The Bank of England MPC was set a far too high target for CPI annual movement and to date has not acted quickly enough to increase interest rates WHEN NECESSARY.
    Rates are currently too low given the effect of the weakness of Sterling on prices and the CPI.
    The measure of the failure of the Brown 'monetary policy' and the MPC's implementation was the extraordinary increase in property valuations from 1997 and in since the CPI replaced the RPI as a target measure and compared with major trading partners UK residential property still looks extremely highly priced.
    However King was far more conservative than others on the MPC over the level of interest rates, others seemingly being either politically motivated or plain incompetent; just as the Blair/Brown Governments were.

  • Comment number 34.

    The SILENCE WAS DEAFENING about any mention of a Robin Hood Tax on the banks' CASINO activities - Little or no regulation, politicians encouraging derivative and securitisation instrument trading etc. Why no 0.05% tax on all such transactions? - this would wipe out the fiscal deficit in 12 months with no cuts being necessary...

  • Comment number 35.

    To 31. At 5:39pm on 15 Sep 2010, Sage_of_Cromerarrh

    It's about not having to pay banks interest on the new money created by them and given to Govrenment.

    If you watch the 'Secret of Oz' or read chapter XI of Murray Rothbards The mystery of banking, both of which are free over the internet, it may give you an insight as to how the system works, and how we (the people) are being crucified by it.

  • Comment number 36.

    If Mervyn is an economist then best take everything he says with a pinch of salt.

  • Comment number 37.

    33 Darrum et al.
    It wasn't just the UK that changed to CPI, the new methodology was world-wide and agreed internationally. So, if it was a conspiracy, it was across the G20. I'm not qualified to say for sure that CPI is wrong or right, but it seems logical to me that measures of price stability that are used for wage negotiations should exclude exceptional items. Much better to treat house price inflation seperately and have fiscal measures to prevent people using residential property purely as a financial investment - but I could be wrong, measuring price stability seems tricky to me.

    Charlie

  • Comment number 38.

    20. At 4:39pm on 15 Sep 2010, supercalmdown wrote:

    Perhaps there should have been a Referendum on these Budget cuts ?



    And a Referendum on Tax rises ?



    Asking how much of each the people would back.



    Such a thing would have been a strong support to any Budget cuts.



    -------------------------------------------------------------------

    Interesting suggestion. Bristol LA did one for Council Tax.



    I suspect that a Chancellor might see that as tying his or her hands a bit too much. Plus, the traditional Paliamentarian response is that the GE is the referendum. Once we have voted the 'winning' party has a mandate to do whatever they like ... er, sorry, I mean ... carry out their manifesto.



    Funny how the expenses scandal and all that surrounded it and flowed from it has faded away ...

  • Comment number 39.

    26. At 5:04pm on 15 Sep 2010, pheasant-plucker wrote:
    does anybody else remember those chaps standing with sandwich boards strapped around them we used to see in the high street back in the day- you know - the ones who were saying 'the end is nigh'

    wonder where all those guys went...? don't see 'em about much...
    -----------------------------------------------------------------------
    They are on here .....

  • Comment number 40.

    I bet he won't go in front of a finance audience and tell them they have to accept big cuts in their standard of living and big job losses...

  • Comment number 41.

    37. At 6:47pm on 15 Sep 2010, Charles Jurcich wrote:

    Sorry Charlie, I disagree. Various agreements were made that allowances and pensions would rise in line with RPI [specifically identified] and there has been no complaint for some decades. Those agreements have been unilaterally broken by the Government. These were contracts and no contract should be broken without agreement - thats what contract law is about. So government ignores the rule of law.

    On the other hand, various companies/utilities have agreements that they can increase their prices by RPI. No announcement that they can now only use CPI to uprate the cost to the consumer. So government sticks to its contracts

    One sided or what?

  • Comment number 42.

    There is so much dishonesty from the Tories and their ilk. In 2001 the UK public sector net borrowing in relation to GDP was minus 1%! I can think of three events that are the major factors for the increase since then: Afghanistan, Iraq, and, most importantly, the bailing out of the banks. All these were policies the Tories publicly supported. Now the Tories are everywhere blaming Labour for pursuing policies they supported, and calling the previous government the worst in history!!

    No good will come from this Tory government - they think that if the British public believed the 'Labour's legacy' nonsense they'll believe the Tory lies about being fair about the cuts. Guillotine the lot of them!

  • Comment number 43.

    Its all great stuff, but what is the Ministry of Magic going to do to fix the banking problem?

  • Comment number 44.

    SleepyDormouse,
    Yes, I agree, but I was referring to the fact the MPC normally sets the interest rate using CPI as a base not RPI. I totally agree that pensions etc should be kept at RPI and all contracts should be honoured.

    I think that Inflation should be controlled by fiscal policy, not monetary policy, as clever fiscal policy can be targetted at the specific commodity / product / service whose price is inflating. E.g. excessive house price inflation can be targetted with a tax on empty properties for example. Monetary policy will never have this level of precision.

    Kind Regards
    Charlie

  • Comment number 45.

    10, 13 and many other times Dempster said

    Remember when the Treasury sells new gilts to the commercial banks, the banks create new money to pay for new debt.

    ===========================

    I think that you are over-estimating the amount of gilts that commercial banks buy. I think you will find that a very large amount are bought by insurance companies and pension funds to balance their long-term liabilities, as well as building societies etc. The banks can make much more money by lending to customers.

  • Comment number 46.

    AnotherEngineer,
    "I think that you are over-estimating the amount of gilts that commercial banks buy. I think you will find that a very large amount are bought by insurance companies and pension funds to balance their long-term liabilities, as well as building societies etc. The banks can make much more money by lending to customers."

    Yes, this makes sense to me. I pretty sure banks can only create money when creating a loan to a customer - maybe i'm wrong. The government does not count because the bank is not issuing the loan - the government is issuing a debt! - a different machanism entirely I think.

