Quantitative Easing: Will it work?

What has happened?
The Bank of England has decided to inject a further £75 billion into the UK economy in a bid to kick-start lending, encourage investment and increase business confidence to recruit.
The Bank’s Monetary Policy Committee (MPC) has already gone down this route. In March 2009, they started the process whereby £200 billion of new money was printed. This is due to run out at the end of February 2011.
The new batch of QE will be introduced over a four month period. It is highly likely that more quantitative easing will be required in March 2012.
Why should it work in theory?
In theory, the new cash injection should encourage banks to lend to businesses and individuals. This will enable businesses to invest and take on new staff and individuals to have access to credit to start spending on purchases that they have put off.
Why might it not work in practice?
It has been tried before but the new money did not get to where it was required. Businesses have been hoarding cash for security.
The Governor of the Bank of England, Mervyn King, spent the money on UK government bonds, a safe investment, but it meant not much of the money got to the small and medium sized businesses that needed the money. Credit terms to individuals for loans and mortgages did not seem to improve much either.
There is no reason to think that the distribution of the funds will be any more successful this time.
Where does credit easing come in to the equation?
Credit easing is a form of QE, but it targets specific companies or sectors of the economy that require help. The last round of QE left the Governor with the responsibility of not losing the money.
So, he was loath to lend to potentially risky recipients. Credit easing should come with some sort of guarantee from the UK Treasury and should be administered in a way that targets the funds to the companies and parts of the economy that need a boost.
However, it is not yet clear how credit easing will work; whether the Treasury will issue funds itself, ask the Bank of England to do this or set up its own vehicle to administer the scheme.
What other factors could hinder the success of QE2?
Quantitative easing or credit easing may not work on their own or in tandem unless other major problems in the global economy are solved.
The major European economies and the United States need to follow a deficit reduction programme and stick to it and the crisis in the eurozone could yet see further bailouts from European countries, a run on major banks and not only recessions in many countries but a global recession and a financial crisis as serious as the one in 2008.
Follow Myfinances on Twitter
@news_myfinances

Will David Cameron implement the ICB proposals?

By Ben Salisbury

The Proposals

The Independent Commission on Banking (ICB) was set up by the coalition government in June 2010 to review UK banks and to ensure that they will not need to be bailed out by the taxpayer in the future.

The ICB is chaired by Sir John Vickers and is set to announce its proposals on Monday September 12th. It is expected to recommend that the banks separate their retail banking sectors from their investment arms.

The disagreement

However, this week leading bankers and business leaders have stepped up their attacks on the reforms, saying that they could harm growth, jobs and lending to businesses and individuals.

John Cridland, from the Confederation of British Industry (CBI) called the proposals “barking mad” and Angela Knight from the British Bankers Association (BBA) said that banks should be able to concentrate on economic recovery and paying back the government and taxpayers.

Vince Cable countered by saying that the comments from business leaders were “disingenuous in the extreme to use the current context to argue against reform.”

Whether this affects the proposals contained in the ICB report remains to be seen, but what matters even more is the reaction from the Chancellor, George Osborne and the Prime Minister, David Cameron.

This is because the government is under no obligations to implement the proposals and no date for the implementation of any reforms has been set.

So what do Mr Osborne and Mr Cameron think?

In an interview on Wednesday, Mr Cameron said that people should not prejudge the outcome of the commission. However, he said that there were two things that he wanted to see from the banks.

Firstly, he wants to see them lending to the economy and supporting business and economic growth, and secondly, they must not take risks that put the economy at risk.

However, a report in the Financial Times today, says that the Prime Minister is increasingly nervous about the effects of reforming the banking sector and that his concern is shared by Jeremy Heywood, his permanent secretary, a former director at Morgan Stanley, who retains close links to the city.

Mr Osborne has not had much to say on the subject recently but had previously promised that he would implement reforms to split banks’ retail and investment operation if the ICB’s report recommended it.

The outcome?

