Tel. +44 (0)20 7287 4414
Tel. +44 (0)20 7287 4414
The Bruges Group spearheaded the intellectual battle to win a vote to leave the European Union and, above all, against the emergence of a centralised EU state.
The Bruges Group spearheaded the intellectual battle to win a vote to leave the European Union and, above all, against the emergence of a centralised EU state.

Quantitative Easing, the Credit Crunch and the EU

Professor Tim Congdon
The Rt Hon. John Redwood MP



Chairman of the Economic Competitiveness Policy Group


One of Britain’s leading economic commentators

Click here to view Professor Congdon's power point presentation

Click here to listen online to Professor Tim Congdon CBE and Rt Hon. John Redwood MP

John Redwood is Chairman of Conservatives Party Economic Competitiveness Policy Group. In May 1993 he was appointed Secretary of State for Wales. In 1995 he challenged John Major for the Conservative Party leadership.

In opposition he has acted as Shadow Secretary of State for Trade and Industry (1997-1999) Shadow Secretary of State for the Environment, Transport and the Regions (1999-2000) and Shadow Secretary of State for Deregulation (2004-2005).

He has written widely on Eurosceptic issues, free enterprise and democracy. His publications include; Our Currency Our Country, Stars and Strife: The coming conflict between Europe and America and The Death of Britain?

Professor Tim Congdon is one of Britain’s leading economic commentators. He was a member of the Treasury Panel of Independent Forecasters (the so-called “wise men”) between 1992 and 1997, which advised the Chancellor of the Exchequer on economic policy. He founded Lombard Street Research, the City of London’s leading economic research and forecasting consultancy, in 1989. He is an honorary professor at Cardiff Business School and a visiting professor at Cass Business School. He has written a number of books on monetary policy, contributes widely to the financial press, and makes frequent radio and television appearances.

Professor Condon is also the author of the Bruges Group paper, Will the EU’s Constitution Rescue its Currency?

He was awarded the CBE for services to economic debate in 1997. Professor Congdon is a member of the Bruges Group’s Academic Advisory Council.

Speech by Professor Tim Congdon, CBE

Good evening ladies and gentlemen. There’s the Groucho Marx joke that there’s no point joining a club which wants him as a member and I think Britain and the eurozone is a similar kind of story: they do want us as a member but there’s really not much point joining the club. And I want in the next 15-20 minutes to explain why we’re lucky to be outside this club.

Until the summer of 2007, we and our neighbours I suppose were lucky to enjoy several years of monetary stability in which we had steady growth of bank assets, a steady growth of money and we had inflation more or less continuously at about 2/2.5% and fairly steady growth of output and employment. Now this stopped in the middle of 2007 with the closing of the international interbank market – sorry to be a bit technical but I can’t really avoid it – and from that time on things have got worse and worse fairly remorselessly.

By late 2008 across the industrial world banks were cutting back on their lending, in some cases the customers didn’t want to borrow, and so we had a sharp slowdown in monetary growth, we had collapses in asset prices and we have this dreadful process called debt deflation. The phrase was started by an American economist called Irving Fisher in the early 1930s and what he was talking about was the following kind of sequence of events: that asset prices are falling that causes bad debt, that means the banks lose some money on their loans, the banks therefore have got less capital, they cut back on their lending, there is less money in the economy so asset prices carry on falling, there are more bad debts so the banks have less capital and so on and it just gets worse and worse and worse and worse and it’s a downwards spiral.

Now there are various answers to a debt deflation spiral of this sort. Obviously first of all there is cutting interest rates, it’s allowing the exchange rate to float, to float downwards, to some extent it insulates one economy from these kinds of problems. And then finally there are ways of managing your own Government’s debt, your own Government’s finances which come under this title of quantitative easing, which create more money and thereby help to stop the recession.

Because we are not in the eurozone we are lucky enough to control our interest rates and to have our own exchange rates and to be able to manage our public debt and our Government finances according to our own circumstances and all of these aspects of economic policy are denied to our neighbours that belong to the eurozone.

