Interest rates in the UK. Heading up

Mainstream economic commentators are currently anticipating an upward movement in interest rates in the UK. Many even anticipating it to occur in the immediate run up to the General Election.

However, rates paid by borrowers in the UK are already some of the highest in Europe.  And the lending rates are until very recently clearly lower. Here is my latest comparion of some key average interest rates across some of the most relevant countries in Europe.

Interest_April_14

 

 

 

 

There are links to the source data in the earlier comparisons – see below. And one can see that across Europe in these years borrowing rates have been lower in the countries compared here. And have even been falling more in the other countries since 2012.

 

 

 

This is the latest in a series of such comparisons

that we have done – begining in December 2011 when we used the comparison to call for the way in which the Bank of England set interest rates to be changed

We also did a comparison in late 2012 when we brought these issues to the attention of the Parliamentary investigation into the rigging of interest rates.

This has all been part of a stream of work concerned with challenging the power of the Bank of England, whose role in our recent UK history goes far beyond the setting of interest rates.

Greater…. – a role model for Birmingham ?

Cities offering themselves as sites for foreign manufacturing companies to make and sell into  their national market can be found all over the world today.

A hundred years ago only one city was systematically doing this in Europe. But far from being a road to prosperity, that city was not one of the few that can claim to have avoided the depression of the interwar years.

And if that city, and it was a British city, saw questionable benefit; it cannot be Victorian Town Hallsaid that the national economy benefited either.  Quite the contrary.

A century of experience

In 1914 the biggest automobile producer in Europe was one of the US giants, and it had been based in this English city since 1911. And although it was used as a base for exporting into Europe, such production would hamper emerging British automotive  producers more than it would hamper Citroen in France or Opel in Germany.

The City in question here was certainly not Birmingham. The political and business leadership of this city would never have gone seeking foreign inward investment. Their answer to the American and German industries taking their customers was to seek to foster the British Empire as a preserve for British exporters. This was what lay behind the Tariff Reform campaign loudly launched by Joe Chamberlain in 1903. This protectionism became known as the ‘Birmingham economics’ as it came to be the official policy of the Conservative and Unionist parties.

Greater_Birmingham_reducedThe Birmingham label would have been prompted by memories of the Victorian Prime Minister Disraeli. He had led the resistance to the huge urban movement to scrap customs duties designed to protect British agriculture. To Disraeli, Manchester was the main base for this free trade philosophy which he called ‘Manchester economics’.

As Chamberlain’s scheme became central to the national debate it got dubbed the Birmingham economics. It seemed the opposite to Manchester… And Manchester between 1905 and 1914 seemed to be the base for the key opponents of Chamberlain’s ideas.

Manchester, it was also, who had offered themselves as a base for Ford Motors of Detroit in England and its markets.

Manchester Economics

Having built a ship canal all the way from Liverpool to Manchester was the basis of Nicholls Trafford Parkthis offer. And then an industrial estate was built on the edge of the conurbation by the people who built the canal.  This brought in mainly US companies. This estate has since been called Trafford Park. And it was all done in the decade before Chamberlain’s protectionism debate.

Westinghouse, the US electrical giant, as well as Esso were there before Ford. More details of these companies can be found here.

By 1910 the opposition to Chamberlain was mainly voiced by the Liberal Party for whom the Manchester Guardian was the regimental bugler. The Manchester Liberals brought their resistance to the Chamberlain agenda to a crescendo during December 1909 as part of the election campaign over Lloyd-George’s ‘People’s Budget’.

The Liberal establishment  rallied at Manchester’s town hall (Free Trade Hall), and the key note speech was carried almost verbatim  by the Guardian, whose editor sat along side the cabinet minister who was making the key note speech.

Archive Logo ‘  Why,   what is the Manchester Ship Canal ?  It is a channel to enable foreign goods to be imported cheaply into this country; –  ( Hear. hear )   It is a tube to bring dumping into the very heart of our national life. And you have built it: you have built this canal yourselves; you have built it at great cost; you have dragged the Trojan horse within your own walls yourselves – (cheers).  But more; you have grown fat in the process of committing this extraordinary folly.’

Whether the cheering audience were aware that the minister had substantial shareholdings in the US railways that brought US goods to their embarkation, we do not know. But they might have had some idea. It was well known that the speaker’s mother was daughter of a Wall St speculator.

Our cabinet minister had already represented two seats in what is now GreaterYoung_Winston Manchester.  The very first of which was Oldham, as those who have seen Richard Attenborough’s film of his early life may recall.

