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Rocking the boat on the MPC

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Stephanie Flanders | 16:56 UK time, Tuesday, 28 September 2010

Someone gave a deeply subversive speech in the north of England today and it wasn't Ed Miliband. The MPC member, Adam Posen, has raised eyebrows at the Bank with some of his past speeches. But speaking to business people in Hull this afternoon, he lobbed several hand grenades into the debate over UK monetary policy, some of which may take a while to explode.

Bank of England

 

The first  is the assertion that "we should do more quantitative easing now in the UK," or else risk a Japan-style period of slow growth and high unemployment.

Policymakers, he warned, must not "settle for weak growth out of misplaced fear of inflation".

True, inflation in the UK has been higher than expected, for longer than expected. As he himself has pointed out, not all of this overshoot can be explained. But looking two to three years ahead, he thinks that inflation is more likely to undershoot the Bank's target in a few years' time than again come in too high.

No, he thinks the risks are all on the other side.

"There are, however, very serious risks if we make policy errors by tightening prematurely, or even if we loosen insufficiently. Those risks are not primarily the potential for a double-dip recession or even of temporary measured deflation...The risks that I believe we face now are the far more serious ones of sustained low growth turning into a self-fulfilling prophecy, and/or inducing a political reaction that could undermine our long-run stability and prosperity. Inaction by central banks could ratify decisions both by businesses to lastingly shrink the economy's productive capacity, and by investors to avoid risk and prefer cash. Those tendencies are already present, and insufficient monetary response is likely to worsen them."

Or, as he puts it: "we are a long way from home, and a long, long, way from overheating."

Dr Posen has spent a lot of time in Japan. He's an acknowledged expert on what happened there, and he sees too many parallels between their experience - and the US experience in the 1930s - and our own. He also thinks we're in danger of making their crucial mistake, which was to underestimate, in the wake of a major financial crisis, the economy's potential growth.

Japanese policymakers thought that the crisis had drastically reduced the country's potential output, so they were wary of taking extreme measures to stimulate the economy, out of fear of overheating. As it turned out, the crisis did do permanent damage. But Posen believes the sheer scale of the downturn meant there was a lot more spare capacity - and more room to grow - than the policymakers allowed. The result was a long period of unnecessarily high unemployment and slow growth.

Looking at the UK, he believes that similar risks apply: policymakers will look at the growth we've achieved since the end of the recession and conclude that the economy is not able to grow as fast as we did before, and the Bank will shortly have to think about putting on the brakes.

You might say this was overdoing it. There is one member of the MPC - Andrew Sentance - who supports higher rates now. The OECD has also suggested that the bank should tighten sooner rather than later. But they are the exception. Most think there is still a lot of spare capacity in the UK, and the Bank should keep policy loose for some time to start using it up.

However, that brings me to the second, more subversive, piece of Posen's message: in his view, the Bank can't afford to just hang around waiting for this potential to be used up, because time is money. Or rather, time is lost output and lost jobs.

Why? Because if you're a firm that's trying to hang on to their under-employed workers - and still oiling that unused production line - growth next year is simply not the same thing as growth today. By next year you might have had to lay those people off, or shut down that production line for good. The extra capacity will be gone.

This might seem like common sense. But if you're a central banker, it is dangerous talk. It suggests that monetary policy can have a lasting impact - not just on inflation, but on the real level of output as well. Efforts to raise output above the sustainable level caused a lot of inflationary grief in the 1970s - central bankers have been understandably nervous about it ever since, insisting that they could only affect inflation, not long-term growth.

But, says Posen, these fears "can be taken to unjustified extremes, and there is a risk of our doing so now when the damage could be great by so doing. When the overwhelming bulk of pressures in the economy are disinflationary, and when the level of output and employment are clearly likely to be below potential for an extended period."

In those circumstances - in these circumstances - he thinks it makes sense for central bankers to go the extra mile to get that unused capacity on stream before it disappears forever and our long-term growth fulfils our gloomiest expectations. (It's worth noting that Charlie Bean, the deputy governor, has also expressed sympathy with this idea.)

I have spent a long time outlining Posen's argument, not just because he is an interesting and influential member of the MPC, but because this speech is perhaps the most detailed statement of the case for "QE2" that anyone has provided - on either side of the Atlantic - since the debate was re-opened over the summer.

That discussion has got "legs" in the US from the Federal Reserve's recent statement suggesting they would move in that direction. Indeed, some might say Dr Posen - a US academic previously based in Washington - is raising the debate in the MPC that he would be like to be having inside the Fed. In many ways his argument looks stronger when applied to the US.

Whether or not you agree with him, this is the case for further - substantial - quantitative easing which less dove-ish MPC colleagues will have to answer at next month's meeting.

It is far from clear he will get his way. Bizarrely, in the speech he says that we cannot even assume - on the basis of this speech - that he will be voting for extra QE next month.

The minutes of the September meeting suggested that a majority of members thought the downside risks to growth over the next few years had gone up, while the inflation risks were about the same. It's not an impossible leap from there to further QE, but it is a leap.

Even if he does prevail - you might ask, how do we know it would even work? Posen has two answers to this.

The first is that "fear of being ineffective should not be a deterrent to doing the right thing. When facing a worsening situation, you work with the tools you have."

The second answer is that you try a lot more QE, but if it looks like even that's not going to be enough, you bring on the big guns: fiscal stimulus, directly financed by the central bank. That is the most subversive suggestion of all, and worthy of a post in its own right.

Comments

Page 1 of 2

  • Comment number 1.

    The Bank of England are completely unable to understand what is going on in the economy.

    It needs to be scrapped.

    They caused (in the UK) the bubble that led to the crash which busted the banks.

    The have wasted 200 bn of QE to prop-up their banking friends to no visible advantage in the real economy.

    If the want to do more QE they should try doing one of the following:

    1. Give the QE to savers on condition they spend it as matched funds with their own.

    2. Use the QE to build capital infrastructure for the Nation. (aka the TVA solution)

    3. Pay off the public sector deficit.

    But they will not - they will give it to their friends in the City again!

    The are unfortuantely totally and irredeemably incompetent and corrupt!!! They have destroyed capitalism.

  • Comment number 2.

    The MPC's sole purpose is to control inflation, which they have failed to do.

    Instead of telling those who've responsibly saved all their lives to 'go out and blow the lot just to get the economy moving', they should be increasing interest rates - firstly to fulfil their purpose and secondly to punish those who've spent beyond their means.

  • Comment number 3.

    I don't know if he is right. He doesn't know if he is right. I don't think anyone knows if he is right or wrong (unless time travel has been invented). The important thing is that he is expressing a contrary view. My biggest fear is that we sleepwalk into a disaster because we did not question a popular opinion.

    The emphasis in that sentence is on 'sleepwalk'. Sometimes you consider every possible angle, make a decision and it goes wrong. That's terrible, but it has happened to everyone. What I don't want is to go back to the TINA approach, where we have to stick doggedly to a policy for fear of appearing weak or indecisive by not listening to another point of view.

    It is strange that in military matters and in business an ability to listen to and take on board other points of view (if they are sound enough) is considered a strength, whereas in politics any deviation from a course you set before you knew all the facts or in response to changing conditions is seen as a weakness.

  • Comment number 4.

    Far be it from me as a non-expert to criticise Adam Posen, but I think he is wrong. I suspect the reason why quantitative easing has not so far caused some of the disastrous consequences that one would expect is that so far it has been replacing some of the imaginary money that was generated by spiralling credit and overcirculation, and then vanished down the plughole when the world economies collapsed. I.e., it has not been as disastrous as expected, but for the wrong reasons, or more accurately, for different reasons from those that have advocated doing it.

    Carrying on doing it though, for the reasons that economists think it is a good idea, will be disastrous.

    But then, I don't think it's the Bank's job to stimulate or manage the economy. I think it's the Bank's job to manage the money.

  • Comment number 5.

    Why don't the MPC just cut out the middle men (banks) and make the QE funds available to SME's that need the cash to support growth

  • Comment number 6.

    The question Mr Posen needs asking is what is he going to buy with his newly created money? More gilts?

    My view of the UK’s credit rating is:
    You get the first is A because you pay back the capital.
    You get the second A because you honour the interest payments
    And I think you should get the third A because you don’t water down the value of the gilt by printing more money.

    In reality I reckon the third ‘A’ is likely long gone but not admitted to.

  • Comment number 7.

    JfromH - I'm inclined to agree with you on the Bank of England's generosity to fellow bankers - incompetency and corruption hard to tell the difference because they're somehow immune from any kind of clip behind the ear. (The preoverbial Old Boy Network, perhaps?)
    We still have our heads in the sand as regards Joe Public getting his hands on the dosh. He'd only spend it on imports which wouldn't help the balance of trade. Both the private and public sectors are skint through their previous over-indulgences and the banks, who have always been morally bankrupt, still grease their palms. So QE will end up being trousered by the chosen few. Why bother making them richer than thou?

  • Comment number 8.

    You are right that this speech is subversive Stephanie and it adds to the interview given to Channel four news by Mr.Bean or should that be Charlie?
    As to Adam Posen's suggestions I looked up the views of the notayesmanseconomics blog.
    "This leads me to a conceptual problem for those who are pushing for QE 2.0. By definition the call means that QE 1.0 has either not worked or not worked as well as expected. I have written before about “thought bubbles” well some parts of the economic profession appear trapped in one here where they can only think of one policy and ignore the fact that one has now to contemplate that the policy has only been a partial success. Indeed it is possible that it is failing. If this is so what good will more of it do? To this question they appear to have no answer."
    In other words we may get very little extra output for the further damage which will be done to our inflation levels which I notice Mr.Posen can not explain.
    http://notayesmanseconomics.wordpress.com

  • Comment number 9.

    1. At 5:20pm on 28 Sep 2010, John_from_Hendon wrote:

    "The Bank of England are completely unable to understand what is going on in the economy.