The IMF has just produced a forecast that we’re going to have the largest fall in output of the major economies in 2009. Well we’ll see, I don’t actually agree with the IMF and I think that what’s going to happen is that some members of the eurozone, they’re in economic trauma at the moment but it’s going to get much worse, I want to talk about one or two of them in the next few minutes and I’m going to focus in fact just for the time being on Ireland because I think this is quite an interesting case, a rather unfortunate case in a way.

The Irish have had of course a very good period in the last 10/20 years, but at the moment they’re definitely suffering because they, unlike Britain, are trapped inside the eurozone, they can’t devalue, they can’t further reduce interest rates – they’ve been reduced by a lot already – but critically they can’t themselves carry out these policies of so called quantitative easing. Let me just explain a bit what’s going on with quantitative easing: the collapse in asset prices that has occurred in the last six months, the last 18 months is to be explained in various ways but one of the key reasons is that there isn’t enough money in the economy and by money I mean bank deposits. The growth of bank deposits in Britain in early 2007 was over 10% a year and company bank deposits were up by over 15% in the year to spring 2007. In the second half of 2008 company bank deposits fell by about 4%, annualised rate of about 8 or 9% and that rate of decline is similar to that which occurred in America in the early 1930s when Irving Fisher invented this phrase ‘debt deflation’.

And the way to stop a debt deflation is for the government and/or the Central Bank, it doesn’t really matter which, very simple, they just buy things from us. They buy things from us, they put money into our bank accounts and the bank deposits rise. That’s all that’s really going on, I mean there are all sorts of complications but in essence that’s all that’s going on. And the obvious assets to buy here, you know they could buy land but then the question is how do you value the land, they could buy stocks and shares but then of course that effects all sorts of incentives in the economy. The simplest thing to buy is government securities and that is now going on in Britain. Apparently it’s been announced in America and Japan; it was announced today in America.

Ladies and gentlemen this will work; it could bring the recession to an end. I’m afraid in our neighbours it’s very difficult to do. The reason is that they’ve got this currency zone with one currency and over 15 or 16 governments – I lose count. And so if you’re buying back government securities, the question is which government securities and all this depends upon negotiation and haggling. I daresay they’ll get around to it, its just much more difficult and the problems that Ireland has got at the moment with collapsing house prices and drastic loss of competitiveness and so on illustrates these larger problems.

Obviously there is a discussion about whether the eurozone is going to break up and rather surprisingly these are the spreads over German government bond yields, over Bunds. You can see that Ireland is if you like the most marginal case, at 279 basis points its almost 3%, the Irish Government bond yields 3% above those in Germany almost, grants about half a percent. So the message here is that if you’re inside the eurozone you have no freedom on interest rates, no freedom on the exchange rate, no freedom on government finances, you’re trapped and that’s why we’re lucky to be outside it.

I don’t know what’s going to happen in the eurozone, all I would say is that the discussion about whether it’s going to break up or not is going to intensify and to some extent it remains an experiment, they themselves don’t really know what’s going to happen in the next year or two. In a way the eurozone has been blessed by being in these very benign conditions with the steady growth of bank credit and steady growth of money. The growth of credit to private sector is now stopping, banks have got some problems, they need the medicine that we’ve adopted in the UK and that is now being adopted in Japan and America and as I say, they can’t really do it without actually having a big discussion about the Treaty that they’re all working under and so on.

Are there any big winners in terms of reputation of running a banking system out of the events of the last two years? I think there are some big winners, some countries have indeed done well and who are they, Canada and Australia.

No banks are in trouble in Canada, none at all. Australia similarly, there are one or two issues but there are really no problems there at all either. They have the same systems that we would have had if we hadn’t joined the European Union in 1973. Much the same sort of thing, strong central bank, the central bank involved directly over the banking system, easy communication between the finance ministries and the banking system and central bank, all these things that we used to have in our own country. They are lucky because they were not contaminated by joining the European Union.

Ladies and gentlemen we’re lucky that our currency didn’t join the eurozone. I think that was the great achievement of the Eurosceptic cause in this country. We’re also I think even luckier if we’re outside the European Union altogether, but there we go.

Thank you very much.