But by 1909 he had lost both these seats and sat for Dundee. But ‘Manchesterism’ had no more ferocious champion, so he still had centre stage at Free Trade Hall that December. Later his son Randolph would sit for neighbouring Preston and our speaker’s grandson also called Winston would be both MP for Stretford until 1997 and on the board of the Trafford Park company itself – part of which lay in his constituency.

Downfall of Birmingham

Had a few things not gone so well for Hitler at the start of 1940, it was never inevitable that Chamberlain would have been ousted from leadership of the UK.

Then the Birmingham model of economic development would not have been so systematically forgotten as Churchill becomes a national icon.

Berrow CourtWe have already done an outline of how the business forces behind Chamberlain and Baldwin in the 1920s and 1930s pursued regional and national priorities. But much of this is totally forgotten today, even in Birmingham. Hence it could be thought that there had never been any alternative to looking to foreign and US investors for the country’s future.

But there was. Manchester was never convinced by Churchill and the liberals. Manchester voted Churchill out, and Chamberlain supporters could win in Manchester. But Manchester economics never had any traction in Birmingham. Churchill was actually President of the Board of Trade when he was finally voted out in Manchester.

A model for economic development ?

By the 1920s Manchester was an economically distressed area. Ford moved out in 1931. Birmingham’s home-grown automotive companies were only just beginning to become significant both in Birmingham and the national economy.Shameless At the beginning of the current century it is hard to say Manchester was fat for long. In popular culture, Manchester is known for foreign-owned football, but otherwise Coronation St and Shameless.

However, the West Midlands is now being pressed to re-style itself as a Greater Birmingham in the quest for profile with overseas capital. But unless one is so close up to it that one cannot see the wood for the trees, can anyone really see that many lessons for Birmingham coming out of Greater Manchester?

Fifty years ago no one would think to find much that Birmingham could learn from Manchester in terms of economic development.  That they might now think they can, may well be because Birmingham now has no more idea of how to give a lead to the business sectors of provincial England than Manchester ever did.

Andrew Lydon

 

Adam Smith’s invisible hand and visible hands in Birmingham

Birmingham has long been a city with some of the highest levels of deprivation in western Europe, living with fears for the future as the loss of big manufacturing becomes apparently permanent.

However, within living memory the city became the UK’s second city, and achieved an economic peak during the 1920s and 1930s – times that for Manchester and most American cities were very tough.

Neville Chamberlain and Stanley Baldwin were major reasons for Birmingham’s success. Theirs is a story that contradicts that of Michael Heseltine, who conjures up illusions about a ‘buccaneering’   entrepreneurial past. A story that underpinned his now clearly failed attempt to forge a common agenda between provincial English business (centered on Local Enterprise Partnerships) and the Downing St of today.

appeasementThe Appeasement of Adolf Hitler has cast a shadow over proper understanding of the era of Birmingham’s expansion. This appeasement occurred before the suburbs where most Birmingham people now live, had come to need their original paintwork renewing.

Local historians have been less effected by such political and  obsuring shadows. And one can find glimpses  in local history of  how Baldwin and Chamberlain and their people worked.

For much of the interwar period one or both of them were tenants in Downing Street. Either as Prime Minister or as Chancellor.

Business alliance

Both were elected from the West Midlands, but there was more to it than that. Kenrick coverTheir families had since 1887 both been in alliance with the Midland’s premier business family – the Kenricks.

As the First World War ended, Kenricks were at the heart of the trade ( the cartels) that supplied baths, cisterns and the metal components that would profit from any house building boom. The Baldwins were major shareholders in Kenricks since selling out their factories in Stourport-upon-Severn.

Neville Chamberlain’s mother was a Kenrick. And her early death meant that he spent most of his childhood at the Kenrick’s main family home – Berrow Court, at Edgbaston in Birmingham.

Berrow CourtAlthough Neville ran a firm of his own, that boasted of being an ‘Admiralty Supplier’ on its letterhead, around  1913 he brought in about a quarter of his income from a second job -chairing a Kenrick owned company.  This company,  called Elliots, made the copper for the plumbing and wiring that building now required, and was the base material for the bulk of Birmingham firms who were then geared towards home-making goods, rather than the automotive bits of  later decades. Indeed as the base for Ford in the UK,   Manchester could until 1929 better claim to be the UK Automotive city.

