Friday, 6 March 2009

A large quantity of unease...

Iain Dale writes this evening about "quantitative easing" saying "I'm horrified that Conservative politicians haven't spoken out against this potentially disastrous move. In fact, no one has. It's about time someone did."

I've been pretty quiet about blogging about what I think about HMG's economic policies recently but I just can't let this one lie.

I'm not easy about this easing... and I'm not alone. I've just got home from a very well attended Conservative constituency dinner in Welwyn Hatfield, home of Grant Schapps MP. The members present certainly were speaking out about quantitative easing.

Here are my views.

I want it to work.... I really want to see the green shoots in my garden start to reappear in the economy, for consumers to have returned confidence in their income, employees to have confidence that their jobs are safe, my unemployed friends to find work and businesses to again be able to ask banks to finance future expansion not just struggling for day to day survival.

I understand that the Bank of England is trying to do something to help. Interest rate cuts have been tried to the end and whilst this has put some money in mortgage holders pockets - its not been enough to kick start spending... partly because cuts have not been passed on, partly because many people were on fixed rate mortgages so didn't benefit, and partly because confidence is so low that even those with more money in their pockets don't have confidence to make substantial the meantime savers have really suffered. I understand why the BoE is trying to help.

In theory the announcement that the Bank of England is going to pump £75 billion into the economy should inspire the consumer to believe that the corner is going to turn and they should go and buy a new car at these discount prices. (As a point of reference, £75 billion is 75% of the NHS budget for England this year) We are also told that the money that banks and investors make from the great bond buy-back will encourage banks to lend more to our companies.

However, the reality is much more complicated.

We have already seen the government pump billions into the banks. In the past few months I have found that, from Hertfordshire commuters to Norfolk farmers, people are deeply aware that every penny of government money is their money. They know this "easing" uses their tax-payers money. Even though QE (although it sounds seductively simple) is hideously complex they know they as tax payers, will have to pay for the consequences in the future - either through increased government debt or inflation... I'm not convinced that this announcement will bring confidence rushing back to the British consumer.

So will it encourage banks to "lend more"? That's a more complicated question - before the credit crunch many many non-UK banks were lending to UK companies and many have retreated back to home turf. I don't foresee them returning in a hurry. If the BoE uses the money to buy back gilts then its not only UK banks that will benefit. (Perhaps someone else will let me know the % of Gilts held overseas- even with the fall in the pound it will be significant) If, on the other hand, the BoE uses the money to buy corporate debt - pushing down interest rates for companies - then the UK taxpayer is taking on yet more risk. Either way it will take some time for the money to trickle back into UK bank lending... and incidentally the last thing I want is for banks to start making ridiculous lending decisions again.

I hope I am wrong, I hope this works. But I am deeply uneasy.