Speech by John Redwood MP

Good evening ladies and gentlemen, I come hotfoot from the House of Commons. We had not had a debate on the economy all year, the opposition called for a debate on the economy in its own time last week, the Chancellor of the Exchequer said he couldn’t fit us in so we gave him longer notice and said we would have a debate today in opposition time on the economy. Again, he could not fit us in so we had lack lustre and pathetic speeches from Angela Eagle and Miss Cooper and from a few assorted Labour back benchers, who think the Government isn’t left wing enough and would like to nationalise the few remaining businesses in the financial sector that haven’t yet been nationalised.

It was I am afraid, the House of Commons at its worst on the Labour side with no understanding of the gravity and seriousness of the economic crisis we find ourselves in, no understanding that the response of the British Authorities has been particularly slow of foot and dim witted, no understanding of the chronic amount of financial risk they have now decided to run ballooning the running deficit, ballooning the commitment to some very damaged banks and now in a mode where I think they take the view that they can spend anything they like and borrow anything they like, print anything they like for as long as it takes to get to the General Election.

I think they have this fond idea that the British public is suddenly going to be spontaneously grateful for having some of its money back and being able to borrow so much more for our children to repay, that suddenly there is going to be a transformation in the opinion poles allowing an early Election, but I just don’t see it myself, it doesn’t feel quite like that, so I think we are in for the long ride, we are in for the full duration.

Tonight with an audience like this, we do need to discuss not just the British but also the European response to this crisis. It is topical tonight because we’ve had the Turner Report published today looking at the origins of the crisis and giving us regulatory answers. Reading Lord Turner’s Report, as I did rapidly during the course of the rather untaxing speeches from the Labour side in the debate, because fortunately the Shadow Chancellor had been sent a copy, of course Parliament didn’t get a copy of the Turner Report just in case we might take an intelligent interest in it and wish to debate it, which would never do.

The Turner Report in its analysis does accept that Britain has a particularly difficult version of the problem. The Turner analysis does accept that the regulators were asleep on the watch; the Turner Report does accept that mistakes were made in the last decade – something more than the Prime Minister is prepared to do. But when you come to the Turner remedies I think you should be very sceptical, most especially the Turner remedy which says that one of the answers to all this is a pan-European super regulator who can sit on top of all the national regulators. If you can have national regulators asleep at the watch, surely ladies and gentlemen it would be equally possible to have Euro-regulators asleep at the watch. If you think you had too many boxes to tick and forms to fill in from the national regulator, don’t you think it might get a little tedious to have another set of them from the European regulator?

Lord Turner is a man of his time serving the government of his choice; it all looks rather old fashioned and backward looking to me. I don’t think this is a crisis of unbridled capitalism that we’re living through, it is a crisis in the inter-reactions between some rather large and not very competitive banks on the one hand and the regulatory system on the other, it is a crisis of money supply and money control as your previous speaker would have told you with great insights and great persuasiveness. Tim has been a beacon of light on all this at a time when others have followed a rather foolish consensus.

There were a number of mistakes made by the so called Independent Monetary Policy Committee, a number of mistakes made by the broken and damaged Bank of England, a number of mistakes made by the regulators who were meant to be watching the extension of credit and the gearing in the banking system but this was not a crisis of under-regulation, never has so much regulation been passed, never has so much regulation been heaped from Brussels onto Britain and never has Britain so willingly surrendered to so much Brussels regulation.

Indeed Britain so liked the regulation coming from Brussels that it always went the extra kilometre, it always went that... oh yes I can speak the language ladies and gentlemen, I’d get arrested probably if I remembered those units that we used to be able to use. I believe I am not allowed to go and buy a pound of apples anymore and I’m sure I’m not allowed to go the extra mile anymore and they would wish to make that impossible. So we had great regulatory enthusiasm.

