Panic on the streets of London

So I got it slightly wrong in my blog of February 23 – the Bank of England must have thought twice about cutting interest rates to minus 2.5%. Instead they just brought them down to 0.5%. In other words, suppose you lend someone £100, taking the risk you don’t get it back. For taking that risk of losing your money, you stand to earn yourself....50p! Interest rates have been slashed by 90 per cent since October, and Labour and the bank are astonished that nobody wants to lend.

Still, the bank’s governor Mervyn King gave a wholehearted defence of the policy. He said: "Nothing in life is ever certain, but these measures we think will work in the long-term." I feel better already! Who was it who said “in the long-term we are all dead”? Oh yes, it was the great economist John Maynard Keynes. Anyway, let me tell Mr King one thing that is certain – those who depend on interest from their savings – like pensioners, for example – are being hastened towards destitution, and they will do exactly the opposite of what the economy needs – they will stop spending.

Yesterday’s decision was another triumph of hope over evidence. Have the previous five interest rate cuts in five months got the banks lending? No. Why should this one? What effect have each of the previous five cuts had on the economy? Nobody knows, because nobody bothered to find out before making the next panic reduction.

All Labour’s economic policies – including the Mugabe option of printing money – are based on doing something, anything to get the banks lending, like the bizarre decision for you and me to take £325 billion of worthless assets off RBS’s hands so it would lend £25 billion (see my blog of Feb 27). It would have been cheaper, more effective, and more socially just for Labour to have simply given us the £25 billion.

There’s no point in basing an economic policy on prayers – prayers that the banks will lend money. Here’s what Labour should do instead – hand out an immediate tax cut or benefit increase to everyone receiving, say, twice average earnings or less. The pay-out should be on a sliding scale, with those earning most getting least, and the poorest getting most. This would stimulate the economy, as people who are less well off are much more likely to spend their money – and to spend it on local goods and services.

If Labour wish to be financially responsible (which I would advocate) the funds could be raised by an emergency tax levy on those earning more than, say, £100,000 a year. These people have benefited from huge tax cuts and pay increases over the last two decades, and are well equipped to help those less fortunate than themselves in what Mr King seems to be painting as the worst economic problems we have faced in the Bank of England’s 315 year history.

It's only money (7)

Now I know this is highly irregular, but I’ve got a leak from the next meeting of the Bank of England’s Monetary Policy Committee. They’ve found the solution to the lack of people wanting to lend – they’re going to cut interest rates again to minus 2.5%!

The reasoning works like this. Back in October, if you lent someone £1,000, at the end of a year, you would get back £1,045 – a profit of £45. No one wanted to lend. So what could the Bank do to ensure a steady supply of lenders? Slash that profit margin! So today let’s imagine you’re brave enough to lend someone £1,000, in the middle of a recession. There’s always a chance, of course, that you won’t get some or all of your money paid back at all, but if you are lucky enough to get the whole debt repaid, you ‘ll get the princely return of £10.

Bizarrely, this change has not resulted in dozens of people queuing up to lend money. So now Labour has persuaded the Bank that the way to attract lenders is to charge them for the privilege. From next month, if you’re fortunate enough to get your money back at all, you’ll receive only £975 for every £1,000 you lent. How could any lender resist this prospect? (I understand the government is also planning to ensure a steady supply of orange juice in the shops by decreeing that its price has to be cut by 80%)

Should this courageous initiative fail, the Bank has another trick up its sleeve - “quantitative easing” – printing money to you and me. It is a policy that has been used with great success by the Weimar Republic and Robert Mugabe among others. There is a ready solution available to the crisis we are in (see my blog of January 29) but that would involve helping the poor, so Labour dogma means it cannot possibly be implemented.