During next week, Bob Diamond, the Chief Executive of Barclays Bank, and other senior bankers will lobby the Prime Minister and it is expected that they will push hard for the government to either water down the reforms or effectively kick them into the long grass for the time being by postponing any action until after the next election in 2015.

On the one hand both the proposals from the ICB and the decision on whether to implement them can be seen as a battle between the banks, led by controversial so-called “fat cats” like Mr Diamond and the taxpayer, roared on by the irrevocable Mr Cable.

My hope is that Mr Cameron and his advisors will recognise that the public were unfairly treated during the last banking crisis but that banks and financial services still have such a vital role to play in lending, helping the economic recovery and through their contribution tax revenue that a fair compromise can be reached.

Keep updated on all the latest financial and economic news at myfinances.co.uk

Carnage on the UK High Street

The last week has seen a raft of big name traders either go bankrupt, issue profit warnings, bring forward summer sales or make staff redundant and the resilience and purpose of the UK High St is being called into question.

So, what happened?

On 23rd June the worst set of retail sales results for 11 months was reported by the Confederation of British Industry (CBI). The report showed that overall sales fell by two per cent and the balance is significantly below the balance for the last six months of 2010.

On top of that a GfK NOP consumer confidence survey published this week shows that the combined influences of high inflation low wage increases and job insecurities are influencing consumers not to spend on big ticket purchases. The index fell by four points to -25, the worst reading since January 2011.

Who has gone?

Major furniture store Habitat has all but gone, with just three London stores to remain. Department store TJ Hughes is looking for an administrator. Fashion retailer Jane Norman and home fittings company, Homeform have also gone bust.

Chocolate retailer Thorntons is likely to close about 180 stores across the UK.

Meanwhile, Carpetright has announced that its profits fell by 70 per cent and is looking at closing stores and reducing staff. Finally, Marks & Spencer has announced that it is bringing its summer sale forward by two weeks to try and regain some sales momentum.

Why have they failed?

Of course, each individual company has its own strengths and weaknesses in its strategy and each market has its own foibles. However, some factors are affecting the whole of retail. Consumer’s wages are not keeping up with inflation and customers are concerned about their jobs and are focusing on paying down debts rather than spending more or increasing their level of personal debt.

The subdued mortgage market means that people are not spending as much on re-decorating, new kitchens and bathrooms and other big purchases.

Who could be next?

Comet, the electrical retailer may possibly close some scores. Focus DIY is close to going bust with the possibility of 3,000 jobs going. Haldanes supermarket is also close to the edge.
Are there any areas of retail that are growing?

Online sales are continuing to grow, but this is at the expense of High Street sales and begs the question of what the role, purpose and future of the High Street in the UK actually is.

What is the future of the High St?

A recent online poll conducted by the Guardian makes sober reading. 74 per cent of respondents felt that the High Street doesn’t have a future and that this is a structural change and there will be more bad news to follow.

Certainly with the rise of online sales, the ability of retailers to cut their overheads by not having a High Street presence are trends and business strategies that are not going to disappear overnight.

Time to get on the property ladder if you can

This week has seen further bad news for the UK property market and it would appear these are worrying times for under-employed estate agents and mortgage brokers.

According to the Bank of England, net lending dramatically fell in March by more than sixty per cent. This is partly due to homeowners taking advantage of low mortgage rates to pay down the levels of debt on their homes but also points to the fact that people are opting to stay in their current homes for the time being, perhaps until the economic outlook improves.

As part of a double whammy against the housing market this week the latest Nationwide House Price Index shows that house prices fell by 0.2 per cent in April from March and by 1.3 per cent over the last 12 months. Most analysts expect a fall of at least five per cent in the next 12 months.

So, does that mean it will be easier to get a home for first-time buyers?

In theory lower prices should make it slightly easier to get on the housing ladder, especially if you have been diligent in saving hard for a deposit. However, just to add salt into the housing sectors wounds a further report Santander has published a report that reveals it takes the average first-time buyer over three years to save for a deposit. To be honest that sounds like good going!