In the House of Commons debate today indeed I was surprised to learn that I am really the architect of the crisis because a Labour briefing is going out yet again saying that in the Report I produced for the Conservation Policy Committee it did indeed say that the process mortgage regulation Labour had introduced was expensive, cumbersome and a waste of time and that we thought we could get on better without it. They alight upon this and say, there you are, the reason we have a mortgage crisis is because the Right Honourable gentleman wanted to get rid of all mortgage regulation. They don’t read on because the Report says they have a serious problem of over-commitment in the mortgage and other banks and that they need to regulate banking capital and cash properly and they hadn’t been doing that. Helpful advice to them which they wish to ignore and they ascribe enormous power to someone working from the opposition side who can make statements but cannot run anything against the background where you would have thought they would have concluded that this massive panoply of mortgage regulation they’d introduced was completely useless, never have mortgages been as regulated as they are today and never have we had such a grave crisis in the mortgage market as we have today.

They were regulating the wrong thing in the wrong way, they didn’t regulate the cash and capital of the mortgage banks properly, they did unfortunately over-regulate the process. It did not stop a single dodgy mortgage, if only it had because there are too many dodgy mortgages, but it did impose a barrier to entry for new competitors, it did impose extra costs, it imposed extra hassle in the way we have become all too used to from this administration.

So what should we do now? Well the answer is not to think that this is a crisis of free enterprise and we should nationalise everything and the answer is not to think this is a crisis of under-regulation and to work out all kinds of new regulation along the same lines as the useless regulation of the last 11 years. This is the time for an intelligent monetary policy as Tim has been advising them, it is a time to grapple with the banks that are now in serious trouble and to try and stop them sinking the tax payer in the way that they have done so much damage to their private shareholders. I have been one of the few House of Commons opponents of bank nationalisation and a consistent opponent of them taking shareholdings in these banks. The model I recommend to them, the model I think they will have to come around to before they completely run out of money is the model of the intelligent bank manager.

The Central Bank when properly functioning is the bank to the banks that is one of its important functions; it is the lender of last resort to the banks. In times of stress it may become the only lender to the banks to see them through the difficulty. The operative word is ‘lender’, it should lend little, it should lend tough, it should make sure its got security, it should try and lend for as short a period as possible whilst the banks sort themselves out, start to generate their own cash, start to generate their own profits, start to sell assets to get cash in, start to bring their costs under control, start to move from loss to profit.

My worry with the huge amounts of taxpayer capital committed to these banks is it is delaying sorting them out and if you delay sorting them out you delay the full and proper recovery. If the banks don’t function properly then tipping money into them doesn’t produce the results many of you may fear: it doesn’t produce hyper-inflation, it doesn’t produce massive extra lending, if the banks are still broken then it doesn’t have anything like the geared effect that it can have if you tip a lot of cash onto a burning credit fire where the banks are functioning very well. We need to sort those banks out and to get them back into proper private sector ownership as well as management so that we can have a more normal functioning economy.

It is one of those myths of the New Labour spin doctors that somehow these banks can be disembodied and held at arms length. The taxpayer has £3 trillion at risk in these banks now, twice the national income, but some Labour Ministers are still on the spin to say of course we mustn’t interfere, we mustn’t touch them, we must let them get on and be run by great luminaries of the banking world like Fred Goodwin and all will be well.

They are going to discover that they live in a tough and difficult political world, they are going to discover that its not just going to be people from the left who tell them that if they own the banks they have to give instructions and have to take some responsibility for the direction and management, it will be all of us who are serious about the proper conduct of public spending and honest return on public finance and taxpayer commitment.

So I am urging them, as I’ve been doing this afternoon in the House of Commons, which is a good way to keep a secret ladies and gentlemen, but I still go on going it because I am paid taxpayer money to do so, I can now tell a wider audience out here, I am saying to them that they must now issue instructions to RBS and Lloyds that they need to sort themselves out, they need to sell profitable assets to get cash in, they need to cut their overseas risk, if they have some profitable and successful businesses overseas, lets get rid of them and have some money in for them.

They need to wind down the expensive and exposed positions on their trading books in their casino investment banks. RBS has £500 billion at risk in an assorted variety of financial instruments, which we trust their traders understand even if some of their Directors perhaps didn’t. We need to get that wound down, netted off, sorted out as quickly as possible because that should not be at taxpayer risk, or if it is a flourishing business sell it, get it out into the private sector where it can be profitably managed by people who stand behind it without committing the taxpayer pound. We need to get the salary levels into line with the earning potential of the current reduced business these banks could do.