    If the want to do more QE they should try doing one of the following:

    1. Give the QE to savers on condition they spend it as matched funds with their own."

    Massive inflation risk

    "2. Use the QE to build capital infrastructure for the Nation. (aka the TVA solution)"

    Possibly....

    "3. Pay off the public sector deficit."

    I like the idea of this one. It may not be inflationary and could mean tax rises were not necessary - even the possibility of tax cuts - and less drastic public service cuts.

    That would get direct stimulus where it's needed: in the hands of the population.

    I agree that QE as before will simply disappear into the banks' balance sheets, while they 'lend' money to the governments (through the purchase of gilts) at profiteering interest rates.

  • Comment number 10.

    "Economy" and "Growth". Two words that go together like "bubble and squeak", "Fred and Ginger" .. where one word cannot be mentioned without direct or implied resonance with the other.

    Why then when these two supposed conjuncts are uttered in an article, conversation or debate with any "supposed" learned scholar or at the other end of the scale ..economist, is there a complete absence of reference of "how" and "what" is essentially nay FUNDAMENTALLY required for those two words to co-habit in the same phrase?

    I am assuming that most of you who write on here (apart from the article editor) are aware that it is surplus or at least sustainable resource. ...and yes boys and girls you will also know, that what we have, we waste and are doing not near enough to replenish for our children's children.

    The phrase "economic growth" will in the next 50 years be consigned to the dictionary of historical terms as a reference to our greed and short sightedness and hopefully sound the bell for the end of that pointless airhead of an occupation - Economist.

  • Comment number 11.

    'Efforts to raise output above the sustainable level caused a lot of inflationary grief in the 1970s - central bankers have been understandably nervous about it ever since, insisting that they could only affect inflation, not long-term growth.'

    Then what have they been doing for the past 2 years? The idea of using monetary policy to control inflation went out with the credit crunch. They've been trying 'apparently' to kick start lending to businesses by keeping interest rates low.

    Which is it ?

  • Comment number 12.

    'The second answer is that you try a lot more QE, but if it looks like even that's not going to be enough, you bring on the big guns: fiscal stimulus, directly financed by the central bank. That is the most subversive suggestion of all, and worthy of a post in its own right.'

    Please get a move on then with this post as it is more relevant.
    QE2 or buying up gilts up is not going to hit the real economy. It will go straight into equities or will just push up bond prices even further.

  • Comment number 13.

    Every night I pray that people in government read your blog. Followed by a quick add-on prayer that some of them are literate enough to reach the end of it.

    The (nice) thing about QE is that it is a very general systemic treatment that is largely immune from being spun or directed. A sort of constant pump priming that independent forces in the economy can take advantage of.

    My concern is that the good old fashioned economy pump we used to have is so broken that all this priming is just leaking this liquidity away into stuff that makes no difference. KnaveofHerts is right in that if the effect is to put new cash into the hands of the financial sector or consumers who fancy a new Korean car, we're in for a long and painful road ahead.

    Any IFA will tell you the value of a diversified portfolio. Which is just what Mr and Mrs UK no longer have.

  • Comment number 14.

    More QE (money printing) here we go again. These guys are clueless. Why can't they accept the obvious that Britain is over-borrowed privately and publically? This will inevitably devalue our money's purchasing power which in turn is inflationary. They are consistently above their inflation target of 2% which is their over-riding responsibility. What are they thinking of making the situation worse? These interest rates are criminal to sensible savers and quite frankly irresponsible for the value of our money. Printing more just beggars belief. Get the "growth is everything monkey" off our backs and find a way to prosper rather than grow.

    In our desperation to grow we will end up ruining any cushion the sensible have built up (savings) in an unsuccessful attempt to grow consumption again. To keep doing the same thing and expect different results is just plain stupid.

  • Comment number 15.

    All the earlier posters are pretty much right, all QE has done has given the banks more free money to gamble with. Most people are tightening their belts and not spending, even The bankers can not steal money directly from our accounts, I think it's called robbery.

    If they can't get our money, get the BOE to print more. Some clown at the BOE ( His name I have forgotten thankfully ) wants people to spend their savings, you can imagine his logic 'we have taken away your interest morons...spend your money'

    If banks cut lending interest to say 3%, it would get money back into the economy, but don't hold your breath, that would reduce their profits and we can't have that'.... Sorry I know little of economics, I'm just a angry hamster shouting from his cage.

  • Comment number 16.

    Between Posen and Bean the BoE is starting to sound desperate and out of control. No one can seriously believe that spending savings plus more and looser credit can be an answer to a crisis caused by too much credit, too loose credit, and debt fuelled artificial growth in capital and earnings.

  • Comment number 17.

    #3 probably the most sensible comment posted here for a while (mine included). Truth is nobody is really sure so we need the debate now. John_from_Hendon can lead the "No more QE2" party

  • Comment number 18.

    It's ideology.

    First, recognise the problem: private debt

    What happens when private debt reaches levels that are too high compared to GDP? People get nervous and switch from investing (borrowing), to paying off debt.

    The private sector is deleveraging. What does that mean?
    a) Any government spending is going into the reserves of commercial banks, as it is being used to pay off debt.
    b) The 'velocity' of money is decreasing (scope, rate and magnitude of exchange)

    What does that mean? Private sector surpluses.

    What does that mean? Public sector deficits.

    Why can't the private sector be induced to raise GDP back to pre-crunch levels through monetary means? Because the GDP was on the back of large bubbles (dotcom, real estate, derivatives) that were not connected to real productivity. A ponzi scheme.

    Monetary policy cannot have an affect on the deleveraging trend in the private sector, now.

    So what can be done?
    a) Carefully managed public spending designed to get society onto new paths, promoting real productivity and real growth
    b) Direct intervention in private banks to assist in deleveraging, forcing private profit to zero, and state funded debt writedowns (zero interest rates and so on)
    c) Tax cuts

    Why can't these be done? : They are termed "left wing" . Ideology.

    Wake me up when some people with common sense get into power.


  • Comment number 19.

    It's weird isn't it that the only weapons our central bank - "the financial rock that supports Britain", has are:

    1) altering the gross interest rate, that effects everybody and everything, but isn't coupled to real rates being offered.

    2) printing money, which can only be delivered into the wrong hands.

    I can't believe that you can deal with a normal economy with these gross instruments, let alone an economy in crisis.

    Surely there are more intelligent instruments at their disposal?

  • Comment number 20.

    OMG, if it didn't work the first time, why do it again? Soon the pound Sterling wil be worth less than a peanut.

  • Comment number 21.

    'The first is the assertion that "we should do more quantitative easing now in the UK," or else risk a Japan-style period of slow growth and high unemployment.

    ....................

    In other words the gamble on the QE experiment has failed ... the false GDP growth is to run out soon ... and the proposed remedy is .... MORE and MORE QE?

  • Comment number 22.

    The Bank of England's Monetary Policy Committee is the product of a dangerous and idiotic mass delusion.

    When we had foreign exchange controls, when the volume of money created bore some resemblance to the Reserves held by the BoE, when there were import restrictions and controls on the flow of money across our borders, then there was SOME element of monetary control which could be exercised in conjunction with fiscal policy.

    In a globalised money market with virtually no controls where banks, companies and individuals can move money around at will, a market of which the UK comprises a tiny fraction of the total world economy, its total money supply and wealth, why oh why do we go on believing that moving one or other of the levers the MPC commands - Base Rate or Quanitative Easing - is going to have any effect in this tiny corner of the world's globalised market?

    Who in their right mind thinks that a quarter percent up or down is going to affect anything? Its like sitting in a bottomless boat stranded on the beach, attempting to bail it out - new water simply comes in as fast as you bail it out - or if you're trying to fill it up with water, it leaks out just as fast.

    Who even thinks that a few tens of billions of pounds in QE will make any difference? So the BoE buys £10 Bn of gilt stock and replaces it with "new" money - so what? In the scheme of things in global economy, that is a tiny drop in the corner of the bucket in the global gilts market - or even in the pension investment market.

    And who precisely are these supposedly wise members of the MPC? They are chosen for their views on monetary policy - i.e. they are somewhere on the spectrum from well-meaning buffoons to borne-again monetarists - they bring cupboards full of metaphorical axes to grind to every meeting - they aren't objective - they are out to prove their pet economic theory right - so the odds of them getting it right - even if you could - are pretty poor.

    We should go back to reading chicken entrails, casting dice or getting hysterical young women to go into trances and read the future - much more fun.

    The other approach is to drive economic policy by market sentiment - this could be done by linking decisions of the MPC to a new National Lottery game - you buy a ticket according to whether you think everyone else thinks interest rates will go down, stay the same, or go up.

    When all the tickets are sold, there is the decision - and the winner gets a prize.

    But Boy George has created a parallel idiot twin to the MPC to hide behind in the shape of the Office for Budgetary Responsibility - now the Chancellor can point to tweedledum or tweedledee to blame for the effects of his economc management of the economy - the MPC carries the can for inflation, interest rates & QE, the OBR is to blame for mis-forcecasting the effects of government spending & taxation on the economy.

    "Don't blame me mate, I just did the best I could - it was tweedledum/ tweedledee who got it wrong - those naughty twins - but they're the only twins we've got, so I've told them, buck up and do better next time!"

    Real interest rates are effectively negative because of the parlous state of the British economy - and pumping more money into this leaking system won't repressurise it.

    What will make the holes much larger and cause money to flood out of the UK is taking £1Tn of aggregate demand out of the domestic economy, when the global market is so fragile and we have such a poor manufacturing base to build on.

    We don't need chicken entrails, dice or hysterical virgins - all you need to do to see the future is to look across the Irish Sea where they are a year ahead of the UK in the austerity stakes. GDP is down 13%, their level of unemployment equates to 5M here, house prices are 35% down and government borrowing has INCREASED. Another banking crisis looms and the level of bailout that could be required will be MORE than the value of the spending cuts that caused it.

    Posen does look a bit like a leprauchan, doesn't he?

  • Comment number 23.

    Again it looks like they are grasping at straws and have no clear idea of what they are doing.