A report from last year by the National Housing Federation also claims that people who were 21 in 2010 can expect to gain their first foot on the property ladder when they are 43, unless they are helped by their parents.

Any likely effect on mortgage rates offered by lenders?

Well, the good news for those with a mortgage and those trying to get one is that the Bank of England kept base rate at 0.5 per cent once again in the meeting of the Monetary Policy Committee (MPC) this week. Most experts are now saying they don’t expect a rise until near the end of the year, with November being the month bandied about my many experts.

The not-so-good news is that new research out this week from Defaqto which compared the rates offered on savings and mortgages during the 26 months in which base rate has remained at 0.5 per cent shows that mortgage rates have not improved much in that period.

So, compared to historical levels rates are still very low, but perhaps they could be even lower.

So, is now a good time to buy?

If you can raise the deposit lower house prices and low interest rates mean that it is a good time to buy and with interest rates likely to remain low for the rest of 2011 and prices set to fall now is a good time to get on the housing ladder.

Keep up to date with all the latest in the world of personal finance with Myfinances.co.uk

George Osborne leads after Round One

Figures released today show that government borrowing in the UK is less than expected for the financial year to the end of March 2011.

This is welcome news for the Chancellor and shows that in terms of reducing the deficit the government’s policies are working.

However, the full impact of spending cuts has yet to be seen. It is still a moot point as to whether these policies and continued weak consumer demand will harm the economy and lead to lower tax revenues. If that is the case then reducing the deficit becomes even more of a difficult task.

This is the show-stopper in terms of whether the policy will be successful and will have huge implications for the direction of other vital economic policies that affect us all such as when the Bank of England’s Monetary Policy Committee decides to raise interest rates.

Wiping out the deficit within the lifetime of one parliament was always an ambitious task that the coalition government set itself but at least the final month’s figures for the year show that the government is bettering its own target.

Today also saw a modest rise in retail sales for March of 0.2 per cent and an overall increase of 0.3 per cent for the quarter January – March. These aren’t mind-blowing numbers but they’re certainly better than predicted by the doom-mongers who expected that the VAT rise alone would cause an economic implosion.

For the record, public borrowing now stands at £903 billion and will almost certainly top £1 trillion during the current financial year. So, although wiping out the deficit within the terms of this parliament (which comes to an end in 2015) is possible, repaying what we owe on ‘the nations credit card’ is another task entirely and the UK will continue to pay interest on the debt.

Still, one task at a time – at least the target of the early stages of the first task is being met. The recent announcement by ratings agency Standard and Poor that it may downgrade the US government’s debt because the Republicans and Democrats are unable to agree an effective deficit reduction plan is not a charge that can be levied against the UK coalition for the time being.

So, George Osborne is winning on points after round one of his battle against the deficit but there are a lot of factors that could influence the outcome over the next four years, so complacency is not an option.

Waiting for the financial dust to settle

This weeks news that unemployment rose by 27,000 for the three months to the end of January and that mortgage lending has remained flat comes as little surprise.

The public is enjoying the relative calm before the storm that will be unleashed in next week’s budget and the subsequent spending cuts.

The big concern is what will happen during the rest of the year.

Unemployment

Yes, it is worrying that the main unemployment count went up, but the amount of people who began to claim jobseekers allowance actually fell by 10,200.

Equally, the increase in 16-24 year olds who are not working to over twenty per cent is a real concern but employment for 50-64 year olds has reached record levels. So, the employment figures are mixed and it remains to be seen whether the huge cuts in public sector employment that will kick-in in April can be compensated by as many new private sector job opportunities.

George Osborne’s budget next week could provide business with a boost of confidence to make it more likely to happen. Equally it could be seen by business as not providing the tools for businesses to lead the recovery.