Homes for Heroes

That Neville Chamberlain would  be the most important figure behind the building of the interwar suburbs, should be seen against this industrial  background. For much of the interwar years he was acting for a cabinet led by Stanley Baldwin.Baldwin

Birmingham was first out of the stocks with building ‘homes fit for heros’ in 1919.  Manchester and Glasgow, Birmingham’s main rivals trailed. Shipbuilding and textiles did not sniff such profit in housing. Nor had either been prepared for a house building campaign.  Manchester did not have much room to expand, being hemmed in by industrial townships like Oldham and Salford in every direction except southwards into Cheshire. Manchester would not get round to buying up land until the end of the 1920s. Neville would be the minister who would assist the setting up of a Manchester Regional Plan in 1927, for the neighbouring councils to co-operate in Manchester’s overspill.

Building the suburbs

Birmingham had not needed any such help, when as a Ladywood councillor Neville had lead the lobbying for Birmingham to expand into the rural districts surrounding  it  in every direction except to the west – where the Black Country lay. This 1911 Birmingham boundary extension assumed future housing estates, the case for which he led the elaboration of – on the very eve of the 1914 war.

This experience in Birmingham gave him a status as a housing expert when he got to Parliament to represent Ladywood in 1918. Conservatives had tended to favour property tax incentives to encourage building, but Neville leaned towards government subsidy. It was no coincidence that subsidy for both private and council house building were introduced by Neville’s brother, when he was chancellor in 1919 (and his deputy was Stanley Baldwin). And this subsidy was rapidly taken up by Birmingham builders.

Manchester, however, was not yet going to be contributing to the profits of firms the likes of Kenricks.  Areas reliant upon textiles and other depressed industries could not afford building without even further subsidy. Led by Manchester, these councils sought an improved subsidy for building council houses in 1923. Baldwin was then chancellor, which ensured Neville ( as Health Minister) had a free enough hand to cut them a better deal. And on this basis, Manchester built out to the south into Wythenshaw.  Orders came Birmingham’s way – as a simple matter of trade association quota.

SmithWhile some might have been wittering on about the wonders worked by the ‘invisible hand’ of the free market, hands were visible reaching down to co-ordinate production, strategic subsidy and government policy – if one knew where to look. This would not be lost on the big banks – who were generous with overdrafts to the businesses so close to Downing St. There was also a Kenrick on the board of Lloyds Bank during those years. So credit got co-ordinated too.

Such strategic planning has more in common with the political economy of China in recent decades, then with the visions of Adam Smith and his invisible hand.  And it is worth bearing this in mind when one examines a further twist in this story.

Confronting the Brick interests

The interwar expansion of the English suburbs was based on bricks rather thanbrickwork any other building material.  And brick is so energy inefficient that it is now a major challenge for today’s suburban life. However, the brick economy was in the 1920s a major drag on the housing boom. Labour tended to blame profiteering on the part of brick manufacturers, while the conservatives tended to blame the bricklayer’s monopoly in the face of the laboriousness of  bricklaying.  But – whichever – this was hampering the flow of Birmingham’s supplies to a housing boom and the rewards.

However, in the late 1920s the brick industry came to have to accept less favourable terms.  It had been during a Labour interlude in office, that their housing minister, John Wheatley began a review of whether new building methods could speed up the delivery of cheap popular housing.  But when Neville got back into the ministerial driving seat he pushed this debate even further.

Houses built from bigger concrete ‘breeze blocks’ were encouraged. But even more radical options were ‘promoted’ by Neville.  He even fostered a scheme to use elements of the Glasgow shipbuilding industry to mass produce the panels for steel bungalows. Pushing such discussion so far, worked its effect on the brick interests, and delivered more profit thereafter for Birmingham than for Glasgow.

Drawing the right/wrong lessons

Since Chamberlain was displaced from power in 1940, the only city that Heseltine   has been able to tug so regularly upon the levers of power has been the ‘City of London’.  The lessons that can be drawn from the rise and fall of Birmingham are legion. However, our purpose here is to weigh up the agenda that Lord Heseltine has been pressing.

Heseltine began life as a ‘buy to let’  landlord who used his profits to become an advertiser/publisher. After going into politics he was a sort of Viceroy for Liverpool for Mrs Thatcher, whom he later sought to replace with himself. Liverpool did build its position on slavery and what went with it. Maybe that is where he gets his notion of a bucaneer capitalism.  But that label also fits himself. And fits him better than it does any inland city, and certainly better than Birmingham.

Birmingham’s experience would really highlight notions of planning, local committment, addressing social need ….