    The picture is now so confused after all the different levers they have pulled I doubt if anyone really knows the true consequences down the line.

    If QE has to be used it should be a measured response to the initial cost of rebalancing the economy and restructuring the country knowing there will be long term cost savings and growth as a result.

    Keeping a low inflation economy is the only way to begin to compete with the inflationary pressured countries in the East.

    The only deflation we need is property deflation for if property prices reach a sane level again buyers will flock in and construction will once again pick up.

  • Comment number 24.

    Is there any earthly reason why the Bank can't use quantitative easing to cancel some of the goverment deficit or to pay for public sector workers salaries. This will provide a very effective stimulus. The previous QE wasn't very effective ad it effectively wrote off corporate debts and corporations weren't unclined to spend the money saved. Real people would lead a demand recovery as they would spend their wages rather than being unemployed.

    The coalitions cuts are simple idealogically driven madness

  • Comment number 25.

    Maybe out of context but it has to be said:
    What really gets up my nose is that credit card users have overstretched the limits to the point of helping to destroy the economy along with incompetent bankers and their ilk.
    On the other hand my personal finances have been very carefully under strict control by not using credit and saving for the consumables and holidays.
    What is my reward, why do I suffer low interest rates for my savings, why the penalization?

  • Comment number 26.

    Plot lost.
    The sad reality is that there is not really any point in UK Plc existing - except of course we have the UK.
    Attempts to invigorate the economy will/can only encourage the bankers to do what they do. Rip off the rest of us.
    Our only hope is to export the bankers.
    Once the rest of the world is suffering then perhaps we will have a level playing field for our exports.
    Then there might be a point in UK Plc existing.
    Sad and long decline until then. Everybody taking in each others washing.

    Arguably the decline started when north sea oil came ashore.
    Revenue wasted. As was the energy. And we end up like the Spanish after they brought all the silver and gold back from their conquests.

  • Comment number 27.

    There is a good explanation of why we need to spend rather than save our way out if the recession on Paul Krugmans blog-


    http://krugman.blogs.nytimes.com/

  • Comment number 28.

    I'm with John_from_Hendon.

    It's a bit of a disgrace really. The captain on the MPC boat should know where he's going. This is the same captain that nearly steered the boat onto the rocks. Meanwhile one of the crew rocks the boat. If it were not so serious it would be funny.

    They talk about inflation and recovery, but they act to help the Banks re-build their Balance Sheets. Why else hold the rate at 0.5% for 18 months when it's never, ever, been less than 2% in the previous 300 years. Why else give the Banks money for worthless pieces of paper ...

  • Comment number 29.

    1. At 5:20pm on 28 Sep 2010, John_from_Hendon wrote:
    The Bank of England are completely unable to understand what is going on in the economy.

    It needs to be scrapped



    ... and replaced by the ECB.

  • Comment number 30.

    21. At 8:11pm on 28 Sep 2010, nautonier wrote:
    'The first is the assertion that "we should do more quantitative easing now in the UK," or else risk a Japan-style period of slow growth and high unemployment.

    ....................

    In other words the gamble on the QE experiment has failed ... the false GDP growth is to run out soon ... and the proposed remedy is .... MORE and MORE QE?



    Sadly, very true. If you are in a hole keep digging.

    The only alternative to a long drawn out recession (we are still in it) is the old favourite but totally discredited one..pump up another BUBBLE.

    The best solution - an export / investment led recovery will take too long.

    In fact has there been a genuine proper recovery since the end of WW2 ?

  • Comment number 31.

    24. At 8:21pm on 28 Sep 2010, Payguy wrote:
    Is there any earthly reason why the Bank can't use quantitative easing to cancel some of the goverment deficit or to pay for public sector workers salaries.



    Not good for international relations - paying off debt with FUNNY MONEY.

    Not good for industrial relations - paying workers with FUNNY MONEY.

    All QE is is the expanding of the money supply electronically. All things being equal it is inflationary.


  • Comment number 32.

    So, QE1 didn't work then?

    And when QE2 doesn't work, no doubt we will have 'experts' telling us QE3 is needed.

    The reason Japan has had such an economic disaster is simple - extreme property price inflation. The worst form of inflation.

    Here and in the US we have had rapid property price inflation, and we are now suffering the consequences.

    Holding interest rates artificially low to keep property prices from dropping to their correct level isn't the answer, as we are now finding out.

    The debt mountain built up on the back of the insane property price spike must be dealt with before we can go forward. Unfortunately none of those in power in Government and at the Bank of England seen to show any recognition of this.

  • Comment number 33.

    Come on where is the evidence that QE has worked? Greecing the palms of the money markets and financial institutions has not helped. What we need is a programme that gets business whizzing and people back to work. Chopping the public capital works spend and chucking loads of workers out of theirjobs is needed like a hole in the head.

  • Comment number 34.

    Stephanie - you seemed more excited by this opinion by the MPC than the recent pronouncement of the IMF

    I wonder why?

  • Comment number 35.

    This does not surprise me but I share the concerns of the majority of the posters on the mechanism - i.e can we avoid putting it into the hands of bankers please.

    On the other comments made about interest rates - note that the BOE is going to keep them down for some time since the alternative is the big shake up John from Hendon talks about - if big enough could lead to more banks being propped up (the properties are still on their books) and another round of bail outs (still too big to fail).

    The essential problem is that most politicians have a time horizon of only the next election so they just want to keep things bubbling along. (remember Gordon Brown - no more boom and bust! Ha)

  • Comment number 36.

    IF the world were stimulated enough to get back to full employment, then how much oil would the world need? This is not an impossible question since the close connection between total production and oil production has been visible for decades. Now suppose that the world simply can't pump that much oil at the moment. What are the economic implications of that?
    To answer that you have to look at where the world is heading. The price of oil has decoupled from the general price of energy. That means that the price includes a component for the energy, and a component for the extra value of oil as a convenient energy carrier (particularly in our world with so much oil-dependent infrastructure, like trucks, cars, petrol supply chains). This means that (a) Where possible (stationary situations) everyone is moving to other energy sources; and (b) We can increasingly use energy to get oil and still make a profit (this opens up options like tar sands, heavy oil, and in the long run we can even make oil out of thin air, perhaps using algae [I'm not suggesting that algae will ever make cheap oil]).
    Other energy will never be as convenient as oil that flows out of the ground under its own pressure. Lack of convenience won't matter if it's cheap enough. The Green view that the cost of energy is unimportant is completely wrong. So the required recipe is clear:
    (A) Stimulus must be used to build cheap electricity, not to try to restart "business as usual".
    (B) We need to actually suck up any resulting excess liquidity in private hands to prevent us smashing again into the current limit of oil production: e.g. Energy Crisis Bonds in the style of War Bonds.

  • Comment number 37.

    @25 Exactly my circumstances and sentiment, 10bobnote.

    Bank Rate (or whatever it's called this year) should be 2%. Then we would only have had our interest income cut by about half over the last 2 years (How much longer?). I would have been disappointed, sure. Now I'm angry. We are paying the price for someone else's incompetence.

    I just hope someone high up in the Government is giving these Banking guys hell. Heaven knows they deserve it.

  • Comment number 38.

    Hi John from Hendon

    I find this discussion difficult, not being an economist. I think I get the idea of QE, however, and from your comment have an idea that the QE of AD (then chancellor) and GB was a shot in the arm (albeit a HUGE shot) to the economy with no strings attached.

    Your idea seems to be a more "ring fenced" approach to QE - something like a grant from the nation to the economy but with some conditions regarding its application.

    If thats what it means then i would say its a very sensible approach.

  • Comment number 39.

    #36 Robert Smart
    "in the long run we can even make oil out of thin air, perhaps using algae"

    Yes you are spot on. In fact I reckon that our existing oil and gas reserves originally came from algae. It took a lot less than a billion years too.

  • Comment number 40.

    Flanders:

    "Most think there is still a lot of spare capacity in the UK, and the Bank should keep policy loose for some time to start using it up."

    Yes,because the ongoing ULTRA loose policy at the bank of England(sic) has done such a good job of using up all the "spare capacity" over the years has`nt it?


    "Using up"(extracting) the spare wealth of the nation more like!


    Flanders(quoting Posen,but clearly agreeing with him):

    " the level of output and employment are clearly likely to be below potential for an extended period."


    The very presence of this QE2 talk 3 years into this financial crisis is proof positive that the recovery narrative is nothing more than desperate lies from central bankers and their cheerleaders to try and blackmail us into getting in yet more debt to "secure" this fictitious "recovery".



    stopsupportingthecriminals

  • Comment number 41.

    Boys and Girls,

    The Bank of Toytown is completely broke...... I am sorry but your pocket money has vanished into the Fat Comptrollers pocket and he has legged it abroad with his 5 Million pound personal pension scheme.[reference to Mervyn King's personal pension pot.]

    I will freely admit that my tongue was rather in my cheek in #1, but... I hope the exposure of QE as fundamentally silly is not lost on anyone.

    The only other way the bank has to influence things is to reduce interest rates - a strategy that it has already completely exhausted. There is of course a reality to understand and that is that the actions of the Toytown bank represent the hidden hand of the Treasury.

    The basic problem is that the people running the system are defective and the system itself is defective. The whole idea of the Bank of England being charged to manage only inflation to the cpi index as set out in the Bank of England Act 1998 was WRONG. Every type of inflation matters - this must critically include asset price inflation- as this was the deliberately ignored inflation that broke the banks.

    The key elements in the 1998 act omitted every type of inflation in inflation. A simple change would have forced the Bank to have taken a dramatically different policy direction. It was I believe deliberately and knowingly excluded and was key to statement such as the abolition of boom and bust. The tragedy at this time is that we are still trying to manage money with these defective rules - approved by defectively educated and certificated so called economists. I am still at a loss to comprehend their incompetence - particularly when many people (me included) wrote to them warning that their actions would inevitably lead to the collapse that happened - I put this down to their self-selection system of like minded ill-educated economists. I do not believe that there is a single competent economist in the bank.