Mortgage lending

Levels of mortgage lending stayed flat through most of 2010 and look likely to do the same in 2011. Figures released today by the Council of Mortgage Lenders (CML) show that there was a rise in the lending figure in February to £9.5 billion, up from £9.475 billion. The amount lent a year ago in February 2010 was £9.419 billion.

Granted, lenders have still not relaxed their criteria for borrowing as much as would be hoped to encourage the market but there are more low equity deals coming onto the market and lending levels are hardly likely to rise until the public sees how the cuts are going to affect them.

The budget

So, once again thoughts turn to George Osborne and next week. The Spending Review in October 2010 laid the ground and prepared us for the tough measures that will be contained in the budget. We know some of what is coming but that doesn’t make it any easier to deal with.

High inflation and rising energy and food prices coupled with stagnating wages and job fears means an improvement in the demand for new homes is likely to remain muted throughout 2011. People are happy to batten down the hatches and brave out the rest of the year with the main priority for both households, individuals and government to keep their jobs and reduce debt and then see how the land lies.

Follow the budget on Myfinances.co.uk

UK tax revenue joins banker’s bonuses and MP’s expenses as public enemy

The failure of the UK tax authorities to get more tax revenue from large companies based on profits they have made on operations in the UK feels like another nail in the coffin for the coalition government’s attempts to convince the public that ‘we’re all in it together.’

As the banks profits return after the credit crunch the true extent of their ability to minimise their corporation tax bill has come to light. The spotlight has fallen on big corporation’s tax bills in a similar way to how the pressure grew on MP’s who after decades of happily claiming expenses with little public examination suddenly had to justify relatively minor expense claims.

However, the expenses scandal that engulfed MP’s and caused so much indignation did at least result in some reforms to the parliamentary expenses procedure and even some legal action against the rogue MP’s who committed the worst breaches of trust.

The other major beating of the public’s drum, originating from the financial crisis, was aimed at bankers and their bonuses, and on this subject the public mood has not been sated.

What sticks in the craw and makes Bob Diamond of Barclays, Jamie Dimon of JP Morgan Chase and other appeasers of bankers pleading for the public to forget the problems caused by bankers so annoying is that the government and other authorities have done very little to rectify the symptoms that caused the problems in the first place.

Project Merlin is not the solution to ensure that the problems in the banking sector that contributed to the credit crunch will never happen again and no fair system of returning taxpayers’ money that helped bail out some of the banks has been agreed.

So, will the powers that be have any ability to make big corporations pay reasonable amount of corporation tax to help increase the treasury’s revenue and reduce the burden of the cuts and the country’s deficit?

On current evidence the answer has to be no. UK banks will be paying little or no tax for years to come as a result of losses suffered during the financial crisis, mainly as a result of their own bad lending policies.

Barclays, who were not bailed out by the banks, only paid £113million on UK profits of £4.85 billion. This figure has caused many ‘banker bashing’ headlines, though Barclays foreign tax payments mean that they paid an effective tax rate of 23 per cent in 2009, not 2.4 per cent which would be the rate on £113million of £4.85 billion.

What is perhaps more worrying is that the famed persistence of HMRC does not seem to extend to big companies. There are currently 22 big businesses that are in dispute with HMRC over tax bills worth over £250 million and more than ninety per cent of these will be settled out of court with the treasury receiving a much smaller amount of tax than anticipated when they sent the companies the bills in the first place.

If the settlement that HMRC boss Dave Hartnett agreed with Vodafone is anything to go by then the tax revenue received from big companies will be less than it probably should be. The problem is that amending regulations governing MP’s expenses is a piece of cake as it only involves one set of laws confined to 657 MP’s on one country.

Trying to amend complex financial legislation and accounting practices that merge throughout the globe against companies that operate in scores of different territories and follow individual tax regimes, which when adhered too, influence the tax implications in other countries is a task that cannot be successfully regulated by any individual government or tax authority.

Keep up to date with all the latest financial news on Myfinances.co.uk