Why is UK monetary policy (still) failing?

“If you also feel that the depreciation of sterling of 2007/08 was tacit
official policy then you would have what a card player calls a full
deck.” Hi Shaun, to use your own expression hereon today, those with thinking faculties do conclude that this is and was tacit policy of the present government and BoE; indeed the principal purpose of the continued “emergency” base rate (ZIRP) and QE debasement was never intended to “stimulate” the UK economy; debasement can never stimulate any economy; it purely destroys the real wealth generating processes, as we have seen in the most extreme examples in other economies already in history. Thus all of this nonsense from the BoE and government has been only “Truth-Speak”. The sole real purpose of QE debasement has been to bail out the banks and the government who are both in reality insolvent – the banks due mainly to horrendous derivative liabilities and the government due to continued serial profligacy. That is why as you seem to have observed now the BoE and the new governor are puppets of the government. Without continued QE debasement now, as a result of their dire failure to reduce public spending in real terms, the UK government and the UK economy will collapse. If the markets do force up interest rates in January, if rating downgrades are on the horizon as feared, then the government will eventually struggle to service its debt unless it resorts to much greater QE debasement in a Zimbabwe style, and then the inevitable hyperinflation will be firmly on the horizon. What needs to be considered is what that scenario will do to the UK economy? The probability is that the UK is heading to become another “banana” economy; and we cannot in this climate even grow bananas!

Good piece Shaun – the BoE’s policies have done everything to help the banks (who’ve promptly gambled it again), and that at the expense of every other citizen. Independent? Only of accountability to the people.

It becomes more apparent with every press conference they have. Thanks for using your own thinking faculties to keep sharing these truths with us.

*insert relevent song lyric here – I can never think of any*

hehe , thats funny

” the BoE’s policies have done everything to help the banks (who’ve promptly gambled it again)”

What do you get if you give a million pounds to a broke gambler ?

a broke gambler !

What can be done to restore confidence in the banks ?

legal reform and prosecution of those guilty in the banks

At no point so far has any politico pushed for this nore has the press

Thus I conclude they are complicit in this fraud and we are doomed as tax payers to keep paying until we are bled dry

Forbin

Governance of the people by the banks for the banks

UK monetary policy is failing to ignite growth but I doubt general economic policy is failing its intended objective; general economic policy in the West is succeeding very well in suffocating economys in the West.

Nero fiddles whilst Rome burns.

Hi shaun,

I see in the press today the BOE thinks the banks will need to raise another £35bn. Anyone for another £100bn or 2 of QE to help the banks on their way?

You would think the way the Government acts to indirectly support the banks, that they had a direct financial stake in them. Oh err they do in two of them. So their policies are all transparent then for the good of the people!

Until the economy is rebalanced by real public spending reductions and tax cuts there will be no growth, just stagflation Real wages will continue to drop through high inflation, while people that have spare money and debts will continue to pay these down, where they are fearful for the future in terms of UK solvency, growth, unemployment and currency debasement through inflation, and once this gets a real grip, it will lead rapidly rising interest rates and a further squeeze on those with mortgages and debts.

Not a good outlook, but with the BOE and Government failing to get to grips with our economic problems, this is not going to end well.

Shaun,
If you need entertainment on this subjcet, read the spoof Private Eye interview with George Osborne this week. It really does capture the insanity of QE!!

Forbin – banker bashing is popular – but what exactly did they do wrong ?

As I see it, the UK banks in particular expanded their balance sheets to lend primarily against property. They borrowed short mostly from abroad and lent long mostly against residential and commercial property.

There may have been losses from so-called casino speculation on credit derivatives e.g. RBS mainly via ABN AMRO – but wasn’t most of the problem caused by plain old property lending in a property bubble e.g. HBOS with commercial property, RBS in Ireland & USA etc, Northern Rock on UK property. Maybe i’ve forgotten the details – were there big losses directly to Lehmans ?