    Kind Regards
    Charlie

  • Comment number 47.

    I do not remember any of the public sector union bosses querying why Gordo was spending money he did not have, like a drunken sailor on shore leave. They did not question where it came from or who would pay it back.

    Somebody else, obviously.

  • Comment number 48.

    The reason we are in this mess is that the goverment of the day was still borrowing money like it was going out of fashion when we had record economic growth. We should of had a budget surplus during those years not a deficit. Labour & chiefly Mr Brown have to take responsibility for this. It was Mr Brown who said he had ended boom & bust..... The FSA etc... failed at regulating the banks & allowed lending to get out of control. If the goverment had of saved in the good days then we would be in such a strong position now as a country & Labour would be still in power. The public sector would not be facing cuts like they are. Please remember public sector workers, people in the private sector have allready been through this pain & you still have your pensions to look forward to we don't!!!!

  • Comment number 49.

    Charlie

    We agree then. I support your views on the use of fiscal policy. Trouble is I don't think the right people read this blog. Not a lot of progress is being made. The BBC doesn't seem to read it either, or there would have been a Panorama programme about it.

    Even Evan Davis's radio programme seemed to me to be mainstream theory biased!

  • Comment number 50.

    Hi Stephanie
    It is a refreshing change to see soem humility from the Governor of the Bank of England. Although considering his performance many of the readers of this may feel that he has much to be humble about.
    I however notice that neither he nor you mention yesterdays disappointing inflation numbers.According to notayesmanseconomics blog.
    "Firstly we keep being told by the Monetary Policy Committee that price rises are “temporary” and yet we find inflation is still more than 1% over its official inflation target and more than 2% over its previous inflation target. The level of CPI inflation has been at least 1% over its official target for all of 2010 and the excuses we are given for this which in my view were never very strong (please see my articles on inflation from the beginning of 2010) are even weaker now."
    So I guess in some ways I can understand why Mervyn King chooses to talk about other issues.http://notayesmanseconomics.wordpress.com

  • Comment number 51.

    46. At 7:54pm on 15 Sep 2010, Charles Jurcich
    45. At 7:45pm on 15 Sep 2010, AnotherEngineer

    Well AE here’s a list of the corporate entities permitted to buy gilts.

    Barclays Capital
    BNP Paribas (London Branch)
    Citigroup Global Markets Limited
    Credit Suisse Securities
    Deutsche Bank AG (London Branch)
    Goldman Sachs International Limited
    HSBC Bank PLC
    Jefferies International Limited
    JP Morgan Securities Limited
    Merrill Lynch International
    Morgan Stanley & Co. International plc
    Nomura International plc
    Royal Bank of Canada Europe Limited
    Royal Bank of Scotland
    Santander Global Banking & Markets UK
    Societe Generale Corporate & Investment Banking
    The Toronto-Dominion Bank (London Branch)*
    UBS Limited
    Winterflood Securities Limited*

    Based on the assumption that you didn’t find a pension fund or insurance company in there, will you believe me now.

    And as regards CJ’s comments:
    'I’m pretty sure banks can only create money when creating a loan to a customer - maybe I'm wrong'

    Sadly you are, but I wish it were different.

  • Comment number 52.

    #50 Francesca Jones

    You are correct to be concerned about inflation.

    The overall economic context is that inflation is at historic lows, despite being over the Chancellor's nominal target. The arch moneterists of the 1980s never mastered it in the way it has been for the last decade or so. It is important not to let the beast escape again, but a little loosening of the chain around its neck will allow it to survive and live on. We need to avoid applying the noose and cutting off the blood and air supplies.

    Other economists and the ONS have disaggregated the inflation data and demonstrated that the majority of the increase is due to the VAT rise and other erratic items, such as oil price and other commodity increases. It has been explained previously that the VAT rise will take a year to unwind, by which time there will be another increase, which will keep inflation artificially high for another year.

    Apart from the erratic items, the rate of underlying inflation has not really budged yet.

    In order to promote recovery an increase in aggregate demand is needed. Public spending cuts and a decrease in exports, as currently are happening will both suppress it, as will weak and proportionately expensive, balance sheet repairing lending for capital investment from the banks.

    It is better to leave the older, tethered alsation, which has growled to deal with the young, loose, untrained doberman that is barking and frightening the children.

  • Comment number 53.

    I'll also blame Merv for messing up my savings plans...
    We've endured 0.5% for 18 months now.
    The people who have done least to cause the problem are feeling the greatest pain...

  • Comment number 54.

    This comment was removed because the moderators found it broke the house rules. Explain.

  • Comment number 55.

    re 51

    Where did that list come from?
    Anyone can buy gilts, including you and me; they are freely traded on the Stock Exchange.
    Do you perhaps mean buy them direct from the issuer on the first day and then resell them?
    Also at least twelve of the list are investment banks rather than commercial banks.

  • Comment number 56.

    This country will pay in the region of £45 billion in interest on debt this year, and that’s 40% of the total cost of the NHS. Next year its going to be more.

    And despite the ‘cuts’ and the pantomime currently being acted out by the unions and the government, it’s not going to stop there.

    In a few years time they’ll have to make more ‘cuts’, and there will be more ‘austerity measures’, and they’ll sell off more state assets, probably land and buildings.

    But it still won’t be enough, eventually they’ll sell off hospitals and roads and rent them back. And finally when the interest payments become astronomic they’ll sell off your right to free NHS treatment (likely save for accidents).

    Now don’t get me wrong in all this, I’m not in favour of government waste, or burdening bureaucracy, I am in fact I’m a self employed Joe who works solely in the private sector.

    I’m not a socialist or a capitalist either, I’m not an ‘ist’ at all if the truth be told, predominantly due to me never really going for the ‘isms’ in the first place.

