(Business) Bank Of England QE program: B of E vote against increasing level of QE programme

The news that the Bank of England will not increase current Quantitive Easing levels of investment should be a cause for praise for members on the monetary policy committee who voted against expanding the £375 billion QE programme but what would have been much news would be the reduction or freezing of the programme all together.

Ever since the financial crisis of 2007-2009, banks across the globe have implemented similar programs of lending cheap money to banks in the hope that it will sink into the real economy but the results, in Britain at least have been less than successful to say the least.

The reason behind why the QE programme has not been a great success  is that what is considered success by its supporters is not really success at all. This is because, contrary to what most media outlet will tell the public,  QE is just a another word for publicly funded corporate welfare ensuring that the taxpayer funds banks that do not lend and are still making very large losses.

The news of RBS still making heavy losses despite the taxpayer being heavily invested in the bank coupled by the reasons behind those losses and the latest news of a computer crash to add to growing list similar instances has left many questions as to why the Bank of England chooses to pump money into banks that are so poorly run to the point that it would make the average observer think they were doing on purpose.

A recent computer malfunction (one in a long line of similar instances) inconveniencing its large base of customer goes to show that RBS are a state as same thing happened less than a year ago  leaving customers unable to   “withdraw cash from ATMs or check their accounts online, customers were also unable to use their card in electronic transactions”[1]The whole debacle has left the bank exposed to “compensation claims” running into millions and has provided another blow to a once proud bank[2].

If the stories do not convince readers of this article (meaning you whoever ‘you’ is) the number will leave no doubt as depressingly:

The bank posted an annual loss of more than £5bn and Stephen Hester, its chief executive, admitted 2012 had been a "chastening" year after its £390m Libor rigging fine. Its total losses since the 2008 bailout have now topped £34bn. However, the bank is still paying out £607m in bonuses in the coming weeks[3]

Seeing that RBS is faltering and looking for a private buyer,  the Bank of England seems to be coming to its senses as Governor Mervyn King in front of the Banking Commission supported  the idea of “full nationalization” of RBS in order  to split the bank “into two: into a “bad bank” of troublesome loans and “good bank” that can make fresh loans to cash-strapped businesses”[4]. While this idea not the worst idea and can actually work,  The Guardian’s Jill Treanor rightly pointed out that the idea of full nationalization is “five years too late”[5].

In sum, news of the Monetary Policy Committee voting against an increase of quantitive easing given to banks is encouraging but nowhere near how encouraging the actual end of pumping public money into private institution that are badly run and thanks to lax regulations and mickey-taking bonuses, are encouraged to continue the bad work.

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[1] J Thompson and E. Moore, 2013, Computer fault anger RBS customers, http://www.ft.com/cms/s/0/faf97d50-8718-11e2-bde6-00144feabdc0.html#axzz2MsSB2TXl

[2] S. Read and S. Anderson, 2013,  ‘#Naffwest’: Fresh compensation claims face RBS and Natwest as customers pledge to abandon bank after SECOND  computer glitch lock them out of their accounts, http://www.independent.co.uk/news/business/news/naffwest-fresh-compensation-claims-face-rbs-and-natwest-as-customers-pledge-to-abandon-bank-after-second-computer-glitch-locks-them-out-of-their-accounts-8523685.html

[3] J. Treanor, 2013, RBS boss admits ‘chastening’ year as losses breach £5bn, http://www.guardian.co.uk/business/2013/feb/28/rbs-losses-chastening-year-stephen-hester

[4] J. Treanor, 2013, Mervyn King backs RBSbreakup – five years too late,  http://www.guardian.co.uk/business/blog/2013/mar/06/mervyn-king-bank-nationalisation-too-late

[5] Ibid

(Politics) Coalition Economic Strategy: Time to consider a new growth strategy?

While it is a fair argument that the incessant pursuit of economic growth is one of the main reasons why the British and global economy in general has been in a malaise for the last five years, it has now become clear that new growth must be considered and drawn up fast. However with the conservatives and Liberals currently at the head of the table , don’t hold your breath for the serious risk of  falling into a state of unconsciousness. It would be a fair assessment to deem the coalition government led by the conservatives to have mastered the ‘day late and dollar short art of governing as the coalition have made poor policy decisions, even those of a political nature.

Prime Minister David Cameron Yesterday doubled down on the government favoured programme of austerity measures in an effort to reduce the deficit in spite of increasing calls for a plan for growth and the UK losing its triple A rating, which will make any borrowing the government makes expensive thus making the deficit even worse. The lack of a plan for growth and the dogged insistence for austerity indicates that the coalition has no idea how to stimulate growth while the answer seems remarkably simple.

The government has been pumping cheap capital into banks for last five years in the hope that it would at once keep banks solvent and provide capital for banks to make loans and invest in businesses but have received very little return on their investment the banks other than international scandal and merit-less ‘performance’ and retirement bonus payments that have left the public seething with anger.

A much better strategy would be to loosen the capital requirements that force banks to hold onto capital ironically derived from cheap money pumped into them and place conditions stipulating that it should go to new loans primarily aimed at new businesses. But this will never happen as the coalition’s aim to is not to improve the economy but to keep the markets happy and content.

This ‘keep the markets happy’ mentality that has become the official economic strategy for every British government since Margaret Thatcher and has not been contradicted even when it has become more than necessary to do so.  David Cameron unwillingness to break the irrational but enduring cycle of throwing money at the banks and getting burned for it down the road in the form of economic turmoil has not brought about progress but has seen one of the greatest transfers of wealth from the taxpayer into private hands.

However, there is signs of change as the Bank of England’s nine member Monetary Policy Committee, contrary to the wishes of its head Mervyn King, voted to freeze the bank’s Quantitive easing program, which triggered an adverse reaction in the global markets.  However this is normal as the markets are predicated on short term interests, a country however cannot and should not be held hostage to the whim of market speculators hungry for  quick profits at the government’s and indeed the country’s expense.

In sum , a plan for growth is needed and should be implemented soon but, I repeat, do not hold your breath.