Andrew Lydon

An analysis of one of our rival cities can be found here

 

 

 

A Very British Coup – How the Bank of England brought us Austerity

Alistair Darling explains a crucial moment in the fall of Gordon Brown in his book Back from the Brink. He explains how as Chancellor he decided to keep Mervyn King on as governor of the Bank of England in 2008.

‘I told Gordon my view, that Mervyn should stay, and with some reluctance he aquiesced. I don’t think that he and Mervyn ever got on. Certainly the next two and a half years saw a growing antipathy between them. This really came to a head during the Treasury select committee hearings in 2009, when Mervyn appeared unilaterally to announce that there was no more money available for fiscal stimulus. Gordon quite rightly felt that this was crossing a line, that he was addressing fiscal policy, which was the remit of government. Certainly Mervyn would have been furious if Gordon or I had expressed an opinion on what the Bank ought to to be doing over monetary policy. Gordon was very angry and tried to phone me during the committee session, which I was watching from the Treasury. He asked me what I was going to do about it and suggested that I should go in and stop him there and then. It was tempting, but not practical.'(p.69)

Brown loses control of his own cabinet

Up until then the Tories had been supporting Labour’s plans to maintain public spending. Very soon after they changed tack to argue that the deficit needed to be addressed. Within the year Alistair Darling was then himself bringing forth a deficit reduction plan. The Labour Cabinet swung then behind Darling and spending cuts, despite the resistance of Gordon Brown and Ed Balls. In the end it was only Ed Balls who resisted.

As it became more and more clear that the outcome of the 2010 General Election would be a hung parliament, the Governor of the Bank of England and the Cabinet Secretary Gus O’Donnell began to work closely together to put together a coalition with a coalition agreement organised around the principle of deficit reduction.

Preparing a new government

For Mervyn King at least this would be a suicide pact of a programme. The measures required to shore up the country’s finances would be so unpopular that the next government would be out of power for a generation.  This is what he said to a American visiting  economist whom he had known for years, who then apparently blurted it out on Australian television. The story got picked up in the British press just hours before the final episode in the series of leaders’ debates that became central to the 2010 British election.

In his book  22 Days in May – The Birth of the Lib Dem-Conservative Coalition David Laws, who was the Lib-Dems  lead negotiator tells us how on the Sunday after the elections that resulted in the hung Parliament the negotiators met.

‘Gus O’Donnell welcomed us and made some comments about the state of the markets and the importance of our work. He said that the Civil Service could offer advice on constitutional issues, budgetary and other matters. He then offered a have us briefed by the Governor of the Bank of England and a representative from the Joint Intelligence Committee, so that we could understand the ‘seriousness of the economic environment’ and other matters.’

Laws goes on …

‘Both sides declined this opportunity. We Liberal Democrats suspected that we knew what both were likely to say, and we did not think it appropriate to have such a briefing at this stage in the negotiations. I suspect the Governor of the Bank of England’s intervention would be perceived to have been aimed more at us than at the Conservatives, and we didn’t want to feel manoeuvred into policy positions that we weren’t confortable with by outside advice.

Later in the day, concerned that our rejection might be misinterpreted, we suggested that Vince Cable, our Treasury spokesman, might speak to the Governor instead.’ (P. 95)

Despite the caution Laws professes about his party being manoeuvred, is it really credible that they really remained masters of their fate ?

Not even in Greece

Conaghan I have assembled these little known snippets from the already published recent history, in order to help get the change in government and policy  into perspective.

Many governments around the world have fallen since the crash of 2008, but nowhere else has the central banker played such a role in putting a government and its priorities together as they did in London in 2010.

Although in Greece a government was put together around a former central banker as prime minister, it was but a stop-gap government with a deliberately restricted lifespan put together by a president.

Andrew Lydon   – LWM Bank of Britain Project 

Interest rates being rigged – what the Parliamentary Banking Commission should be looking into

Since Christmas we have published a number of blogs looking at everyday interest rates in the UK. Long before even the Governor of the Bank of England claims he heard that the big banks were rigging the now famous LIBOR, we were pointing out how the banks were squeezing us all. Savers in the UK were being offered derisory returns, but average mortgage-payers are usually paying over 5%. The difference in the UK is far more stark than in France and Germany, or even in crisis countries like Ireland and Greece.

In the real world,  borrowers in the UK are paying some of the highest interest rates in the developed world. We have highlighted this in previous reports and the chart brings together some most recent comparable figures assembled by all Europe’s central banks and contributed to the ECB Data Warehouse.