    But be under absolutely no illusion, we are closing in on a compound debt trap with alarming speed. And that trap will strip this nation of its assets, and the people of there ability to access ‘free services’ such as the NHS.

    If you want an example, look at the decline of NHS dentistry, means testing for elderly care. Look at the sale of state assets over the years, and look at sales planned for the future.

    We’re paying banks interest on money they banks have created from nothing under the fractional reserve system, and selling off assets to pay for it.

    Spend some time watch ‘Money as Debt’ & ‘The secret of OZ’.
    Read Murray Rothbard’s The mystery of banking, particularly chapter XI.

    The visit the two groups wishing to make changes to the system, see links below.
    http://www.bankofenglandact.co.uk/act/
    http://www.prosperityuk.com/prosperity/prosperity.html

    On the other hand don’t do it, but try and remember the point when you had the opportunity.

  • Comment number 57.

    51. At 8:35pm on 15 Sep 2010, you wrote:
    46. At 7:54pm on 15 Sep 2010, Charles Jurcich
    45. At 7:45pm on 15 Sep 2010, AnotherEngineer

    Well AE here’s a list of the corporate entities permitted to buy gilts.

    What I should have written was:

    Well AE here’s a list of the corporate entities permitted to buy new gilts.

  • Comment number 58.

    At 4:03pm on 15 Sep 2010, Wee-Scamp

    Though buying a house at present, I have always thought that it is immoral that houses increase in price so dramatically. Unfortunately, though prices might have stayed lower, houses would not have been more affordable if interest rates had gone up because people would not have been able to afford the mortgages. If people had been able to afford them, then prices would have gone up. House prices will only reduce if less people can afford them or more houses are built and it is this latter that must be changed.

  • Comment number 59.

    Dempster

    Many thanks for your posts here. I've really enjoyed reading them and following up on the links. Not read all yet; The mystery of banking looks interesting, but will take time.

    As you may have realised, I like the ideas espoused by MMT but have doubts about how to get it implemented with us being in the state we are now and the finance industry ruled by neo-liberals [I suspect the situation is going to get worse too, as you have written].

    Question I have is 'how do we get change'?

  • Comment number 60.

    #57

    Exactly. These banks buy the gilts in bulk and then sell them at a very small margin to the people who actually want them i.e. act as brokers.

    How does this affect your theory of money creation?

  • Comment number 61.

    20. At 4:39pm on 15 Sep 2010, supercalmdown wrote: "Perhaps there should have been a Referendum on these Budget cuts ? And a Referendum on Tax rises?"

    We did have a referendum, it was called an election. If the population wanted a less fierce set of cuts I am sure the Member for Kirkcaldy would have done that. Then we would all be paying for the exemplary control of the economy of the previous Government from 2001 to 2009 till the end of the century.

  • Comment number 62.

    59. At 9:42pm on 15 Sep 2010, SleepyDormouse wrote:
    Question I have is 'how do we get change'?

    To SleepyDormouse

    I believe it is the responsibility of each generation to do that which is right by the next generation. And it is for this reason I post on this website.

    I do not believe that the current fractional reserve banking system works in the best interests of the country and more particularly, the younger generation.

    I do not believe that those children I see queuing up at bus stops on my way to work, should be encumbered with debt that will enslave their lives in the payment of interest on it.

    I believe that the current debt based system of government funding acts to enrich the financial institutions to the detriment of the young.

    And finally, if the current hopes and aims of the group at the ‘Bank of England Act’ fail, I can look forward to going to my grave in the full and complete belief that at least I tried.

    If you want to try and change things, http://www.bankofenglandact.co.uk/act/

  • Comment number 63.

    #61 dontmakeawave,

    If you care to look at the results of the election then you will find that the country did NOT vote for the cuts that are now being toted.

    There is a major difference betwen a General Election and a referendum.

    As for paying until the end of the century, this may well be true. There is very little evidence that fast and deep cutting without any clear policy for re-generation of the non-financial sectors of the economy will give us the basis to truly grow the strength of our economy.

  • Comment number 64.

    Dempster

    Many thanks for your post. I greatly appreciate the time and trouble you have taken.

    Lets hope for change soon. But being a pessimist by nature, I think I'll plan for no change and batten down the hatches. The financial figures today don't seem too bad; but I expect life to really start to get difficult for many from the first quarter of next year.

  • Comment number 65.

    63. At 10:45pm on 15 Sep 2010, foredeckdave wrote:
    "If you care to look at the results of the election then you will find that the country did NOT vote for the cuts that are now being toted.
    There is a major difference between a General Election and a referendum."

    So FDD if the country didn't vote for cuts and the parties in power said there were going to be cuts, and they're in power how come we have a Government carrying out cuts?

    I don't recollect any party saying vote for me then I'll have a referendum on cuts and if you say NO, then cuts there won't be! Come on FDD even you can't spin that one UNLESS you are Crowbar in disguise?

  • Comment number 66.

    60. At 10:09pm on 15 Sep 2010, AnotherEngineer wrote:
    #57
    Exactly. These banks buy the gilts in bulk and then sell them at a very small margin to the people who actually want them i.e. act as brokers.
    How does this affect your theory of money creation?


    What I'm trying to say is that the banks create money from nothing give it to the Government, who then promises to repay + interest. They may sell on and make a profit from the same.

    If you're going to create money from nothing, why create it bearing interest which is payable to financial institutions?

    In short we're paying interest on debt we don't have to, and thereby stoking up inflation as well.

    There are many internet sources which explain the debt creation process, the best I've found, I've previously posted.

    Irrespective of whether you agree or disagree, it must be starting to become clear to most that there is a debt problem both individually and nationally.

    And let’s face it this debt problem hasn’t appeared from outer space, it has been generated here.

  • Comment number 67.