    What is needed is a way of returning to sane economics and regulation. We can define what this means [which I will not do here as completeness necessitates far to many words] The next thing is to work out how we get from where we are today to where we need to be.

    The role of interest rates in smoothing out credit bubbles is well understood - and it MUST be used as there is no other mechanism available. In short to run a capitalist system economy money needs to have a price to encourage rational market operation and market efficiency. This price is of course not a single price but a range of prices for that paid to depositors/savers/lenders and that paid by secured and unsecured borrowers. At a mid point between this range of rates should be the regulator's rate. Savers should get less, secured borrower a bit more and unsecured borrower considerably more. This historic compact has been broken by the Bank of England with disastrous consequences. In short: The Bank is not only doing the wrong thing it has lost any control of the price and market for money. The Bank of England is a disaster zone.

    This matter is urgent as unless rapid action is taken history shows us that the inevitable consequence is high if not hyper inflation. This is the only and inevitable destination for the Bank of England's present policy.

    We have to step back from the precipice - fire than Bank of England's and the Treasury's management and re-establish a rational price for money. If this does not happen quickly sterling will collapse, trade and business will be crippled and there will be far higher mass unemployment.

    The consequence of re-establishing a rational price for money will include the default and where secured the re-possession of the overly indebted who cannot, or will not, pay the new higher price for their indebtedness, but that is the price to rescue our currency from collapse. Banks will also need some bailing out as at present they are over confident in their assessment of the quality of their loan books. Recent analysis suggests that this could be 15% of national housing stock. We can also expect house price falls of the same order as those already apparent in the USA and Ireland. All of this was apparent in late 2008 delaying the inevitable only makes it worse as we are and have already seen - yet again a demonstration of the incompetence of the Bank of England and the Treasury.

    Aside:
    As to describing another QE as QE2: will we need a republic before this is over? - is that what some people are saying? - if so, it is perhaps a distraction!

  • Comment number 42.

    It was obvious that as soon as the housing market started to slow down the printing of money would resume. The people with the most to gain from maintaining the property bubble are the banks who hold all those millions of outstanding mortgages, the vast majority of mortgage payers are old enough to have lived through the bubbles of the 80s and 90s and are still around to tell the tale. Its all about house prices, all of it, the 0.5% interest rates, the printing of new money, all the borrowing to prop up the economy, its all because the banks are hell bent on actuating all that notional 'equity' into something real and tangible. Nothing will stop them and there is no price that we won't be forced to pay in order to achieve that end.
    Where is the democratic accountability in all this? What say do ordinary people have in these decisions that wreck our savings and pensions if we are old, or mean that we have to work until we die and will never be able to afford to live anywhere except a bed-sit if we are young?
    In April of 2007 I was personally offered an 8 times my salary mortgage! That is what the banks did, pushed up the value of housing, and all those 25 years of mortgages sitting gathering dust in their vaults, by simply lending higher and higher multiples of a person's salary.
    The growth in the economy has been what its been all year, no real panic by anyone, all the talk was of...steady as she goes...encouraging signs...growth to get stronger over the next year or so...It has only been in the past couple of months with the slow down in the housing market that, all of a sudden, all the talk is of a full blown return to QE, funny that.
    The central bank is only concerned with the interests of the banks, the MPC no longer cares about inflation, why should they? they've all got indexed linked pensions, they can float serenely above the carnage on their cloud of gas cut off from reality by a complete lack of accountability.

  • Comment number 43.

    Stephanie,
    All Posen and Bean appear to want is more consumer spending. Is that not one of the many factors that got us into this mess in the first place? And surely, the way to obtain consumer spending is to shift the tax burden higher up the income scale and slash VAT which our Chancellor is not allowed to do by EU rules?

    You can have all the QE in the world but if the bulk of low and middle incomes are sinking, and pensioners are earning nothing on savings (remember they are a growing group both in number and economic force) and tax remains high on all but the high paid, something has got to give.

    If you want pensioners to spend then you have got to not only slash VAT but get interest rates up to ten or twelve per cent.

    Although bread has gone down in price recently despite high wheat prices, food costs are steadily increasing, petrol and diesel have started to increase again after recent short-term falls, water charges are going up and there are rumours/hints/signs that gas and electricity prices could rise again.

    And when people feel that maybe, after all, they own as much as they need, why go spend when you can be thankful and enjoy what you have.

    Time to take a break from macro economics. Get down and dirty with micro and sub-micro economics. Individual situations. Where the rubber hits the road!

    Hey! Let's be careful out there, tomorrow.

  • Comment number 44.

    Andrex will soon have some stiff competition in the bottom wiping stakes.

  • Comment number 45.

    #42 Mugghwhump

    Everything you said is absolutely right.

    What is yet more outrageous is that the current government got in on the pretext that government spending was the source of the problem. Now what they must do is dodge both the market AND the public.

    The IMF gave them a tentative thumbs up, but even they know their time has come. Four years is too long to wait, and even the current government know this.

    We'll see policy changes that amount to autocracy. It's going to be really hilarious. Hilarious.

  • Comment number 46.

    Do we really believe that there isn't enough money in the world, so the BoE needs to create more by QE to solve our problems?

    I'd say that the opposite is probably true - there is simply too much money being taken out of the "real economy" i.e. the one we live in - and syphoned off into sovereign wealth funds and rich corporations & individuals, where it becomes "capital", which is then touted round the markets looking for a return. Who do you think the banks borrowed the money from to lend to the sub-prime housing market in the USA, which sparked the current crisis? What about the speculative boom in Dubai - or Hong Kong land prices, the Middle Eastern white knight that lent Barclays billions to avoid HMG taking control: where is the capital coming from to fuel these vast investment & lending projects?

    As interest rates are in effect "the price of money" - i.e. what it costs you to borrow money - then the reason why interest rates are so low is that money is so abundant that it's becoming worth less and less all the time.

    The reason why this is the case is that the real economy has to function to allow the human race to exist - so the amount of profit that can be syphoned off each year then reinvested can only be what the real economy can carry, or it will go into a tailspin as purchasing power is removed from our pockets and dumped in Swiss/Cayman/Channel Isles/etc Banks, so we can't afford our lefestyles, so global GDP begins to fall and pretty soon you've got a global recession.

    But we avoided that by simply running the printing presses and borrowed money individually, as communites, as nations and as corporations and used that borrowing to bridge the gap between what we earned and what we wanted to spend.

    Whether we print it or borrow it, either way the mechanism we use to define value is being debased once this exceeds the rate of growth in the world's economy, because it no longer bears any link to the true worth of what's going on in the real world.

    Debasing the value of money puts unsustainable pressures on the system which in the end MUST result in the excess value of the money being destroyed one way or another - e.g. stock market meltdowns, personal bankruptcy, corporate liquidations, sovereign debt defaults, etc.

    The other alternative is hyperinflation, which effectively destroys an overissued/borrowed currency from within - but with the same outcome - the excess volume of money changes from the medium of exchange to toilet paper.

    Wall Street tried a new wheeze - develop hugely complex financial investment vehicles then build a vast electronic trading system, where paper profits can be generated outside the real world - fine until you have the drains up on these products and discover they're worthless, but it bought the system another few years of profitability for the mountains of wealth looking for a return.

    I'd say the very last thing we need is more money - we could do with a lot less fo the stuff hanging around the real economy looking to take a piece out of every individual and business.

    Several strategies suggest themselves - prevent UK companies being swallowed, asset stripped and loaded with debt. Look long and hard at our trading performance and put real effort into import substitution. Encourage grass roots economic development - self-employment, small businesses and cooperatives. FORCE banks to lend at decent interest rates - tax the rentier class heavily on their property incomes and excess profits - a Robin Hood tax sounds sensible too.

    Finally we need to act on the laissez faire attitude to foreign currency movements - I'm not talking about people going on holiday - but I do not see inward investment as the wonderful thing it's held up to be - it means a large lump is taken out and sent abroad for every pound of turnover in the business, which is lost to the rest of us in the real economy.

    If we could find £200 Bn to bail out the banks, we could have invested that money for the future and probably solved the underlying trade, employment and industrial production problems that are the root cause of borrowing, debt and the lack of decent private sector jobs. How many homes could have been built for even 10% of that money? Our renewable energy could be far advanced by spending another 20% there - what about transport? £40 Bn buys you a hell of a lot of high speed electrified rail lines. A decent investment in electric or hydrogen cars could have made us the market leader in the world - enough of that....

    The point I want to leave you with is that we were told the country couldn't afford these sorts of projects - there simply wasn't the money.

    BUT THE MONEY WAS SUDDENLY THERE TO BAIL OUT THE BANKS to the tune of £850 Bn., which works out at over £35,000 PER HOUSEHOLD! The NAO says final total will probably top £1Tn.

    We have been had bigtime - and we're being conned again by the monetarist shalatans and their quantitative easing mumbojumbo, combined with their transparently unworkable public spending cuts.

  • Comment number 47.

    I am generally a glass half full person by nature, but I fear this is all going to end in tears. I can't see more QE as the answer, and eventually we will be left with a choice. Not between a positive or negative outcome for the economy, but rather we will be left wondering exactly which negative outcome we are in for.

  • Comment number 48.

    I think we need to make some basic, but really fundamental decisions about what sort of society we want. I'd start with asking the question about whether we want one based on competition for resources versus none of us asked to be born and a more "socialist" model. Assuming the answer is toward the "socialist" then we need to junk the concept of money and start from scratch.

    I find it amazing that so many want a socialist, protectionist society (to help support the "weak") whilst at the same time supporting, nay, advocating, the competition model. To my mind, they are mutally exclusive and don't mix at all, let alone well.

    We have peak "everything", except it seems intelligence and consideration.

    Good luck to you all on QE2, 3 and 4. Or, argue for raising interest rates versus letting them sink. Try tinkering with energy production on "renewables" which are just as precariously supported by oil as petrol itself. Tinker with all the things that support the old competition modal way of living and continue to wonder why some, if not the majority, then suffer at the expense of the few. Ask not what population overshoot means and its effect on a finite planet. Old, old thinking for the last century, imo.