We have compared the UK figures here with the Eurozone leaders and some of the countries in distress. The rate for savings is based on deposits that are only tied up for three months and the rate for loans is based on loans for house purchase based on a term of  at least 5 years .  So the savings rate is the one that would be appropriate to new and modest savers, and the housing rate is one of the most used in the UK given how much borrowing (even for business) is based on using houses as security.

This exploitation is really how the bonuses are being paid.

Anyone who looks up the LIBOR on the internet, will find it is usually well within one percent of the Bank of England ‘base rate’. But the interest rates real people get bears no comparison to the record low interest rates the Bank of England claims to be providing us.

The Bank of England has failed the UK. They have let financial practices occur in London, including rigging the LIBOR, that have damaged the world economy, and which would not be allowed in the USA.  Their monetary policy has failed us. We have long had the highest inflation rate in G7 countries despite us having such steep actual interest rates.

As the government’s new banking enquiry gets underway, we are looking to get our project to reform the Bank of England, and make it more representative, back on the road.  Reform of the Bank of England is something none of our political leaders have recognised as part of bringing our financial economy back under control.

This cannot be done by regulation, sealing up the loopholes or re-shuffling the names in the regulatory apparatus. People have rightly said that cultural change is needed. The most far-reaching way of doing this is to democratise banking supervision.

Our central bank is run by a board (‘the court’) appointed by whoever is in government. Seeking to foster some semblence of the bank being representative New Labour started the practice of putting a leading trade union magnate on the court; Dave Prentis, Unison general secretary, is on it now. But New Labour was never otherwise keen to enhance the role of the unions in the economy, as opposed to the role of the very biggest of businesses and the Bank of England, itself.
Women and Scots members would also improve the image  of the bank. If  both could be covered in a single nomination, the gods of diversity and equality would be chuffed.   The woman in question being head of Lloyds TSB in Scotland would even bolster the traditional banking interests. Further reading though confirms she is actually an American – but she would not feel at all out of place: an American who helps run the investment bank Deutsche Bank (after having previously been with Goldman Sachs) is also on the court. Goldman Sachs currently has an ‘old boy’ on the interest rate setting committee too. Lady Rice of Lloyds TSB  also happens to be a director of Scottish & Southern Electricity, one of the Big Six energy utilities that dominate the UK energy market. But she would not be alone in that either, because the Chairman of the parent company of British Gas is also there.

In the US, the central bank is dominated by people from the small local banks with representation weighted towards the regions. This sort of federal model was the basis of the old German central bank; and all the member nations are represented in the European Central Bank – and not forgetting Canada which has regional representatives on the board.

These examples offer food for thought for making maybe a Bank of Britain the voice of the peoples of Britain in finance, rather than the voice of the big interests laying down how things should be to the people… With Scotland possibly becoming independent in the next few years, and there being questions about whether it remains in the Sterling economy, these are issues that have only just begun to appear on the agenda.

 

Andrew Lydon

We have since done a piece on the role of the Bank of England in bringing Austerity government, which can be accessed here.

Housing reflation and housing inflation – Alternative inflation …

As this is being written, in 2012,  squeezed living standards have been the norm in the UK now for a good many years. The lastest news indicates apparently that the global downturn is taking the pressure off food and energy prices.

Rental prices for housing are still edging upwards although purchase prices are subsiding, and it is only the inflow of Greek and Chinese money into the upper end of the London housing market that is hiding this in national figures.

With our ‘double-dip’ recession the coalition government is now talking about using house purchase and house building to look to return us to some sort of ‘growth’. Whether in the coming years this will ease or increase the inflationary pressures on the population, would be clearer to all if we had an inflation index in this country that properly took housing, and especially owner-occupied housing, properly into account.

New Inflation Indices

House price inflation in this country has always tended to become apparent in one part of the country before going on to become a general phenomenon. And it affects some social strata before going on to affect everyone. That is why we have been calling for regional inflation indices in the UK and indices that follow the fortunes of different types of households. However, none of these indices would be any good unless housing was properly factored into these figures.

The Office for National Statistics (ONS) is currently doing a consultation on these issues. They are consulting on the formula for owner-occupied housing and the regional issue at the same time. You might have heard of the consultation on owner-occupied housing, but you will not have heard about the consultation on regional indices because it takes the form of a few sentences on the last but one page of  the document on the housing issue. And it says – let’s just forget about them.

