Interest rate decision: the choices

Tomorrow the MPC will announce that Alastair Darling has given permission to the governor of the Bank of England, Mervyn King to begin quantitative easing. The Bank’s purchase of government gilts and assets is designed to increase liquidity and, ultimately, increase lending.

Firstly, this wont work. The only thing printing money is likely to achieve is an immediate devaluation of the currency and, with no significant exporting sector, is unlikely to act as a fiscal stimulus. But more on that tomorrow.

For tonight, let’s look at the three options available to the MPC re: interest rates.

1. 0.5 per cent cut

Expected by almost everyone. In spite of David Blanchflower’s assertion that the “transition mechanism of monetary policy is broken” the Bank is likely to continue easing central credit conditions in a bid to encourage lending.

Round the houses

It’s becoming clear that, over the last decade, house prices have been wildly and unsustainable high. The news from Nationwide today that house prices have fallen 18 per cent in the last year is both arresting and oddly comforting.

Too many young people have been unable to even claw at the first rung of that Jacob’s housing ladder. Far too many mortgage borrowers were forced to take loans that they must have known would lead to negative equity.

Bankers, politicians and regulators have all landed in the public blame cross-hairs when, in a way, they should turn the gun on themselves. Private debt is a product of individual greed and capitalist competition, yes. But it was also, in many cases, the only way that people could afford to get a place of their own.

Make hay

Some people are arguing (usually from across the Commons benches) that Britain has become too heavily reliant on its financial services sector. As we headed, blissfully unaware, into this maelstrom, the City of London and associated banks and fund management corporations counted for just less than 20 per cent of Britain’s GDP. That’s probably too much.

Manufacturing. That’s what we need. That’s what the unions reckon. We need to make stuff that other countries need. Our only marketable export currently is actors. So this clearly needs to be addressed.

The argument that our country would be better placed to withstand the global financial slowdown if we manufactured and exported more goods is a strong one. But manufacturing is not a panacea. And it wouldn’t have saved us from this recession.

The Crosby no show

As bankers once again sat in the stocks today, grilled by the politicians who are also not above reproach for precipitating the crunch, one man from a third liable party fell on his silver-edged sword.

Sir James Crosby, deputy chairman of the City regulatory body, the Financial Services Authority (FSA), was handpicked by Gordon Brown to oversee a bull market – and presumably keep it that way. 30 minutes before PMQs today, he was forced to resign.

The allegations that Crosby sacked senior manager Peter Moore for expressing worries of unsustainable market trading may or may not be true. He may or may not have been right to do so.

Confidence is so crucially important in stock markets that saying a crash is coming can arguably make it so. It is thought by many to be best to keep saying things are swell, even when clearly, they aren’t. We need look only back to Roger Babson who said at the Annual National Business Conference on September 5, 1929, in New York:

Sooner or later a crash is coming, and it may be terrific.

We know what happened after that.

Crosby denies the allegations, but this will provide little comfort for Brown, who’s reputation for prudence must surely now be in tatters.

In the Brown stuff

Some of you may have noticed a change in the demeanour of our Prime Minister. Although he’s not quite started entertaining at childrens’ parties under the alter-ego Gordo the Clown – he’s still as dour as a Nairn’s oatcake – he has started to look more comfortable in himself.

He now has a purpose; a tangible situation at which he can throw himself. He has a reason for those masochistic 20-hour days. The global financial crisis has been a blessing for Brown.

Now he has the opportunity to call upon all his finance experience and City acumen. As chancellor for a decade, Brown presided over a period of almost unprecedented growth, with low interest rates and controllable inflation. It was the new jazz age in London. Many, many people got obscenely rich, facilitated by a Brown led, risk-fuelled system of lending. Many more people had their pension’s dissolved or lost. More still borrowed beyond their means.

That was the boom and – let’s be clear here – it was a boom during which Brown was at the helm. His actions led to a wild, risky and ultimately rotten financial system. Not that any of us were complaining at the time.

Now comes bust, and the prime minister is leaning on his ‘experience’ to steer us through. The problem is, Brown has no experience whatsoever of presiding over bust. In that sense, he’s as qualified to run the economy as I am to chair the City University Quantum Mechanics Club.