    Yes, there are many parts of Mervyn King's speech that are unpalatable, but let's have at least two cheers for his nailing the pernicious myth that the Government has been perpetuating that this financial crisis is down to money spent on benefits for the poor, grants to troupes of one-legged Rumanian transgendered Buddhists and "lifestyle choice" unemployment.

    It was the banks. To bail them out we took on huge debts - it is the servicing of those debts (you didn't think they were interest free, did you?) that is largely responsible for the deficit. Remember that as FTSE 100 companies return to 140% of salary bonuses for their top employees and intone the mantra, "We're all in this together".
    Remember it as the banks charge 17% interest on the loans they make to hard-working plebs and to small businesses, while paying 0.5% to their savers and crediting the bumper profit to the skills of their top executives; intone the mantra "We're all in this together"
    Remember it when your local primary school closes, but the high-fee private school doesn't; when you get your rubbish collected fortnightly, while in Knightsbridge they need more collections because they throw away so much more. Remember it as the dole queues grow. And intone the mantra, "We're all in this together"

  • Comment number 68.

    61. At 10:16pm on 15 Sep 2010, dontmakeawave wrote:
    20. At 4:39pm on 15 Sep 2010, supercalmdown wrote: "Perhaps there should have been a Referendum on these Budget cuts ? And a Referendum on Tax rises?"

    We did have a referendum, it was called an election. If the population wanted a less fierce set of cuts I am sure the Member for Kirkcaldy would have done that. Then we would all be paying for the exemplary control of the economy of the previous Government from 2001 to 2009 till the end of the century.

    -------------------------------------------------------------------

    Except, of course, that "the population" DID vote for a less fierce set of cuts. Prior to the election the Lib Dems were right alongside Labour on that one. One presumes that those voting for them knew that. Silly old them, eh?

  • Comment number 69.

    66 Dempster,
    "What I'm trying to say is that the banks create money from nothing give it to the Government, who then promises to repay + interest. They may sell on and make a profit from the same."

    I'm not disagreeing with you about the fact that 'new' money entering the economy by credit alone is wrong - in that we are on the same team. What I am saying (unless you can open my eyes and prove differently) is that banks cannot simply create money at will - it has to be as a result of issuing a loan to a customer.

    Therefore banks cannot create money simply to buy gilts - they would have to find another source of funding to purchase gilts - funding a loan is different from funding a purchase, I submit.


    I do agree that the government should issue sovereign money and spend it into the economy. The reason for this is that fiscal policy is superior to monetary policy for:

    -Maintaining price stability (inflation)
    -Maintaining full employment
    -Pursuing Public Purpose
    -Offsetting the pro-cyclical nature of the banks with counter-cyclical policies

    I'm disagreeing with you on detail, not your correct opposition to the pro-cyclical operations of the bank.

    Kind Regards
    Charlie

  • Comment number 70.

    #65 dontmakeawave,

    Let's take the referendum point first. A referendum is a totally different beast to a general election. An election is a competition on a series of policies whereas a referendum is limited to 1 specific question.

    I never argued that any of the parties promised a referndum on cuts. I did respond to your assertion that a Labour victory would have resulted in paying until the end of the century.

    Now the Tories are not implemeting the cuts that they presented at the time of the election. So their proposals do not have a mandate. That's not spin it is fact.

    So rather than wasting time on semantics perhaps you can concentrate upon on the real meat of my response and prove me wrong about the lack of any substantial policy to grow the strength of our economy. Let's assume for a moment that the Coalition does survive for a full term and that they actually achieve the levels of 'savings' they propose. Now show me how that will make our economy any more balanced and/or strengthened?

    Let's assume that the private sector moves in to provide services formerly provided by the public sector. What will that achieve? If you stop to think about it all you have really achieved is a change of label. All you will have done is to increase velocity within the economy without generating any new value.

    Therefore what I am saying is that cuts alone are NOT the answer.

  • Comment number 71.

    We are in danger of being silly here. Mervin King is a professional and speaks with one tongue on all occassions and to all audiences.

    There was an aweful lot of bad judgement in the "debt decade" but it was due to Labour and the FSA and not the Bank of England which had had its responsibilities considerably trimmed by Labour with their introduction of the FSA.

    Hundreds of commentators and thousands of citizens pointed to the folly of spend, spend, spend and debt, debt, debt during the "debt decade" but there was no-one listening. When house prices went up threefold in less than a decade many said house prices had to fall but their voices were drowned by others saying "its different today with low interest rates". When the unfunded NHS pensions liability was estimated at £1.5t by an accountancy firm about six years ago it did not result in a slowdown in public sector recruitment but rather the opposite. I could go on and on about the "debt decade" and the total lack of sound economic management during the period. School building programme, PFI (hidden from the books for so long), student loans, tuition fees, the great pensions robbery...

    Here are some facts:

    1. Virtually the sole source of financial crisis is debt. We had a decade of ramping up personal, corporate and sovereign debt and now have the biggest combined debt in the world.

    2. The credit crunch was not the start of the problems but the inevitable conclusion of the debt balloon.

    3. There was never any boom years. There was never a "nice decade" or a "stability decade". You get into debt mostly because your outgoings exceed your income. Take a simple calculation. UK personal debt reached £1.5t at its peak and equalled GDP. If we distribute this debt build up evenly over a decade at 10% pa then real GDP is reduced from approximately plus 3% to minus 7%.

    4. Much of the debt didn't lead to worry as it should have done. For a start, the individual with his car loan and credit card debt looked over his shoulder and saw his little house growing in value by tens of thousands of pounds pa. The commission on debt overheated the financial services industry and delivered rising revenue to the Exchequer, 35% of their total income. Debt was good for Labour because the illusion of GDP growth even won them the 2005 election which they even dred to fight on their economic record and so many wallies indluding economic jouralists and Conservative MPs agreed with.

    Going forward is where the discussion should be now. Please can we get it right from now on and not get it all completely wrong again and then rush to write books and make documentaries about the next big mistake in retrospect.