Now as an exponent of free enterprise, I have no problem about somebody earning £500,000, a million, two million in the private sector if it’s being paid for out of turnover, out of profits, out of private shareholders’ money. I don’t even mind if it’s a loss making business if the shareholders want to give somebody half a million pounds a year to run a loss making business I think they are a bit silly but its none of my business, if that’s what they want to do good luck to the guy or girl who gets the half a million a year. It will either come right or they’ll have lost their money.

But what I do object to as a taxpayers’ representative is the thought that I have to watch whilst Labour votes through unbelievable sums of taxpayer money to pay losses, to subsidise and to shore up banks that are still paying people £300,000/£400,000/£500,000 a year or more to lose in the case of RBS £24 billion in a single year, indeed worse than that, apparently to lose the £24 billion in the six weeks between the day when the Chancellor agreed to put the money into the shares and the day when he finally discovered that they’d lost £24 billion. He either did no due diligence at all when he bought the shares, perish the thought, or they lost an awful lot of money in six weeks ladies and gentlemen.

How can you explain that to taxpayers? How can I go back to Wokingham and look somebody in the eye and say, I know you’re running a small business whose turnover has just collapsed in the building trade, I know you’re worried that you may have to close your business down, I know you’re worried that you can’t get enough borrowing from your local branch of RBS and if you do get some money its at a very high price, nothing like the 0.5% the NPC are talking about, but I do expect you to pay a lot more tax in order to prop up people in RBS earning £500,000 a year or a million pounds a year and I’m sure you will also do the decent thing Mr Entrepreneur and want to make a contribution to their pensions and to their bonuses. It takes a lot of hard work to lose £24 billion so it would be a pity not to pay them a bonus and to recognise how lucky we are to have people who can deal in such big numbers.

Ladies and gentlemen, it is a disgrace and you would have thought that a Labour Government might have seen that that didn’t make any sense, but they dither and they dodge and they wee. And they used to have a couple of sound bites to get them through everything, ‘no more boom and bust’ they said. Well we don’t here that one now; even they I think see that that’s a tad difficult in the current situation. And we used to have the ‘we made the Bank of England independent and we created economic and financial stability’. Well they’ve certainly dropped the second half of that one ladies and gentlemen because that too is just a little much of a strain on the credibility of the statement. And of course the first half of the statement is not true either, if anybody believes the Bank of England is still independent after the events of the last few months, I’m afraid they haven’t been watching the plot at all, it is very clear now that the direction is coming from number 10 and occasionally from number 11 and after all even the famously independent MPC had to write about quantitative easing to the Chancellor and the Chancellor is the man who made the decision and gave them the authority to do it.

We’ve moved on so we have a new set of sound bites for a new age, we no longer have the sound bites that got them through the age of irresponsibility, now we have the sound bites for the age of nationalisation and over-borrowing by the state. And the main sound bite they say is ‘we will do whatever it takes’, but they wont say what and they wont say when, we just have a series of initiatives day after day, most of them fortunately don’t actually result in anything, a few of them it would be nice if they did result in something because they are quite sensible schemes, but when we test them out we discover a month later/two months later/three months later nothing much has happened.

And we also have the sound bite that ‘we’re on your side unlike the Tories who would do nothing, we will help you through the recession’. Well of course it’s a great slur on the Conservative Party that we did nothing. Yes we had difficult economic times on two occasions I can remember, never anything as bad as this and of course we were on people’s side, of course we made sure that there were schemes to get people retrained and schemes to help people stay in work, schemes to assist companies. I can remember doing lots of those myself when I was working with Margaret because of course we were deeply worried and we did not wish for that number of people to be out of work and we did those things. You can argue about how efficacious they were but we were certainly very worried and we were doing exactly the same sort of thing at the micro level that the Labour Government now might get around to doing and has said it is doing.