This is something worthy of Sir Humphrey Appleby, the satirical character from the 1980s BBC comedy, who was endlessly inventive at stopping anything happening that he did not want to happen. Indeed earlier in his career, Appleby might well have helped kill off the idea of regional inflation indices, when in the early 1970s Whitehall decided not to follow the rest of the developed world, and much of the less developed world, in establishing them.

…so that things remain the same.

Sir Humphrey has also been involved in framing what we are being offered as a new national inflation index that will include housing inflation, and owner-occupation inflation especially. Over a year ago they were offering us a choice of 2 indices. But when you looked at them closely there was no significant difference between them. Below you will see a chart which shows these two choices. It is a very busy chart. The green and the purple lines represent the two ways of including owner-occupied housing  that were being considered until early this year.

The green line is the index that the ONS wants to use and is currently asking approval for. It is the line that is closest to the black line that is the current Consumer Prices Index. Indeed for most of the time shown here you will barely be able to tell them apart.  However neither the  green nor the purple index are significantly different to the current black index.

When inflation exceeds 3%,  the Bank of England can no longer deny a problem and must write to the Chancellor to explain it and what they are going to do. None of the indices in the chart above compel any such attention before food and energy prices create pressure during the final years of the noughties. None of these indices would have triggered an alert at 3 % during the UK house price boom which is shown at its most accelerated in 2003 –  indicated by the additional blue line on this chart. Indeed you can see house prices are actually falling (notice the scale on the right) when the indices cross the 3%  letter-writing  point.

However, the Sir Humphrey consultation document does not ask readers whether they think these problems might make these indices unfit for purpose. Instead the consultation asks a whole series of very technical questions that could be guaranteed to provoke the rival camps among statisticians that have variously been championing the green and the purple.

               

 Can you see the bubble ?

Indeed,when you say that the house price bubble should make some significant  presence in these figures for the early 2000s, the ONS says – well it is not a house price index. However, when you look at the US Consumer Price Index over the last decade, their house price boom is visible in that.

Very specifically the impact of the infamous US house price bubble is visible in the weights of the housing components of the US CPI.

This can be seen in the chart shown immediately below. The weight given to what they term ‘Owners equivalent rent of primary residence’  can be seen here  (in the red columns). It rises from 20%  as the US house price boom took off from 2001.  Had the price rise only been in line with either general inflation or popular incomes, this item would not have needed to be enlarged as a factor in US consumer price inflation.

But over the period 2001-2005, US average house prices rose by about a third in relation to median/average US incomes.  So this item came to play a bigger role than before in driving the US inflation indices up to levels that would provoke the US Federal Reserve to take action to address this by increasing interest rates. (It is now down to where it was in 2002 – as can be seen by scrolling down the current weights.)

Not in no UK index

The black columns are the weights that our UK Office for National Statistics wants to use in their new UK Consumer Price Index as they would be felt during the same period of our even bigger house price boom. They only go up from just over 10% to just under 11% of the index during this period.

This failure to properly pick up the housing inflation in the weights is why the ONS chart we have already displayed fails to pick up our even bigger UK house price boom in any significant way. We have previously quantified this boom from the particular standpoint of the West Midlands. Over the period 1997 to 2007, UK house prices doubled in relation to income. But any increase in the weights in the ONS’ proposal is barely visible, even if we charted the figures back to 1996.  That the weights are less than half the weights in the US index is a further flaw, because during all the period shown in our chart, house prices have been far higher in relation to income in the UK then in the US.

What should the ONS do now ?

The best thing is for the ONS to go back to the drawing board and sort out some proper weights for the new index.  To go ahead with this deeply flawed index, even as an interim measure, would be pointless given that it is basically the same as the existing CPI in most important respects. Worse, to go ahead with this index would give the public the impression that housing in the inflation index is a problem that has been solved, when it has not.

It is clear that the index the ONS is proposing, had it been available 10 years ago, would have done nothing to make the UK’s entrapment in house price inflation and huge private debt any less likely to have happened.  The doubling of UK house prices in relation to incomes was only brought to an end because interest rates around the world began to head upwards, when the US Federal Reserve began to push them up as their house price bubble began to be a problem in their index that could not be ignored. UK house price inflation was brought to a halt by the action of the US system –  not our own.

It was as if they put their brakes on, and because we had no proper controls over our system, we went straight into the back of them. How much better it would have been if we had had an index that had prompted us to damp down our house inflation before the Americans. Then we would not have ended up in this transatlantic pile up when they acted on theirs.