    We are corrupting the science of economics that Adam Smith gave us for political ends. First with Marx and then with Keynes. Either looking for avoiding working for a living by robbing from others with more or by getting a bright new future from stimulus.

    This is the future but I'm afraid it is steeped in reality and working for a living:

    a. The magic funny money stimulus ends because your creditor threatens to kneecap you and you do get a double dip. We already have a double dip in much of the West even using the two quarters rule. Remember the 5.7% annualised GDP in the last quarter of 2009 in the US. 1.6% in the second quarter of 2010 is definately less.

    b. The debt and equity release (£50b of equity release was inflating UK GDP) that was turning minus 7% GDP into growth in GDP is no more. Instead we have lack of credit and debt paydown such that minus 7% GDP has the potential to become minus 17% GDP.

    c. Talk of too rapid a deficit reduction is mischevious and definitely in the teritory of hijacking the science of economics for political or media attention ends. We are only scratching the surface with the cuts planned todate. We are going no-where towards reducing our grandchildren's debt. Even with the 25% cuts we will more or less double our national debt in five or six years time. You have all seen the numbers; £43b debt servicing costs today, £63b in four years time, ie. still racking up debt for future generations. We need to make big cultural changes now and the TUC and others need to grow up and Mervin King and others need to continue to get them on board.

    d. The cultural changes include the public sector doing as the private sector have done. Keep jobs by taking wage cuts and shorter hours. Shops don't open one day a week whilst they are doing paperwork four days a week and neither should the Police, Offender Management and social workers. We cannot allow 5.2m jobless to say there are no jobs when we have 1.5m quest workers readily finding work in the UK because their alternative is poverty when our alternative is cool benefits.

    e. The unions have to stop and consider who pays for their rhetoric. All the income tax and NIC paid by their members is only a quarter of the cost of benefits. The welfare bill exceeds the total revenue from income tax and NIC and yet every individual on benefits has a neighbour who needs some help with gardening, decorating, cooking, dressing, shopping etc and we are paying them anyway. One in five of the polulation is retired and there are 1m over 85 years old.

    f. The first thing we must do going forward is to stop hitting the financial services industry that has been our golden goose during the debt decade. They can quite easily pay their taxes in another land. We had no respect for patriotism when we banked with Iceland so why should our financial services industry stay here when we have no thanks for them paying our bills.

    g. There is some good news. Stupid house prices fall, money stops going into the house price bubble and goes into investment in industry and job creation, workers (union members) keep more of their wage and pay less tax and the banks fix their liquidity with a four-fold increase in margin and we sell our stake at a profit.

    h. We get a better understanding of what went wrong and we never elect Labour again. Our grandchildren will certainly never vote Labour because it is they who will pick up the bill.

  • Comment number 72.

    The Bank of England is culpable in a variety of ways

    1) Its a member of the Bank of International Settlements which agree the various Basle regimes. It was part of the group that agreed Basle II that enabled banks to hold less capital where debt issued was related to property amongst other things

    2) It seems to have no understanding of how differential rates of interest can affect the flow of 'money' from one place to another. Its no accident that hot money piled into moderately safe, property related debt at institutions such as Northern Rock (Granite), HBOS, RBS etc... you know the culprits... look at rates in Japan and the US at the time when these outfits were issuing property related securities like mad.

    3) The Bank seems to have no understanding of how prices are affected by speculation in commodity prices - aluminium, copper, oil, cotton, wheat and the impact of pricing in dollars. Nor does it seem to understand that cheap imports aren't necessarily a good thing - for jobs, employment, for the environment

    4) It seems to still believe in the GDP-growth-Bretton-Woods mythology. I'd like to see how the bank squares the circle of hoping for growth in spending when we're exhorted to use low energy light bulbs, for example.

  • Comment number 73.

    In terms of strengths and weaknesses Mervyn King showed that he has great inner strength yesterday ... he faced the militant trouble makers and holiday wreckers and told them to their faces just exactly how it is.

    Many of them didn't like it ... 'Champagne socialists' still in denial ... the great opportunity was squandered in recent years and Goondog Trillionaire should reflect on that at considerable length ... and 'come clean'.

    More to the point, Mervyn King is acutely aware of the political and economic risks facing the Coalition govt ... but George Osborne has the most difficult of tasks facing him due to the appalling state of the nation's finances ... he needs some support and good faith to mop up the New Labour mess.

    George Osborne and his Coalition friends are right is what they are proposing in terms of the short medium and long term UK economic issues... but many are warning that 'real politik' means that only radical means of delivery will likely enable their survival in and as a government, for a full parliamentary term and beyond.

    The UK needs fresh leadership, direction and a real vision and not politicians UK global sell out GDP overall spending measurement nonsense (i.e. we are only as good as the maximum amount that we can spend) ... and getting this right, is another major challenge.

    'Champagne Socialism' and the cosying of the political class with the bankers has failed us ... we need something else and we need it now.

    The 'Champagne Socialists' should perhaps reflect on the damage that has been done and allow George Osborne, D Alexander and his colleagues/'The Coalition' to get on with his democratic mandate to 'balance the books'.

  • Comment number 74.

    69. At 00:08am on 16 Sep 2010, Charles Jurcich wrote:
    'What I am saying (unless you can open my eyes and prove differently) is that banks cannot simply create money at will - it has to be as a result of issuing a loan to a customer'

    True the bank's can only create money against a 'promise to pay'.

    The government's gilt is the 'promise to pay'.
    Same as you or I taking out a loan, and making a promise to pay, and that promise to pay gives the bank a right to create money.


  • Comment number 75.