    Economics, the current (old) way, will only produce results which benefit a few. Those that can compete on some level or other. And if you're on the lower level, expect to get stuffed by someone on the higher level(s). And if you support this and get to a level above a gutter, expect to get there at someone elses expense in one way or another.

    Personally, I think We need to get off money, get off oil, power-trips, the "my work is worth more than yours", etc if we want a truly caring and supportive society. That is if you want everyone to have somewhere to call home, be fed, etc. If not, then no worries - go for the competitive way of doing things. Just accept that on the way to your job you may meet/see those who have no home, no food and suffer - just do us all a favour and be honest about it and don't winge that you have to walk past such. Oh, and of course, if you then get trumped by someone else, don't moan you lost your position in life and you find that your life is now in the gutter with no lifeline to help pick you up.

    So far, I see nothing from the masses or the "elite" that truly addresses this state of affairs. Just a re-arranging of the deck-chairs on the massive titanic we call planet earth. We, the human race, deserve all we have - simply because we won't let go of being an animal (at heart) and for all the "brilliant" thinking, won't come-up with a proper solution because it means change, trust in each other and, above all, relinquishing political power to stop getting it all our own way.

  • Comment number 49.

    30. At 9:06pm on 28 Sep 2010, Richard Dingle wrote:

    21. At 8:11pm on 28 Sep 2010, nautonier wrote:
    'The first is the assertion that "we should do more quantitative easing now in the UK," or else risk a Japan-style period of slow growth and high unemployment.

    ....................

    In other words the gamble on the QE experiment has failed ... the false GDP growth is to run out soon ... and the proposed remedy is .... MORE and MORE QE?


    Sadly, very true. If you are in a hole keep digging.

    The only alternative to a long drawn out recession (we are still in it) is the old favourite but totally discredited one..pump up another BUBBLE.

    The best solution - an export / investment led recovery will take too long.

    In fact has there been a genuine proper recovery since the end of WW2 ?

    .........................................

    We do not have any govt in the UK of any political persuasion capable of getting us out of the current hole in a short time frame without further massive problems ... we must adjust mentally to the new conditions an realise this isn't just a temporary setback in the UK economy ... this is a long term set back ... this is where we are and making sure that things do not get any worse ... and not the false engineerment of a 'recovery' ... should be the macro economic priority.

    Let's hope that someone has a very big radical plan besides ... 'cuts' as we are stuck in the short and medium term in struggling for stability.

    The biggest nonsense is all the talk of UK 'growth' when we know that outside of the monopolies/ multi nationals and City of London there is a continuing recession ... just shows what a load of rubbish is 'GDP' as any kind of sensible measure of our national economic performance!

  • Comment number 50.

    http://www.correntewire.com/blog/stirling_newberry

    this is the clearest explanation I have seen of our future and our future choices.

  • Comment number 51.

    The received political wisdom of the day is cuts and austerity. One needs dissenting voices if only to provide the opportunity for the proponents of said RPW to reinforce the soundness of their position.

    I can't say that it bodes well for the RPW argument if dissenters are referred to as subversives - it smacks of the need to impose an idealogical gag on their perceived opponents, and begs the question - what are they afraid of? Could it be that those supporting the RPW are afraid of being caught out in a kind of "Emperor's New Clothes" scenario.


    If the "subversives" are wrong, where is the counter argument that invalidates their thesis?

  • Comment number 52.

    QE is the economic equivalent of formaldehyde pumped into the nations arteries in the hope that JP morguegains frankensTone economy will leap to its feet and go "anyone for tennis"and "whos been at my nuts with WD40."

  • Comment number 53.

    "They have destroyed capitalism."

    No, capitalism is a system which ultimately destroys itself by nature and necessity. All they have done is sped it up.

  • Comment number 54.

    "46. At 11:31pm on 28 Sep 2010, richard bunning wrote:
    Do we really believe that there isn't enough money in the world, so the BoE needs to create more by QE to solve our problems?"

    All bank lending is brand new money in to the economy - "printing money" is just about as mundane process as it can get in the everyday working of the economy. Unfortunately, money gets destroyed when it's paid back. Here's a good documentary to explain it all:

    Money as Debt II
    http://www.youtube.com/watch?v=_doYllBk5No

  • Comment number 55.

    Most illegal sperm banks providing womb service between their queuees and their queuers have more real net capital than the Bank of England and without basel 3

    Its ironic that illegal sperm banks were prosecuted over the quality of their sperm ,or was it to get their hands on their visual aids,yet the high street banks regulated by the SFA full of dead and toxic stuff with a sorry tail have never been taken to court[lol]

    The endless brazen hypocrisy of it all .

    I could weep with laughter!

  • Comment number 56.

    Steph,
    "The second answer is that you try a lot more QE, but if it looks like even that's not going to be enough, you bring on the big guns: fiscal stimulus, directly financed by the central bank. That is the most subversive suggestion of all, and worthy of a post in its own right."

    Yes, Yes, Yes! Fiscal stimulus rules! and direct from the BoE is very cool!

    I think that any rules for a 'Fiscal' option for the BoE should be based on a 2 main variables: unemplyment, and CPI!

    The higher the unemplyment rate, the higher the tolerance for inflation.

    Direct fiscal injection into the real economy is immediate and precise.

    It's nice to see i'm not the only one thinking this.

  • Comment number 57.

    The trouble with the Bank of England (BoE) is that it is NOT ‘independent’. It is, like the USA Fed, a PRIVATE bank presented and posing as a National Central Government Bank. Therefore it puts the interest (no pun intended re interest rates :-) of bankers and banks at the top of its priority banking list agenda!

    With BoE base interest rates at 0.5% - designed to help prop up the housing market - and most commercial banks offering bank deposit savers under 0.20% interest per annum, for every £100 held in savings with inflation at 4.7 (RPI) and left on deposit at the bank is depreciating by 4.5% per annum or £4.50 minimum.

    In a little over 2 years a saver with £10,000 savings will lose a minimum of £1000 through current inflation and low interest rates.

  • Comment number 58.

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

  • Comment number 59.

    I wouldn't say Adam Posen is out of step with government policy, this government is just following IMF policy and so is he.

    The IMF Concluding Statement section 11 states

    'However, near-term adjustments might become necessary in response to incoming data. If the recovery were to weaken and increase disinflationary pressure, asset purchases should resume.'

    Which is what Adam Posen was saying.

    Section 6 states

    'The government’s strong deficit reduction plan will ensure fiscal sustainability. The fiscal mandate of balancing the cyclically-adjusted current budget by 2015/16 is appropriately ambitious.'

    Which is what George Osborn says.

    Funnily enough, if you look back through the IMF reports to when Gordon Brown was 'saving the world', his policies at the time were also suggested/commended by the IMF.

  • Comment number 60.

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

  • Comment number 61.

    Is the MPC a quango by any chance? If it is then it could go on the bonfire with all the others...

  • Comment number 62.

    The MPC is a boxing quanguru court that jumps to conclusions into the nearest skippy

  • Comment number 63.

    I'd be far happier if we looked at ways of increasing the velocity of money. That is the real problem. You can have as much money supply as you like, if no one is using it then that is a problem. That is our present problem. Institutions are hoarding it because they are petrified that they are going to be caught short. So we print more money, which creates an enormous monetary over-hang, which means that once things do turn, and they will, it will be very difficult for policy makers to exert precise, measured control quickly enough to prevent inflation. Charge banks and pension funds for any cash balances that they have. That should liven things up.

  • Comment number 64.

    31. At 9:11pm on 28 Sep 2010, Richard Dingle wrote:
    24. At 8:21pm on 28 Sep 2010, Payguy wrote:
    Is there any earthly reason why the Bank can't use quantitative easing to cancel some of the goverment deficit or to pay for public sector workers salaries.

    Not good for international relations - paying off debt with FUNNY MONEY.
    Not good for industrial relations - paying workers with FUNNY MONEY.
    All QE is is the expanding of the money supply electronically. All things being equal it is inflationary.
    ___________________________________________________________________

    But it's ok when the banks print it. Then it's serious money.
    As long as it's backed by debt then we can be sure it's not funny money.
    Ludicrous

    Oh and the inflationary bit. Just stop the banks printing as much as the Govt issues debt free. If you think there is any control on the money supply at the moment, take a look at their 'measurements' of it. I think if you are going to use inflation as an argument you need to back it up not just regurgitate urban (city) myths.

  • Comment number 65.

    " I sincerely believe that banking intsitutions are more dangerous to our liberties than standing armies. The issuing power should be taken from the banks and restored to the people to whom it rightly belongs"

    Thomas Jefferson

    "Until we stop talking about deficits and Government spending and start talking about who controls how much money we have, it's all just a big show game, a complete and utter deception. It won't matter if you pass an iron-clad ammendment to the constitution madating a balanced budget, our situation is only going to get worse until we root out the cause at its source"

    Bill Steer

  • Comment number 66.

    I pretty much agree wth JFH regarding house prices and intrest rates.

    If we are to go into another round of QE then why not at least try something along these lines:

    Divide the total amount of QE2 equally between all UK passport holders and give it the said people as a gift, but a gift with conditions.
    First condition is that this money must be used to pay off or pay down any kind of debt held by the said individual.
    This should do two things.....reduce the high level of individual debt and also put more money on to banks books which they then will should be able to release as sensible loans.
    It will also cushion banks and people against the inevitable crash in house prices.
    At the same time pass a law which simply states that no person can have a total debt burden in the future of more than 4 times their salary, and for couples 4 times the main earner plus 1 times the spouse.

    If you happen to be one of the lucky debt free people the gift is yours to spend, but give some kind of incentive to people buy UK made goods.

    All the better if this money can be created 'debt free' by the government rather than by the fractional reserve keep the bankers rich system we now use.

    I know all this sounds a bit simplistic and would surely need a lot of refining, and maybe some people here will shoot it down, but it's an idea that could be talked about.

  • Comment number 67.