I thought a lot of the early problems in 2008 were caused by liquidity – wholesale and retail bank runs – inability to role over short term borrowing and then loss of confidence. But borrowing short and lending long is normal – they just did it on a much bigger scale and increasingly from abroad.

Now the massive expansion of their balance sheets to fund the property bubble – well that was irresponsible. But no-one stopped them – just the opposite. The central banks were happy, the political leaders were happy (gave them knighthoods) – in US, Clinton encouraged the banks to lend sub-prime. They just did what you would expect – they maximised their profits.

The reason everybody was happy, is that globalisation couldn’t work unless the banks provided the conduit for huge flows of debt from the surplus countries (e.g. China, Germany) to the deficit countries (e.g. UK, Greece). Economic growth for both sides relied on the debt flowing – that is why growth has stalled now .

The fault lies with the politicians & economists that led us into this crazy unbalanced & inherently unstable economic system. The bankers were big beneficiaries for sure and have been bailed out when they didn’t deserve to be. But what did we expect them to do ? – put their hands up and say “sorry folks we are making too much money here – don’t listen to the regulators, central bankers and leaders who say this is just great, no more boom/bust”.

Yes, I agree broadly with “Drf”. The whole ZIRP and QE is an attempt to mask insolvency via an inflation adjustment. Sustainability used to be a word championed a couple of years ago by logical and practical folk but I am afraid a conscious or planned economic reset option was “given-up” in 2008. You will have noticed that the desperate stares and circular reasoning of excuses by policy makers. The trouble is that the “half-life” of their treatments is getting shorter, QE in ever larger chunks is the inevitable conclusion of the course taken so far and the wheel ruts are now very deep. There was a chance back in 2008 that if we clung on 2,3,4 years that BRICs countries could have “pulled us out” with exporting demand but I just don’t see it now in 2012. I think 2013 will be very interesting , where is Dr Doom….? Regards Paul Chadwick BSc (Econ)

Hello DaveS,

The important point is that it was the politicians who by their actions – or inaction if you will , allowed the crdit boom.

In the end days I hope that this will be seen by the general public but I cannot see the media allow them to see this

I hope that GB gets his just come uppance – he is not the only one and I dont in general agree to be blaming one person , but…..

” But what did we expect them to do ? ”

yah you correct I would not really expect them do have done anything else .

But what to do next is the vexing issue

and printing our way out I feel is inevitiable

Forbin

Hi Shaun, I’ve said before and again now, the UK economy will grow in Q4 2012 and Q1 2013. M1 and M4 have been outgrowing inflation for most of 2012, that will result in economic growth this quarter and the next.

Unfortunately, inflation is once more catching up. I agree your overall point that QE is not a sustainable long term economic growth plan, but it can result in short term bursts of growth until inflation catches up again. QE is clearly here to help Government and banks reduce their respective debts by causing a stealth tax known as inflation!

Dave S

1.”banker bashing is popular – but what exactly did they do wrong ?” and

2. “But what did we expect them to do ? – put their hands up and say “sorry
folks we are making too much money here – don’t listen to the
regulators, central bankers and leaders who say this is just great, no
more boom/bust”.

1. The real question is why did the wholesale markets from which the banks borrowed short dry up very quickly? Because the Wholesalers suddenly realised the banks were issuing lots of sub – prime mortgages in the UK too. Not only this but the UK banks were simply taking applicants’ word at face value re their declared income and weren’t even bothering to check potential mortgagees declared earnings with the mortgagee’s employer! Minimum periods of employment requirements were scrapped too! Then there was the nonsense of lending 100% and more of the purchase price including the value of the land the property was built on. That’s what I call a high risk buccaneering approach to long term mortgage issuance. This is what the UK bankers did wrong and this is why the Wholesale markets stepped away.

2. Well, yes in a word. They were supposed to be the level headed, sober, conservative (with a little c) heads of safe, secure bastions of the financial pillars of the economy whom could be trusted. Of course we have learned differently now and are now regarded with contempt and mistrust. II doubt they will regain the trust of the population before another generation has come and gone.