    44. At 7:32pm on 15 Sep 2010, Charles Jurcich wrote:

    I think that Inflation should be controlled by fiscal policy, not monetary policy, as clever fiscal policy can be targetted at the specific commodity / product / service whose price is inflating. E.g. excessive house price inflation can be targetted with a tax on empty properties for example. Monetary policy will never have this level of precision.
    ---------------------------------------------------------------------
    Interesting idea. Would you have separate taxes for each commodity? How would it affect manufacturers/producers of goods? How would it effect the consumer? I would have thought that taxes tend to inflate prices.

    Do you envisage that eventually you would be able scrap all other taxes and run the State on commodity taxes alone? Who would benefit most from that and who would lose out?

  • Comment number 76.

    David Lilley - well said sir. Speaking of lending would you be willing to loan you brain to Andrew Morton so he doesn't have to cry himself to sleep about those "nasty bankers".

    I agree with all you said except the second sentence:

    "Mervin King is a professional and speaks with one tongue on all occassions and to all audiences."

    Mervin King is heavily invested in one asset: his neck. He agrees with whoever is in power because that keeps him in wine and goose down. How +anyone+ could think there wasn't a massive problem with house prices from 2002 onwards I have no idea. I've been waiting (not hoping) for this crash for years. To me it was as plain as day as friends who were teachers suddenly owned houses worth nearly half a million. Insane.

    The one reassuring thing about all of this is that in 50 years time when Brown, Blair, King and maybe even Cameron are all dead history will record that Brown and King werer morons, whatever spin they put on it now.

    Andrew Morton - remember it! I'll still be paying for much of it through PFI! PFI is the definition of unsustainable spending. (yeah the Tories invented PFI but JPMorgan initiated CDS - but it's how you use it that counts, neither used them in dumb ways)

    Good to see lots of people who put the root of the crisis with house prices under Labour. How very Nu Labour of King - "yeah we messed up, but hey, I'm sorry". Mmmm! Rhetoric for tea - what's for pudding mum? Humble pie! Hooray. Pity he didn't speak up in 2002. But that could have endangered his neck.

  • Comment number 77.

    #66
    Dempster wrote
    'What I'm trying to say is that the banks create money from nothing give it to the Government, who then promises to repay + interest. They may sell on and make a profit from the same.'
    =============
    No, the government borrows existing money from people and financial institutions, in the UK and other countries who want a 'safe investment'. The banks merely act as wholesalers. And the only reason that they do this is because during and after Big Bang they bought the small private companies called jobbers who had traditionally carried out this function e.g. Barclays bought Wedd, Durlacher.
    The reason that the government borrows this money is that they have decided to spend more than their income. This is not compulsory: many governments have reduced the national debt if only temprarily. I think Mts Thatcher did but I will have to check on that. Certainly the Canadian province of Alberta has repaid most of its debt out of surplus revenues with no ill effects. On the contrary they have saved a great deal of interest.

    The villains in this case are politicians not bankers.

  • Comment number 78.

    The most remarkable part of King's speech was his claim that the recession "was not caused by problems in the real economy".

    Does he not, even now, recognize the fundamental role of the house price and credit bubble that led up to the crisis, a bubble that is still largely in place? The boost to consumption arising from an unsustainable annual increase in credit was THE "problem in the real economy".

    Was he being diplomatic, or does he really believe what he said? If the latter, that is quite scary.

  • Comment number 79.

    #77 Anotherengineer

    Is this correct?

    1) Commercial banks have reserve accounts at the central bank.
    2) The government issues gilts and buyers pay for them from their private accounts at the commercial banks.
    3) The cheques clear resulting in the commercial banks debiting their reserve account at the central bank, crediting the govt operating account at the central bank, and crediting newly created savings accounts for the gilts at the central bank.
    4) The govt spends the money into the private sector by issuing cheques to various commercial/private entities. The govt also spends the money on internal entities, who then go on to spend the money in the private sector, issuing cheques/cash to the private sector.
    5) This results in the commercial banks crediting their reserve accounts back in the central bank.
    6) All that has happened is that money has been taken from investment institutions and recycled via the avrg Joe, stimulating the private sector.
    7) Eventually after say 10yrs the gilts come due. The govt debits the savings account and credits the reserve accounts at the central bank.

    The only other side effect is that reserves have increased at the private banks, which in a fractional reserve system allows more debt to be issued.

    Is this correct?

  • Comment number 80.

    77. At 08:49am on 16 Sep 2010, AnotherEngineer wrote:
    'No, the government borrows existing money from people and financial institutions, in the UK and other countries who want a 'safe investment'

    The gilts may end up in anyone's hands, and they may end up being funded from existing money. But they don't have to be, and often initially aren't.

    In any event the issue is whether we should (as a nation) be creating money as debt bearing interest, or debt free.

  • Comment number 81.

    @ 66. At 11:35pm on 15 Sep 2010, Dempster

    Just to clarify...I'm sure QE was by way of the BoE buying gilts from banks and institutions thereby providing them with capital to lend out rather than selling gilts to banks (since the banks didnt have the cash and hence the credit squeeze) was it not?

  • Comment number 82.

    80. At 09:30am on 16 Sep 2010, Dempster wrote:

    "In any event the issue is whether we should (as a nation) be creating money as debt bearing interest, or debt free."

    -----------------

    I don't think there is any difference between the two to all practical purposes, so there's no doubt in my mind, it has to be debt free. Otherwise we have to have a good reason to just pay the financial industry interest on the debt. I really cannot see why we should do that. Its a risk free income [mostly] for the finance industry - a huge unspoken subsidy. I do not think it is justified.

  • Comment number 83.

    DAVID LILLEY,

    Excellent post. Only one contradiction I think about the financial industry being the golden goose. After all it remains the financial industry with it's loans for consumption and ponzi derivative and credit default swaps that has magnified the bubble in asset prices and continues to do so.

    BBC news story today. Oil isn't a problem, its's gone down in price for three whole days now!