    No.65. At 06:24am on 29 Sep 2010, Morpheus wrote:

    The truth of the matter.

  • Comment number 68.


    I'm afraid I have become too cynical - but I find it hard to belive that Mr Posen's speech was "subversive" or that it raised eyebrows in the Bank of England or the Treasury. It looks to me like a toe in the water: or peehaps a teaser, to see how the markets might react to a return to QE.

    Reading other posts on this blog it seems that the long game is to keep property prices from falling at any cost - presumably because any significant falls would precipitate a further crisis in the banks. If this is the case, then are we in for a long and sustained period of inflation/devaluation as the Bank sustains the nominal value of property while allowing the real value to fall?

    And how this sits with an austerity package is something I'd welcome views on. To my eye, the implications for the real economy are pretty stark.

  • Comment number 69.

    More and more QE will force interest base rate rises on us all very quickly ... there is a suspicion that a good proportion of the QE money is simply shuffled by the banks and leaves the UK money supply and is 'used' overseas ... and while some of it may show in GDP the current QE arrangements is simpley exchanged for money being leeched overseas.

    The UK, its government and democratic processes have very little if indeed any strategic management of the UK banking system and therefore our UK government has zero strategic control over the UK financial system ... Ask yourself is the UK banking system working for Britain?

    Countries that are doing better than the UK have a strong element of strategic guidance and control over their financial systems e.g. China whereby the government controls a vast proportion of strategic investment decisions in teh Chinese economy. To a lesser extent France and Germany ... and Japan have more strategic political control over their financial and vested interest sectors.

    Until our UK Parliament wrestle back this 'function' from the City of London and powerful city institutions/the establishment ... Britain cannot revover in the medium and long term in terms of raising overall living standards for British citizens living in the UK.

    QE is a near complete 'waste of money' until this strategic shift is put in place ... the important issue is that the strategic shift will cost little more than political vision and will power ... politicians 'rolling their sleeves up' and getting stuck in and earning their salaries and perqs.

    Failure to implement this 'strategic shift' ... so that the UK financial sector sets UK investment as its highest priority ... is a recipe for disaster.

    The true test of UK economic performance is not in measuring GDP - it is asking the ordinary person in the street 'how they are doing'

  • Comment number 70.

    In our financial system where 97% of all money is created as debt bearing interest, more debt has to be created each year to satisfy capital and interest payments.

    There’s a catch of course, there always is isn’t there.
    You need people willing to take on more debt.

    Now the hopelessly indebted will take on more debt, but sadly can’t pay it back.
    The modestly indebted will take on more debt, but only if they feel reasonable secure in their economic future, which at the moment, many don’t
    And the prudent see debt as the road to ruin, so they won’t borrow per-se.

    So what does that leave us with.
    Well you’ve got the hopelessly naïve, the students, maybe they will try and load the young up with more debt. On the other hand they could simply print more money.


    Ode to Mervyn

    Print more money, and print it quick
    Lest our debt mountain makes us sick

    Ignore the savers and fixed income pensioners to
    Just fire up the press, we want twenties in blue

    Because as each day passes we’re sinking further into the red
    And not even the prudent can sleep soundly in bed

    Tell us it’s a stimulus package and lie to us out-right
    But don’t leave us stranded in case the workers take fright

    We don’t want to see riots and pickets on the gate
    So print lots more money before it’s too late


    Let’s face it, it’s either significant inflation, insolvency or a non-debt based monetary system.

    I hope Mr Carswell succeeds in his endeavours, and not for myself, for the younger generation. http://www.positivemoney.org.uk/

  • Comment number 71.

    Lots of bad feelings towards the Bank of England in most comments, but nobody has yet mentioned that it was the (now defunct) FSA's failure to regulate the banking system properly which led to the financial crisis. It was not the Bank of England's remit to regulate the banks, at the time. Now, of course, the FSA has been integrated into the BoE, so they now have to pick up the pieces.

  • Comment number 72.


    We cannot bring our selfs to accept that when faced with financial ruin, society has always turned to conflict

    to stimulate an economy. Our small attempts at war have failed.We need to think BIG!!!!!

  • Comment number 73.

    Re: 68

    I think you've spotted the contradiction in the UK economic policy - property prices vs. monetary policy.

    House prices in the overcrowded UK are a function of peoples' ability to pay - so the price of money - interest rates - is the MAIN component in house price levels - incomes, employment and supply/demand are important factors, but when it comes down to buying a house, it's the level of mortgage you can afford that is the dominant factor in which house you buy.

    Therefore a base rate that is effectively negative given inflation, should make demand for housing remain buoyant, but given the banking crisis, banks are now operating at an enormous spread in terms of the wholesale price they can borrow at and the retail price of mortgages.

    The housing market needs first time buyers coming in - yet the av. age has now reached 35??? And the differential on mortages rates to equity level is now a steep curve due to the risk element in lending 75%+ mortgages. If you factor in student loans, graduate unemployment and the cost of living/salary rates, it's not surprising that the bottom end of the housing market is getting jumpy as demand is drying up.

    Aggregate demand in the UK is driven by the net effect of public and private expenditure. Cutting £1Tn of demand through the impending spending cuts is by definition deflationary, but even if the banks are stuffed full with cash from QE, even if interest rates are effectively negative, the banks' exposure to the housing market is now so extreme that they know that a sharp fall of £1Tn in aggregate demand will ramp up unemployment and destroy confidence, which will leave many people unable to pay their mortgages when they lose their jobs or have income cuts - this will lead to repossessions and distressed house sales - which will drive property prices down - RISK is writ large - there is not going to be a 2nd bail out if the banks get themselves into trouble - so no amount of QE or low interest rates is going to overcome the roadblock of risk exposure for the banks - another credit crisis and they're out of business. Ditto lending to small businesses.

    In Eire house prices have fallen 35% - the OECD assessed UK house prices as being 40% over-valued.

    We know that a UK house price meltdown would probably push the banks over the edge - we know there isn't the money to bail them out again - the BoE has pulled both levers as hard as they can to provide monetary stimulation - it isn't working.

    That only leaves fiscal policy - that is going to be tightened HARD in short order with the spending cuts. Monetarist and Keynesian economics both point towards a rapid fall in GDP as a result of this policy - house prices are already sliding, if Gorgeous George precipitates a housing crash he will be faced with having to find another £1Tn to bail out the banks again - not possible IMHO - or let them go down, risking the entire financial system melting down.

    We can argue about what sort of society we want to have - we can debate how QE should work in terms of where the money goes - but in the short to medium term, I am still amazed at the way the IMF, OBR, BoE and the rest don't SCREAM RISK at the ConDems' spending cuts policy.

    Forget politics - forget debates about the role of the state - focus in on the ECONOMICS of what is about to happen - I find it flatly impossible to believe there won't be a collapse in house prices which will take the UK economy into a deep, longlasting depression that will be virtually impossible to recover from, if the government does make cuts on the scale they advocate.

    In doing so it will leave UK PLC with a nationalised banking industry that in turn holds a mortgage book with negative equity levels that won't recover for generations. Even Old Labour didn't advocate nationalising the entire financial services industry and privately owned housing - but that is the probable outcome - the exact opposite of what the ConDems believe in.

    This is punk politics, pig ignorant economics and is quite simply politicians putting dogma before reason. Even if they don't share my assessment, surely they must accept that there is SOME risk of the wheels coming off? Yes debt levels are too high, but trying to tackle them in the current economic climate is too dangerous - we should wait until the global economic and UK PLC are firmly out of the woods. Without Darling's construction stimulus, we are still in recession.

    Ye3s we shouldn't leave our children paying for our excesses in terms of indebtedness - but do we really want to smash the economy up so badly that it will be their grandchildren who finally see light at the end of the tunnel?

  • Comment number 74.

    #71. keribillen wrote:

    "Lots of bad feelings towards the Bank of England in most comments, but nobody has yet mentioned that it was the (now defunct) FSA's failure to regulate the banking system properly which led to the financial crisis. It was not the Bank of England's remit to regulate the banks, at the time. Now, of course, the FSA has been integrated into the BoE, so they now have to pick up the pieces."

    In the past I have listed all of the suspects, including the FSA, MPC, BoE and HMTreasury - [I will not list all the names here, yet again.]

    However, I know [as I wrote to them myself for over a decade] that all of the issues that created the bubble were thoroughly explained in very simple language, so even they could not fail to understand, to both the current and previous head of the Treasury and the both this and the previous governor of the Bank of England - the structure of the responses I received were that

    1. house price inflation was good (!!!!)

    and

    2. that the Bank of England was ONLY responsible for ensuring that the cpi was kept within a prescribed range.

    These were the responses of, at best 'jobs-worths' and, at worst demonstrated a massive and inexcusable ignorance of economics - for which skill we were both paying them handsomely and had a right to expect that they were both diligent and demonstrated real integrity.

    Isn't it time that we started instituting prosecutions for negligence as is being attempted in Iceland?

    We need an entirely re-staffed Bank of England and Treasury and we need them NOW!

  • Comment number 75.

    `The first is the assertion that "we should do more quantitative easing now in the UK," or else risk a Japan-style period of slow growth and high unemployment.'

    But isn't it just this policy which helped to cause the lost decade in Japan?

    What is wrong with the Bank of England these days? (Dear God, I am starting to sound like John from Hendon). We had a Deputy Governor on Monday telling the savers to go out and spend their savings and now we have a member of the MPC saying print money.

    Is it any wonder that the country is near bankrupt? The people directing our monetary policy are themselves morally and intellectually bankrupt.

    I suppose we can be thankful these people don't operate the fire brigade as it won't be water used to put out the fire in your house but petrol.

    The solution to our economic problems is to restructure the economy away from government and away from the banks. But then these people are bankers employed by the government so they have to sing for their supper. If they got a real job they could afford not to.

  • Comment number 76.