But the other thing you must avoid doing, when you have a problem this big, is to do things for the sake of doing something that makes the problem worse and it is my contention that the endless schemes towards the banks are making the problem worse. And work this one out, you take a majority stake in a major bank and then you double up and you say you will insure the dodgy assets of that bank. Well surely by taking the majority stake and saying there are no circumstances in which the bank will go under, you’ve already agreed to stand behind the dodgy assets of the bank, why do you need to have a set of consultants and a new set of legal agreements to underwrite the dodgy assets which are effectively already yours.

And why do they think ladies and gentlemen, that taking dodgy assets from the private sector and sticking them on the taxpayer solves the problem. There is no way it solves the underlying problem, the underlying problem is how much of that money is the bank going to get back, the underlying problem is how many of those businesses and how many of those homebuyers will be able to repay the money, the underlying problem is when can you get the economy functioning well enough again in the way that Tim is trying to get them to do, so that instead of each day having more and more bad debts on your book you have fewer and fewer bad debts.

There are quite a lot of people who think it all happened in the past, they think there’s a pile of bad debts, some of them are naïve enough to believe they’re all to do with America – how that can relate to Northern Rock when it was all British mortgages to British lenders under a British regulator I’ll never know – but they think there was a pile of sort of foreign things that went wrong and if you ring fence it and guarantee it then everything else can go on as normal.

I’m afraid it’s not like that; it’s a dynamic deteriorating situation. You could identify the bad mortgages today very accurately, you know exactly which mortgages today have behind them people who aren’t paying the interest or can’t make the repayments or are out of work and have no income, that’s quite easy, we know exactly how many there are and you know what sort of a problem you’ve got to manage through that. You don’t know for sure how many people will get a job in a year’s time and be able to resume payments and all will be well, you don’t know for sure how many are never going to be able to repay and you’ve got to repossess, that’s a judgment. But what you don’t know is how many more people will get into that category in the next year for example.

Now I don’t want to be a Jonah, I want my country to do well, of course I want spirits to lift and for the recovery to begin, but what I do know is that even if the recovery began tomorrow unemployment would go on rising for quite a long time and what I do know is that even Geoffrey Robinson today in the House of Commons said that people expected three million unemployed quite soon on the back of the sad rise of unemployment through two million tonight. That is not a good situation if you’re a mortgage bank because it means you could have more bad mortgages around the corner.

And what we also know tonight as we meet is that business is still suffering very badly, there could be more bankruptcies, there could be more serious problems and so the corporate loan book is going to have further difficulties, further hits.

So my concluding comments to the Government are these, do not believe that you can solve the banking problem by subsidising and feather bedding the banks, you have to get them to face up to the truth, sort out the mess, generate some cash, get their costs down, start to find profitable business to replace the unprofitable business they’ve written in past years. And above all they’ve got to sensitively and intelligently work their way through all those loan books at the moment where the situation is still deteriorating. Do not believe Government that transferring bad debts from shareholders to taxpayers solves the problem, you’ve still got to work it through and create a strong and sensible bank that is in a good position to lend more and behave sensibly.

Oh Government understand there is a mighty anger in this country if taxpayers’ money paid by people of modest means struggling to keep their jobs and their businesses alive is seen to be frittered on very large salaries, very large bonuses and very large pensions for the very people who presided over the losses in the banking sector.

And oh Government, if you really believe that a load more regulation along the lines that has gone so horribly wrong in the last 11 years is going to be the answer to the banking problem, we do have serious difficulties. Regulate less, regulate better, be tough on cash and capital and prudential issues for those who can credit create and those who take in client money and have to look after it, but you do not need nearly as much of the other regulations that have not stopped any of this crisis and in a way meant the regulator was looking in the wrong direction, looking for the wrong problem which allowed this problem to become so enormous.

And finally for the Bruges Group, there is absolutely no need to have a mezzanine level of regulation at EU level on top of national regulation and in addition to any international agreements that may result. There may be a case for trying to get global agreements on some of the main principles and some of the main items, although I fear that the Barzel agreements were part of the problem, they produced a capital framework which most demonstrably did not discipline the banks in many jurisdictions. But do not believe there is a need for this mezzanine level, it would be damaging to Britain, damaging to the City of London, unnecessary and would not stop a single bad mortgage let alone a mortgage crisis.

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