    I despair. Its gone up relentlessly in price for 8 years now at an annual rate of 22%, but it's fallen for three days to the same price it was a week ago.

    This typifies our constant short term outlook to running our economy and planning our focus.

  • Comment number 84.

    To 79. At 09:26am on 16 Sep 2010, Oblivion wrote:

    It is my understanding that:
    Gov’t borrowing this year is to be around £150 billion this year of which £10 billion may come from overseas.
    The GDP is expected to be around £1280 billion
    Therefore Gov’t borrowing from this country as a proportion of GDP is around 11%.

    If the borrowing is to be funded without the use of the fractional reserve system, then collectively after taxation and overall costs of living/trading, we as a nation would have to produce a surplus of 11% to fund it, AND wish to invest it in gilts.

    Given that the better FTSE 100 stock is only producing a yield of around 6%, is that likely?

  • Comment number 85.

    81. At 09:49am on 16 Sep 2010, Hugh_Janus wrote:
    @ 66. At 11:35pm on 15 Sep 2010, Dempster
    ’Just to clarify...I'm sure QE was by way of the BoE buying gilts from banks and institutions thereby providing them with capital to lend out rather than selling gilts to banks (since the banks didnt have the cash and hence the credit squeeze) was it not?’

    In my humble opinion QE was primarily a method of making sure there was no ‘gilt strike’. 2008 saw the collapse of RBS Halifax Lloyds etc. I reckon at the end of 2008 there was a question mark over whether there was sufficient demand for gilts at normal yield levels.

  • Comment number 86.

    #84 Dempster

    According to this MMT stuff, the govt spending does not need to be funded from taxation or gilts at all.

    Apparently the government merely needs to credit the private sector clients' bank accounts. Is there any limit on how much it can credit? Do any of the EU/BASEL agreements actually apply?

    Without accompanying income in the given timeframe, the result would be of course a government deficit. However, that new government money would end up in the private sector, thus crediting the commercial banks' reserve accounts at the central bank.

    In other words, the 11% private sector surplus would in fact be a *result of* the goverment deficit. Not the prerequisite of.

  • Comment number 87.

    @ 85. At 10:13am on 16 Sep 2010, Dempster

    My point was that when you posted...

    "When the Treasury sells new gilts to the commercial banks, new money is created."

    ...you implied QE (i.e. money creation) was via banks buying gilts from the Treasury. This takes money out of the system rather than putting it in, so has the opposite effect of QE.

  • Comment number 88.

    #85 Dempster

    'In my humble opinion QE was primarily a method of making sure there was no ‘gilt strike’.'

    I agree with this position but I think its a little more complex...

    I suspect dodgier assets were bought by the BOE via the QE process which enabled the banks to then buy gilts that boosted their tier 1 assets and capitalisation.

  • Comment number 89.

    71. At 00:46am on 16 Sep 2010, David Lilley wrote:

    ---------------

    Agree with the first part of your post. Particularly "Going forward is where the discussion should be now. Please can we get it right from now on and not get it all completely wrong again and then rush to write books and make documentaries about the next big mistake in retrospect."

    Sadly economics is not a science yet [maybe it will never be. What has surprised me is the extent to which mainstream economic thought and ideas is based around the rules associated with the gold standard era or some other form of fixed relationships between currencies. This no longer applies [euro area is different].

    The ideas within Modern Monetary Theory are based on research that examined how the system actually works. In my view, until policy and actions area based on reality rather than wishful thinking harking back to the past, we won't get out of the mess; it will actually be made worse. Much if what is being done now will cause great harm and only line the pockets of the neoliberal tendency. The majority of the population will head towards poverty and they won't escape. Eg. Its not foreign holidays that will be a thing of the past, its holidays period!

  • Comment number 90.

    Thank you flech_dor for your support for my suggestion that Tuesdays inflation numbers and indeed the ones from earlier this year are a concern. It is also true that this blog seems to have stopped following them.
    However even in Mervyn King's speech there was a reference. According to notayesmanseconomics he mentioned "keeping inflation on track" in his speech which provokes him to wonder what exactly this means. A quick glance at this years inflation figures so far tends to disagree with Mervyn King

  • Comment number 91.

    #83 Sage..

    'I despair. Its gone up relentlessly in price for 8 years now at an annual rate of 22%, but it's fallen for three days to the same price it was a week ago.

    This typifies our constant short term outlook to running our economy and planning our focus.'

    - oil prices, stock market levels, house price data from lending institutions, you name it, 24 hour news and continuous need to manage the content of websites provides a truly short term outlook and little sensible analysis, investigation or review.

    Furthermore, 'the news' is lead by press release. Any press release received should be assessed initially by saying 'what's in it for them?'.

  • Comment number 92.

    #71 David Lilley

    You were doing so well until you slipped in your banking apology at point f.

    Do you see the contradiction in your own post?

    You understand we had a 'debt decade' - an illusion of growth -but still think the finance industry will return to as before the crunch?

    The finance industry is no longer the golden goose laying golden eggs because no one can borrow money anymore - (the main source of profit).

    The entire industry is a giant zombie now.

  • Comment number 93.

    #77 "The reason that the government borrows this money is that they have decided to spend more than their income. This is not compulsory: many governments have reduced the national debt if only temprarily. I think Mts Thatcher did but I will have to check on that. "

    =============================

    From memory Nigel Lawson had one maybe two years with a budget surplus and maybe another one with the budget that was basically in balance.

    Even that was highly unusual as the previous time the budget was in surplus was in the late 1950s or early 1960s. Maybe some one with a more left wing outlook can look up when a Labour govt last managed a budget surplus (if ever)

    For most govt's they are doing well when the deficit is increasing at a rate which is less than the rate of growth in GDP. That way the govt debt as a percentage of GDP falls. That is not too bad a result but does leaves govt vulnerable should interest rates rise

  • Comment number 94.