    If, therefore, currency is multiplied, it is a delusion to suppose that capital is multiplied.....If banks not only lend capital but also lend "coined credit" some time or other a liquidation must come, there must be an effort to touch the capital which the notes pretend to convey. Then it is found they represent nothing; then "credit breaks down," and there must be a settlement, a liquidation, a dividend, and a new start....The real amount of capital we posses is divided up, and we have to make up our minds that we posses only 50 to 75 per cent of what we thought we possessed. we put smaller figures for everything, and reconcile ourselves to smaller hopes, but the experience is soon forgotten, and the old process of inflation and delusion begin again.
    William Graham Sumner 1870

  • Comment number 77.

    Posen's views are within the current orthodoxy as BobRocket's reference to the recent IMF outpouring testifies.

    Further QE based on the same model as previous QE is unlikely to have much effect because the private sector is deleveraging.

    In particular financial companies have greatly increased their debt in the last 25 years or so and don't have an appetite for taking on more.

    Changes in the level of debt is a component of aggregate demand.

  • Comment number 78.

    #73

    I have probably not read a post on here that I have agreed with more.

  • Comment number 79.

    NATTY_1: a great post which unfortunately will be completely overlooked by the titanic deck chair arrangers running our economy and most of the contributors of this blog. What you say is completely true, Peak Oil is upon us and we are still churning out the "lets spend and grow our way out of this" unachievable solution.

    36.ROBERT makes some interesting suggestions that would help us mitigate the impending disastrous economic situation. However, his implication that oil can be made and obtained in other ways in the volumes and at the prices we require is impossible due to the second law of thermodynamics, namely "energy can not be created or destroyed."

    To manufacture oil from algae or other such ways requires a form of concentrated energy in the first place (food for the bugs). This can only be assimilated from the sun's incident energy over a long period of time and competes directly for scarce agricultural land. With oil this has taken hundreds of million of years to form and we are using it up in a century and a half.

    Tar sand oil and other heavy oils are very difficult to extract and require a lot of energy and water input to do this. They also contain a very high level of sulphur, mercury,arsenic, and other heavy metal pollutants that are an environmental poisoning nightmare. They yield a much lower energy out compared to energy required to be put in to produce them.

    We have an energy crunch problem.

    We can mitigate this as ROBERT says by building nuclear and wind/wave/tidal generation plants but we can not substitute these totally for the utility that oil currently gives us.

    We have to work on some new technologies and on a massive scale. Hydrogen cars could help but again to produce hydrogen you have to put a lot more energy in than you get out from the hydrogen produced.

    Despite the downsides we have to do these things. The future useful employment of the masses will be on developing alternate sources of energy and ways of delivering them.

    We will also have to engineer societal changes including the death of suburbia and the long commute in a private vehicle.

    We will also have to organise has China realised 30 years ago a reduction in our future population and stop state sponsoring having children.

    These are tough and seemingly draconian authoritarian measures but we will have no option.

    Check out for your own vital enlightenment the looming iceberg of peak oil rapidly followed by peak just about everything mined, quarried, farmed, and grown. Time to stop discussing deckchair rearrangements.

  • Comment number 80.

    There are known:knowns, known:unknowns and unknown:unknowns but one thing remains constant – Bankers are not interested in economies of countries nor the welfare of people and every time one of them speaks it confirms their position!

    In the past (and relevant today); who knowingly would destroy their own country to make a ‘buck’ – sorry guys, it’s bankers! Who still believes that they did not know what they were doing, if you still think they didn’t, then you are underestimating their ingenuity and guile.

    Lets go to war and sell the opposition money to but arms – yes it has happened!

    Banks are out to make money and make more in a recession or war than at any time!

    My high street business closed early 2005 because Jan/Feb/mar of that year was dreadful with many shops unable to break even. I do not want to dwell on this but about the aftermath. I/we as a family were left with aprox 80% of our assets as debt. So by introducing our own austerity measures we avoided bankruptcy and are now at about 60% and stable (the banks don’t like me for this attitude, especially by refusing to take out further loans?). So what? you may say, you are just another statistic and there is no comparison to UK Plc. I for one say that there is (but on a different scale). Have we lost growth – yes and no, our life style has remained fairly constant, were as we have lost our 3 holidays per year but our 80 to 60% drop compensates for this. We/I am now thinking about moving forward again so there is a confidence increase on top.

    Perhaps Maslows theory has merit?

    Written by a common man in a common family who were in the middle income bracket and now just below P.S. Thanks for the last 13 years of lost hope.

  • Comment number 81.

    As J.K.Galbraith so aptly put it:

    "No one can tell what the effect of a given tightening of the money supply...will have...There is similar uncertainty as to the borrower's response to lower interest rates and easier borrowing terms...because of this uncertainty central bank actions always reflect the collective judgement of men who, individually, are in ignorance of the immediate consequences of their action." ('Economics And The Public Purpose')

    In addition, bankers, economists, forecasters and the like, with their figures, statistics and projections based on input/output models, are not objective scientists but are part of what they are trying to understand, explain and influence - the economy. People take note of what they say and act in not always helpful ways - hence, dependng on how rational or perverse that action is, the problem of self-fulfilling prophecies or the complete opposite outcome to that predicted. Maybe it would be more useful to focus on just getting people working, making things that others want to buy and also earning in order to buy things themselves. In other words : is it possible that if you get things in the area of micro-economics, encompassing as it does firms, products and product innovation, workforce training and development and so on, right then the macro-economic state of affairs will improve? If you properly tend and nurture the various shrubs, vegetables, lawns, trees and flowers in the garden then the garden will look after itself, so to speak.

  • Comment number 82.



    ...Hull...QE2....Rocking the Boat...

    Sounds a bight like the shipping forecast.

    In the wake, of the hurrican, just passed by, are we sailing into calmer waters ?

    OR PERHAPS, well under the Plimsoll line, are there not limpets which need to be hosed away with the Gale Force of monetary easing ? The motion of the ocean alone is inadequate.

    Oh Ms Flanders ! Check the davits ! Launch the Life Boats... at least for a Practice Run.

    Tots of rum for all your bloggers Ma'am . We are on course for Scylla and Charybdis... and Posen is far to the east of Berlin. We need him in the Med PDQ !

  • Comment number 83.

    ‘QUANTITATIVE EASING’, a benign description of the malignant?

    So what is the average Joes reaction to it?
    Well if you’ve saved up any money for retirement, a rainy day or the unexpected financial burden, you’ll want to protect its value.

    So perhaps you’ll buy:
    Gold, which has now risen to around $1300 an ounce.
    Or
    Index linked savings certificates, the demand for which became so great that they were withdrawn.
    Or
    Shares, which have been steadily rising.

    In essence anyone who has saved ‘money’ for a rainy day will endeavour to protect their savings from inflation. And add to that, the full implications of ‘debt’ is now being brought home to those encumbered with it, 25% interest on a credit card for example.

    So with RPI inflation (excl housing) running @ 5% and average wages increasing @ 1.5%, the prudent will endeavour to protect their savings and the sensibly indebted will resist the pressure to take on more debt.

    And given that the only way money can be created is by the creation of debt, but total UK debt already exceeds our ability to service it. Enter ‘quantitative easing’, the devaluation of wages and savings, in the hope that the debt based monetary system will survive.

    So it doesn’t matter much who you are, because ultimately your ‘earnings’ are going to be reduced to pay for the continuance of the debt based monetary system, whether you like it or not.

  • Comment number 84.

    Peak oil per capita happened some years ago.

  • Comment number 85.

    Mervyn King has just urged savers to spend their savings. At first glance this seems a good idea? It will increase the velocity of money (that's "good") and it will apparently make more money available for more goods and services to be purchased, I stress apparently, so this again is "good"

    Will Mr King, top-dog on the totem-pole, please explain to me how it is possible for savings NOT to be spent? Short of putting £ notes under the mattress, how can savings NOT BE SPENT

    I am naughty, I have savings, naughty because I have saved them via Premium Bonds, naughty because I did not spend them on goods --- which goods workers had to manufacture which gave them jobs and they in turn then had more spending power....

    But I lent them to Electronic Ernie at Lytham St Annes and he (that is HMG) then used them to buy things, maybe bullets to fire off at the Taliban. These had to be made which meant jobs and those workers having spending power....

    In whatever form I "save" I cannot avoid my savings being spent. Whoever gets their hands on my savings then spends them. I do have a credit at the bank (which is a form of saving) and so the bank lends it for somebody to buy a house. That has to be built which is jobs and more spending power for those workers....

    It is impossible for a saver NOT to have his savings spent. Why is Mr Mervyn King demonising me? Please don't answer that. UK-Bruce +++

  • Comment number 86.

    73 richard bunning

    I agree that we are in a cleft stick of being damned if we do and damned if we don't, but we have to move on somehow. Like it or not but tomorrow always arrives.

    In my view we already have a broken economy: up until two years ago there were only two dominant themes: the financial services industry and bigger and presumably `better' government. The manufacturer had been largely squeezed out and many small business put into liquidation by a total failure of economic policy.

    In the Credit Crunch what happened is that the provisional political-economic solution constructed on the back of an economy hollowed out by rampant corporate self-interest has inevitably collapsed.

    This is our Stunde Zero or Zero Hour as the Germans called the summer of 1945. Chuck away the blueprints as we have to start again. The only hope is what we make for ourselves. There is nothing to be had from big government or big business other than more big bills: we just need to make them both so utterly last year.

  • Comment number 87.

    Stephanie, you said "... fiscal stimulus, directly financed by the central bank. That is the most subversive suggestion of all, and worthy of a post in its own right"

    This point might have been made above. Sorry if it has.

    Where did Mr Posen say he would recommend fiscal stimulus financed by the central bank? I thought he suggested fiscal stimulus by government subject to debt sustainability issues, and then made clear he was confining himself to monetary matters?

    Do the BoE have a mandate to buy gilts to support and energise economic capacity, or would they use unproved disinflation as the incidental target.

  • Comment number 88.

    79. At 10:05am on 29 Sep 2010, Sage_of_Cromerarrh wrote:
    Check out for your own vital enlightenment the looming iceberg of peak oil rapidly followed by peak just about everything mined, quarried, farmed, and grown. Time to stop discussing deckchair rearrangements.