Andrew Lydon

LWM Regional Prosperity & Inflation Project

UK in recession – but the highest interest rates in Europe

The UK has now gone into recession, with the national income having shrunk for 2 successive quarters. Classical economics has always suggested that an important part of fostering growth in such circumstances is for interest rates to be reduced.

Our Bank of England have again told us that their policy rate of interest is being held at 0.5%.  That is lower than the policy rate that the European Central Bank has set for the countries of the Eurozone.

Thus it might surprise readers to see that the actual rates on loans here in the UK are higher than those in most of Europe. Here in red are the average rates for loans for house purchase in a number of topical European countries, set beside ours.

Alongside in blue are the average savings rates being paid on basic savings that are not tied up for   more than 3 months.

A time traveller who stumbled into 2012 from twenty years ago, and who ended up trying to come to grips with our financial problems before he had updated himself on our politics, might wonder if an extremist Green cabal had seized control of our monetary policy. One could suspect that they deliberately  want to undermine consumption and punish the ‘strivers’ and people with aspiration.  But no, this is just Sir Mervyn King and the Bank of England!

This chart  has not changed much since we did a similar comparison of the same interest rates in December.

In that report we suggested that even then the time had come not just to change interest rates, but to reform the way the Bank of England gives guidance to the banks about what sort of rates should be suitable. That December Report can be found here.  And a more up to date comparison can be found here.

And on top of this recession, high interest charges and the highest inflation rate among the leading countries that, with the UK,  founded the old G7.

Mervyn King is now in his last year as Governor of the Bank of England. With the selection process to choose a successor about to begin, so too must a debate on how the Bank can reform the way it works; and even how it can be made more accountable to the society it has served so very poorly.

ANDREW LYDON            

Regional Prosperity & Inflation Project

George Osborne’s regional pay plan – and picking up on our Regional Prosperity and Inflation Project‏

Gordon Brown was talking about bringing in regional pay around the time we were doing some of the original work on our prosperity and inflation project.  This is explained more fully in this article I wrote for the Birmingham Post at the time.

One of the main reasons Brown flinched from it, was that that he could not get the official statisticians to come up with regional inflation indices that could have helped negotiate the process. George Osborne seems to think the current situation will allow him to at least start to drive it through regardless.  But if he goes through with it, it may have a big effect on the provincial economies. Maybe even the biggest of all his policies.

Had we got proper regional inflation indices in place, my own suspicion is that they would show more serious inflation in provincial England in the last decade than in London and the south east.

18 months ago the Statistics Authority told the ONS to look at the sort of regional and social inflation indices I had lobbied them on.


However, nothing has happened on this yet because the ONS seems bogged down in the problem of including the costs of owner-occupied housing in the Consumer Prices Index. We outlined what they were trying to do, and the problems with it, in an Alternative inflation report of now over a year ago.

However, in the year since they have done very little. We are increasingly thinking that we will have to do some lobbying on the housing issue ourselves because, if they get the housing issue wrong, any new indices may be of very little use. We are considering making this part of  the work programme  necessary to move this whole project forward again. The importance of housing for living standards in the region is explained here.

In the short run Osborne’s move will make a return to business as usual in the provinces of England even less likely. But from there things could go in any number of directions.

However, if Osborne even only partly succeeds in adjusting pay and pay expectations, it means that there will be greater diversity in wages and prices across the UK, and there will be a greater need for more regionalised policies and statistics.

Andrew Lydon

Time for interest rates to be sorted – Alternative Inflation Report

Inflation in the UK is officially supposed to be about 5% and thus is the highest among the developed economies who founded the G7. Despite this our Bank of England ‘Base Rate’ has for nearly 3 years been  0.5 % – one of the very lowest in the developed world and lower than that of  the Eurozone.

But in the real world,  borrowers in the UK are paying some of the highest interest rates in the developed world. We have highlighted this in previous reports and the chart (left) brings together some most recent comparable figures assembled by all Europe’s central banks and contributed to the ECB Data Warehouse.

We have compared the UK figures here with the Eurozone leaders and some of the countries in distress. The rate for savings is based on deposits that are only tied up for three months and the rate for loans is based on loans for house purchase based on a term of  at least 5 years .  So the savings rate is the one that would be appropriate to new and modest savers, and the housing rate is one of the most used in the UK given how much borrowing (even for business) is based on using houses as security.