Hi Drf
It is interesting that Mervyn King wants another depreciation of the value of the pound. In this respect we can be clear that he is going against JM Keynes who offered the famous phrase “When the evidence changes I change my mind,what do you do Sir?”
In fact Mervyn King’s last few years as Bank Governor seems to be based on ignoring such questions…

Hi Rods
Whenever there is an official estimate of what a bank or group of banks needs in terms of a bailout you can be sure that even the upper bound will only be a starting point….

I will take a look thank you. Apparently there was also a show on this week where Rowan Atkinson played a banker version of Blackadder. Quite what cunning plans he would concoct as a banker i dread to think!

Hi Paul
We may find out some more about one of the alternative destinations should the LDP win the Japanese elction in the middle of next month. Its leader Abe san has been repeating his 3% inflation target mantra which if enacted will have to mean QE to the max and negative interest rates (unless he becomes a late convert to rasing the sales tax)

Hi Noo 2
It may be tight as to whether we see positive growth in Q4 but if we move on from quarterly numbers and look at the over all trend QE has disappointed. As I put in today’s post any gain from QE for the real economy has in the UK’s experience so far been eroded and maybe wiped out by the falls in real wages that the higher inflation path has given us.

what did the banks do wrong ? liars loans and120% LTV mortgages.

the biggest problem with bank bailouts is the moral hazard of rewarding failure ….

Hi Shaun,

UK inflation certainly is high at the moment, what started out at £35bn the banks need to raise this morning has changed with losses to a need of at least £60bn tonight! And tomorrows figure will be…

Time to invest in some wheel barrow makers shares maybe.

As an ex-investment banker myself, I would say that the thing that banks did wrong was to allow traders to take over the balance sheet without ever understanding what they were doing. I was in the city (on the advisory side) when big bang happened and you suddenly had people who had lent money as a career buying stockbrokers (not too serious because they didnt trade in a proproetary fashion) and jobbers (disaster, as they did).
I can assure you that the top people at my bank, Kleinwort Benson, would not have known what a trade was if it hit them in the face.
You then had the explosion in derivatives. The idea that the risk of derivatives was understood was just laughable but the profits (unreal, generally) turned even the sanest of heads. If you look at the history of Barings going bust, Nick Leeson apparently made so much money in the Far East that he constantly needed extra funding from the UK until he had the whole capital base of Barings sent to him. Not one director at the bank asked why, if it was so profitable, he needed extra cash.
But even derivatives trading needs a capital base. You can either create one by raising money for the purpose or, rather more conveniently, you can use an existing one known as a clearing bank. This has the added advantage that you can collect your rather agreeable bonuses and, whatever mess you make, the bank does not go bust.
I am frankly amazed that we are not stringing bankers up on lampposts. I know, as an ex-insider, exactly what they have done. They have uttrerly trashed our economy while collecting obscene rewards and still do not get it.

Hi James: an excellent comment which essentially summarizes the causes very well; I also worked in Investment Banking for a significant number of years in the City and 4 other key financial capitals abroad, and can support all that you write here. Many people are just not aware of the potential derivative liabilities which the major banks still have, and which to a great extent they have hidden (as skeletons in their cupboards) from the governments which bailed them out in their last insolvency before the receivers were called in. These still run into trillions of $ and total much more than the complete global GDP. If you think what will occur if and when many of these become payment liabilities due for redemption instead of revenue stream generators the mind boggles! It is of course the large leverage which generates the significant profits, but also the horrendous liabilities if the risk goes wrong. Only yesterday even Mervyn King pronounced that the main 4 banks in the UK would need something like 38 billion of additional capital to cover the likely liabilities and he of course is one of the unaware “top people” to whom you refer, who clearly do not properly understand these things. The amount he stated is a severe under-estimate in my opinion.