    Things move on Sage. The human race managed without oil once. We will again. There is no no need to stick your head in the sand and ignore all the other fundamental problems.

  • Comment number 89.

    #75. stanilic

    I do not attack the Bank of England and its governor out of any visceral hatred, but from the analysed results of examining who knew what when, who was holding themselves out as being in-charge and who did not do what a reasonable person might expect that they should have done.

    Leaving the Bank aside...

    There is a general reluctance to understand the blindingly obvious with regard to debt and credit. Savers, when faced with statements from the regulators that they will have their rightful returns stolen for a decade will naturally enforce personal austerity, just as the country is. Furthermore this austerity will inevitable create a situation where annuity rates can only continue falling which make all pension schemes more and more underfunded and unaffordable or simply pay out less. This policy is insane economics, but its consequences must be understood by the Bank of England.

    So why is the Bank of England setting about to further destroy the price of money? Why would they want to do this?

    Here is a thought - that they are well aware of the very low quality of a significant proportion of the so called secured loans held on the books of the UK lending institutions. Or perhaps that they fear that this is true. So any upward pressure of lending rates will create a second wave of lending institution collapse far more serious than the first. The Bank of England probably already knows that the overseas property lending of the British lenders is already severely compromised (i.e. in Spain and the USA).

    However what the Bank fails to understand is that their policy will collapse the UK economy far deeper than getting over these bad loans quickly. I look at it this way: If you go without food for a few days you survive, but is you are on a starvation diet for a decade you die or remain permanently damaged. The Bank is taking the starvation diet option. They are wrong.

    Looking at the 1930: studies show that it was only after the debt-deflation that the economy started to pick up again. (see Irving Fisher et al.)

    We need to get rid of the low quality and quasi non-performing debt through bankruptcy/repossession/reselling to free up the real assets for productive use. This is the import aspect of recovery.

    Look at it this way is there is a shop that has a rent that is far too high no-body will rent the shop. The shop's rent is related to its asset price. As the shop is not rented no business takes place and there is no employment related to the asset - it is a non-performing asset. When the rent is reduced substantially then the economy can re-start. The problem is the historical financial debt on the books of the lender. This is not worth what it is on the books at. However we have to decide if it is more important to preserve the bank or to get the economy going - we can't do both due to the incompetence that I have long outlined.

    It is, I believe, better to have assets economically active - the Bank of England believes the opposite - I believe they are wrong.

    I further believe that to get back to having assets economically active we need to do it as quickly as possible - the Bank of England believes the opposite, that the people and business needs to economically strangled for decades more to come - I believe they are wrong.

    These are the fundamental differences between our economics.

    My recipe: Take the hit now, get Britain back working quickly, sort out the Banks later, join the Euro and look forward to trading and doing business profitably whilst at the same time re-establishing a rational positive price for money ASAP and protecting small savers and depositors (up to say £250,000 - the EU prescribe an increase to €100,000 by 1/1/11 anyway). We need to get the Nation back to work and thinking things will get better soon!

  • Comment number 90.

    70. At 08:41am on 29 Sep 2010, Dempster wrote:
    In our financial system where 97% of all money is created as debt bearing interest, more debt has to be created each year to satisfy capital and interest payments.
    ============================
    Quite a few of you keep saying this and I am fascinated. I just can’t get my head round it, so please could you explain. If we work a simple example that should help.

    If I borrow £7200 including interest to change my car I need to repay £300 per month for 24 months. So my net salary is £1500 per month and I spend £1200 per month on living and pay £300 off the car debt.
    At the end of 24 months I have no money and have paid off the debt.
    So please could you explain: who has incurred a debt, who did they borrow from and how much? What am I missing?

    You could have another convert!

  • Comment number 91.

    81. At 10:18am on 29 Sep 2010, BJK

    Very well put.

    There is still of course the question og the slugs in the garden. They still need to be dealt with otherwise you will end up with no produce.

  • Comment number 92.

    84. SEAN said: "Peak oil per capita happened some years ago".

    This is true and is the reason why oil has climbed in price for over a decade now since that started to occur. Oil was circa $20 per barrel throughout the 80's and 90's. Now it is circa $76 and has increased linearly at 15% per annum.

    Peak oil production means that the oil per capita will now begin a huge drop on a gradient far steeper than the last decade. This is compounded by more of the former world's poor now becoming industrialised (BRICS and OPEC).

    This means that due to a complete lack of a viable alternative we are in for huge supply crunches and price spikes.

    The impact on our economy and way of life is obvious and needs to be mitigated by planning, policy, and action urgently.

  • Comment number 93.

    88. Morpheus said "Things move on Sage. The human race managed without oil once. We will again. There is no no need to stick your head in the sand and ignore all the other fundamental problems."

    This unfortunately is using a part-fact to justify a policy. Yes we did once survive without oil.

    We traded mostly locally and most of us worked the land. In short we had only a tiny energy surplus to invest in progress beyond subsistence living (Maslow's first and second levels).

    Critically the world population was circa 800million for thousands of years up until fossil fuels powered the industrial revolution. This was because that is all the surplus energy we had could sustain.

    We now have a growoing world population of 7 billion, almost 10 times the pre industrial level. The vast majority of that population growth has been enabled and sustained by the cheap surplus energy of cheap plentiful oil.

    I think we have a huge problem and it is those such as yourself who haven't thought it through that have their head in the sand.

    Please enlighten me otherwise.

  • Comment number 94.

    #85 UK-Bruce

    Mervyn King wants to help clear bank balance sheets. He is like many others stuck in the past. He thinks neoliberalism has a future.

    When you spend your savings, if people are deleveraging, only 2 things happen:
    a) The money you spend stays in the central bank reserve accounts, just that the banks now have lower liabilities
    b) The economic activity results in additional taxes reducing the government deficit

    For example:
    1)You withdraw your savings.
    2)You spend that money by paying some shopkeeper electronically.
    3)The shopkeeper pays off his commercial loan.

    This is equivalent to:
    1) Bank saving account debit liability to you and credit checking account liability
    2) Bank debit checking account liability and credit shopkkeeper checking account liability
    3) Debit shopkeeper checking account liability, debit loan asset, credit capital account

    Net effect? Bank loses liability to you, government gains tax revenue, (+bank loses loan asset, bank gains premature payment fees).

    If it accelerates deleveraging, it does so in favour of banks and at the expense of savers. Make the banks pay. Not everyone else.



  • Comment number 95.

    The prescent course is the correct one.

    1. Reduce the public finances to match the tax income . If that means 30% reduction then so be it , do it once and do it hard , then everyone knows where they stand. A significantly smaller government is required for the future and an end to £100,000 salaries for running councils ,quangos etc that in effect run themselves.

    2. Keep interest rates low for the next 12 months . At the moment banks are re building their balance sheets and are charging a 2.5% margin (Typically it's about 1%). Last thing we need is people hoarding cash , if you want 6% return on your capital invest it in the equity / bond market.

    3. Don't carry out any morev quantitive easing its simply giving money to the big institutions.

    4. Keep inflation low at 2-3 % for next 5 years to slowly depreciate the debt

    5. Don't listen to Red ED , the labour party is 80% responsible for all the public sector cuts , they could not stop spending , spending and taxing. Even in the good times they were spending more tham the tax take . Completely irresponsible.

  • Comment number 96.

    #90 Another engineer

    a)Where does your 1500 a month come from?

  • Comment number 97.

    93. At 11:47am on 29 Sep 2010, Sage_of_Cromerarrh wrote:
    I think we have a huge problem and it is those such as yourself who haven't thought it through that have their head in the sand.

    Maybe so but right now I'm interested in stopping public spending cuts, and starting banking and monetary reform. if I start worrying about oil, societal collapse and the 2nd coming I might as well go off and join the moonies.

  • Comment number 98.

    To 90. At 11:03am on 29 Sep 2010, AnotherEngineer

    All new money other than notes and coins is created from ‘a promise to pay’.

    Your promise to repay the loan for a car gives the bank the right to create the money from nothing and lend it to you.

    Your promise to pay is an asset on its balance sheet and the money it has created from nothing is a liability. The interest you pay funds its operating costs and profit.

    As you pay off the loan, the asset ‘your promise to pay’ and the liability ‘the money it created’ are gradually reduced until such time as they cease to exist (you pay the last instalment).

    The reason why people do not like the system is: The existing amount of money is always less than that needed to satisfy all the debts + interest, therefore the overall level of debt must constantly rise.

    Which is why for example, the Office of Budget Responsibility predicts that household debt will rise from £1456bn to £1823bn over the next five years.

  • Comment number 99.

    JFH 89

    John you posts are getting more and more extreme , I think you need a holiday . We don't need to do any of the things you suggest . Althought I don't agree with more quantitive easing , all the other actions taking place are fine . Ok house prices might fall 10% next year , but not in all areas , in parts of the SE prices will be up . History will prove me right and your drastic measures completely unnecessary. We have had a credit explosion mixed with a Labour (Spend , spend , spend) government , it was always going to end in disaster . Just like 1979 , it took us 5 years to get over Labours last inheritancy, or should I say lunancy...Roll on Red Ed new ideas yeah..

  • Comment number 100.

    Dr Posen's experience within the MPC sounds like a repeat of Professor Blanchflower's. Most of the members of the MPC seem to operate on the basis of simple rules, like raise interest rates to stop inflation, without thinking about the underlying mechanisms on which those rules are based.

    The reason why it was a good idea to raise interest rates, when inflation threatened, was that this was supposed to reduce bank lending, since excessive credit is one of the principal causes of inflation. Raising interest rates when shortage of credit is already causing problems by restricting demand is obviously stupid. This is exactly the mistake that the MPC made when the credit crunch occurred, causing Professor Blanchflower to resign. It is shocking that there are members of the MPC who have not learned this lesson.

    The Governor of the BoE has admitted recently that mistakes were made. But some of his colleagues on the MPC do not seem to have learned from those mistakes.

 

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