    86. At 10:29am on 16 Sep 2010, Oblivion wrote:

    ----------------

    Yes there have to be limits or your currency becomes worthless due to inflation.

    My understanding – briefly; read more on BillyBlog
    http://bilbo.economicoutlook.net/blog/
    It requires educated and sensible people to control it. They need to be disciplined and not expand too far, else inflation results. The productive capacity of the country effectively sets the limit. Once you have full productive employment – that's it. You then need to grow by having population growth or efficiency growth. Hope this helps

  • Comment number 95.

    87. At 10:43am on 16 Sep 2010, Hugh_Janus wrote:
    My point was that when you posted...
    "When the Treasury sells new gilts to the commercial banks, new money is created."
    ...you implied QE (i.e. money creation) was via banks buying gilts from the Treasury. This takes money out of the system rather than putting it in, so has the opposite effect of QE.


    My understanding of it is this:

    If a commercial bank buys gilts and uses its fractional reserve to do so, then the governments promise to pay is funded with new money created by the fractional reserve (this assumes the bank is not fully loaned up).

    As regards QE. The BOE purchases existing gilts and does so with new money it has created from nothing (it can do this because it’s a central bank), this increases the money supply as demand deposits will rise.

    If the entity in receipt of this money deposits it in a bank, then this will increase the reserve base, which can be multiplied by the fractional reserve ratio to purchase more gilts.

    If for example £200 billion was simply deposited in banks, it could be fractional reserved up at a factor of 20 based on a 5% reserve ration

    However if the person in receipt of the £200 billion buys more gilts, then the government is the end recipient of the money created by the BOE. The government will spend the £200 billion on wages and whatever, and those in receipt of the money will end up depositing some of it in a bank, those demand deposits can then be fractionally reserved up to more money against new promises to pay.

    Ultimately the creation of money by a central bank (QE) should be hyper inflationary.
    But only if there is demand for enormous amounts of new debt from the public, government and corporations etc.

    And it seems that corporations and the public at least are not that keen.

  • Comment number 96.

    For anyone who is interested:

    An MP (Douglas Carswell) has introduced legislation into UK parliament that takes the first step towards ending fractional reserve banking.
    Link below:

    http://www.positivemoney.org.uk/2010/09/douglas-carswell-mp-introduces-bill-to-stop-fractional-reserve-banking/

  • Comment number 97.

    #80 Dempster

    In the USA Tbills and Tnotes are auctioned. Anyone (effectively) can bid. For example, a condominium with reserves built up from owners payments can bid for and acquire Tbills/Tnotes. They do this because a) they have a fiduciary responsibility to look after their owners money (they shouldn't gamble) and b) they believe that government will make good their promise to return the cash and c) they believe that government will make good their promise to pay the interest due.

    No money is created here - all the mrsbloggses pay their maintenance charge from their earnings, some of this is put in the bank for a rainy day and at some stage the treasurer says lets buy a T-bill or lets replace a T-bill that's matured.

    The mrsbloggses looking for a personal safe haven invest in money market accounts that invest in a range of government debt - its their surpluses they use to do this, they don't borrow to do so - the returns don't cover the debt payments.

    In 2008, just as for the condominium owners, organisations and institutions from all over were looking for a safe haven, money from all round the world slopped into Tbills and Tnotes The yield from some auctions was negative (good for government) but losing say 2% on a Tbill was better than losing much greater sums in currency or stock market fluctations.

    This flood of money strengthened the dollar (it went from $2 to the pound to $1.35) This consequently affected the price of oil - as the dollar strengthened, the oil price weakened. It also made it much more difficult for the likes of HBOS to raise cash for securities.

    Its my view that the price of oil was one of the triggers of the crisis. If you live in the 'biggest economy in the world' where a car is a necessity ( and this is the case in the US) and 'gas' doubles in price (it did) and people travel longer distances in the car to go to work (they do) then mortgage payments become more difficult to meet, women don't travel to get their nails done or the bottle of wine is eliminated. Furthermore heating bills increased etc. Consumption of everything reduced and jobs were at risk. Combine that with ARM mortgages issued in 2003 coming up for their first reset and LIBOR rates double what they had been as the FED had increased rates quarter point by quarter point over a three year basis you get massive numbers of defaults or arrears.

    The 'sub-prime' mortgages that caused problems were the ones that had teaser or sub prime rates. Sub-prime mortgagees pay much higher rates for the priviledge of borrowing money with dodgy credit records.

    Anyway just to go back to the condo example.... if you said there were ten million individual condo owners and each had contributed the equivalent of $10,000 to a reserve fund over time from income, thats 100 billion, probably in tbills, not borrowed money at all.

    Cash ISAs deposits probably are invested the same way.

  • Comment number 98.

    David Lilley (#71) writes:

    "g. There is some good news. Stupid house prices fall, money stops going into the house price bubble and goes into investment in industry and job creation, ..."

    David,

    One of the problems I have is that I'm not sure that industry creates large numbers of jobs. To be cost effective in the UK, a modern industry must reduce it's head count and use the most advanced automation possible; otherwise it is cheaper to have the work done in China (or wherever).

    This, I think, is the reason that we have someone like Ruth Lee (IoD) telling us about manufacturing success in the UK, and most of us scratching our heads wondering where the jobs are.

  • Comment number 99.

    mrsbloggs13c2 - agreed. The BBC approach to all stats is as a percentage increase/decrease.

    This morning I cut off 3 of Robert Peston's limbs, then sowed one back on. He thanked me profusely for a 100% increase!

  • Comment number 100.

    re #93

    according to www.ukpublicspending.co.uk the UK public debt dropped from £167.8 billion in 1987 to £151.3 billion in 1991.
    To be fair, it also fell from £352.90 bn in 1998 to £315.50 in 2002 (when Gordon Brown was following the Tory spending policies.
    It now estimated at £771.50 bn.

 

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