With savings rates being so unattractive, there is little incentive to keep any savings in the UK. For example UK pensioners in Europe would get a better rate of return in keeping as much of their pensions as possible in accounts on the continent rather than leaving them in their UK £ accounts. Businesses would get an even better return on cash balances on the continent.

Hence the Pound, which has fallen by 20% since the credit crunch, has had no upward pressure on it since the time the very lowest of interest rates has been officially justified. This devaluation has exaggerated price increases in the UK. However, we have argued in earlier reports that devaluation has not and cannot now do much for employment in exporting industries.

Interest rate adjustment for 2012

Hence we now think that the government and the Bank of England should change the way they give guidance to the banks in setting interest rates. The Bank of England should now be recommending a savings rate of about 2% and maybe a lending rate based on 4%. They should discard the fictional rate of 0.5%. This would boost the £, and therefore bear down on inflation. But it would also safeguard domestic purchasing power and give a much needed boost to confidence.

Another variant would perhaps be not to recommend a drop in lending rates, but to suggest that the banks adopt a distress rate of 4% for individuals and sectors in difficulty. The banks could be told to come back with proposals for applying this first in the regions that are experiencing particular difficulties.

In the current crisis the West Midlands, where we are based, has suffered some of the worst increases in unemployment, especially for young people. This is a distress that is not evenly spread across the UK. Scotland for example has even seen unemployment fall in 2011. So the Bank of England could ask that the banks report on the credit situation in the Midlands.  This would be like the scrutiny regularly undertaken by the US Federal Reserve, who publish what is called the Beige Book, consisting of feedback from the local economies across the whole USA. Initiating such open assessments would allow the consideration of  distress arrangements that might be appropriate, as an initial step towards stability and relief in 2012.

Where the money is to be found

It can be seen that the UK banks are adding a stunning mark-up to the money they are lending. This mark-up cannot be justified in the current circumstances. Based on the rates presented in the chart above, the mark-up in the UK is roughly 700%. This is far higher than in any of the other countries in the chart. Their mark-ups on the same calculation would be:

Germany      200%

Greece        200%

France          80%

Ireland          40%

This scale of mark-up has only been occurring during our years of crisis. Back in 2004 the same calculations show a mark-up in the UK of a mere 64%, which was less than any of the other countries in the comparison. German banks were already marking-up 200% and the others averaged out at 135%.

This recent squeezing of their customers, while it must have done a lot for the profits of  UK banks, has done little for shareholder value.  But above all it has been the basis of the continuation of excessive bonuses for executives. The time has come when the revenues coming into the banking sector have to be adjusted to support savings in a UK that still imports other countries’ savings and also needs to relieve a UK  economy that in some parts is heading back into another recession.

So the time has come for the Bank of England to be more insistent upon its guidance, and get the banks to stop putting themselves first. The money is in their margins to allow this to be done. In 2012 we hope to attract more attention to how we would like to see the Bank of England reformed and made more accountable and responsive to the pressures being felt in the various parts of the UK economy.  We also hope to do this while continuing our long-standing work to change the way inflation is measured and controlled in the UK.

Our last report on inflation undermining consumer confidence and growth can be found here.

Andrew Lydon

 

 

Further details of our  Regional Prosperity & Inflation Project

Invitation to a presentation – Making the Bank more accountable

In 2008, just as the banking crisis was coming to a climax, we in LWM were finishing a feasibility study on reform of the Bank of England through decentralisation. A couple of slide shows were prepared, which we have been asked to re-show at the next meeting of  West Midlands New Economics Group.  

  

Saturday, December 3, 2011  

The Warehouse, 54 Allison Street,  

Digbeth, Birmingham  

10.15 am – 12.00  

All welcome.  

   

The presentations will outine how the Bank of England has been set up with a very phoney form of independence and how other central banks including the US, Europe and Canada involve more interests in their decision-making processes. The presentation will start by exploring how the remoteness of our Bank of England was a major factor in what went wrong in 2008 and the years before.  

  Alistair Darling’s recently published memoirs provided considerable fresh confirmation of what we recognised in the failure of the banking system, which will also be shown during the presentations.   

With the Bank of England having set the agenda of economic policy now for governments of all parties, and done so very badly – we are looking to see if we can begin to raise some of these issues again in 2012.  

In the decade since Gordon Brown  handed control of the bank to so-called experts, we have ended up suffering the most serious boom and bust since the war and have had to nationalise more of our banks than any other country.  

This will be an open meeting, so please feel free to pass this invitation along.   

Bank of Britain project.