King of the spoilsports

Just as all the signs point to the worst being over for the UK economy, up pops the Bank of England with a request to pump an extra £25 billion into its quantitative easing programme on top of the £25 billion it still has in hand.

The Bank has already spent £125 billion in a programme that few people understand and even fewer think will make a blind bit of difference and the Bank itself had paused for breath after splashing out £25 billion a month for five months earlier this year.

There was still £25 billion left in the original kitty of £150 billion and it was reasonable to assume that the Bank would at least wait to see what effect its largesse had achieved, if anything, before taking further action.

It was certainly fair to assume that the last portion would be dribbled out before there was any suggestion of expanding the size of the pot.

Yet here we have Governor Mervyn King asking the Chancellor of the Exchequer for permission to run up another £25 billion, taking the total to £175 billion, on the basis that the UK recession "appears to have been deeper than previously thought." He manages to admit though that "the pace of contraction has moderated and business surveys suggest that the trough in output is close at hand."

This is a curious analysis. When the Bank called a temporary halt to the easing in July, the signs were already emerging that the economy was falling more slowly and since then there have been early signs of a recovery, with manufacturing, services and housing all indicating this week that UK plc was on the up again, albeit slowly from a low base.

It is always possible that the Bank of England knows something that the rest of us do not and one certainly hopes that it has its finger on the economic pulse. However, I suspect that two other factors are behind the decision.

Firstly, we have the ballooning of government debt. Northern Rock and Lloyds Banking Group, two banks where the Government has been sucked in to carry massive risks, reported hefty losses this week. The possibility of getting out of either of them at a profit before the next General Election is somewhere in the vicinity of zero. Breakeven or an acceptable loss in that time frame is extremely long odds against.

Meanwhile the economy has shrunk and although it now seems to be picking up again tax receipts are well down. The gap is being stretched in both directions. So more billions will be needed to fund the sale of gilt edged securities to plug the deficit.

The second possibility is that the Bank of England has recognised that the High Street banks are showing little sign of increased lending to businesses and where they do lend they demand unreasonably high interest payments. So the central bank could intend to step up its buying of company rather than government debt.

I believe that the former possibility is far more likely as an elaborate game of pass the parcel sees cash effectively shifted from one arm of government to another via third parties. Only a few crumbs will be left for hard pressed industry. Unfortunately that will do nothing to get the economy going.

Never mind, by the time that the bills have to be picked up it won’t be Chancellor Alistair Darling’s problem, nor Mervyn King’s in all likelihood.

Either way, investors have rightly seen the Bank of England’s move as positive for shares. Any cash to business will help the economy and any cash to government will stoke up inflation, making shares more attractive compared with savings accounts paying next to nothing.

Bank report
First half results from the banks have been awful but not ghastly, which on balance is quite a bit better than it might have been. Barclays and HSBC both made profits of £3 billion and although their performances were patchy they indicate better times ahead.

Lloyds managed a loss of £4 billion despite premature hopes that a little juggling with the accounts might produce an artificial profit. More bad debt write-offs are still to come but we must surely be past the peak. One lives in hope that some day Lloyds will start writing back in some of the provisions made now. Click here for a round-up of UK bank earnings.

Royal Bank of Scotland figures look good with a £15 billion pre-tax profit but the accompanying statement was worryingly downbeat. I suspect that the position there is genuinely improving and that the bank is trying to play down expectations so that the second half will look better.

Northern Rock is just bad beyond belief but we knew that already, however much the angry former shareholders may protest. There was a time when Northern Rock was the first bank to produce its results and was up there with the best of them. Now it is third in timing and last in quality.

Macho men
The view has been put forward by no less a person than Harriet Harman that if women had a greater say in how things are run we would not be in this mess now. As she thinks she is in charge of the Government while Gordon Brown is on holiday her views have gained considerable publicity, not to mention notoriety.

She does have a point in that women do seem to be less inclined than men to take risks, at least in business though possibly not in politics. Perhaps if we had more women in the boardroom we would see fewer of the senseless macho takeover bids that male chairmen and chief executives find so hard to resist.

Two came home to roost this week. The more spectacular was the continuing fallout from the ever more depressing takeover of HBOS by Lloyds. This destruction of two banks for the price of one has produced £13.4 billion of bad debts in the first half, with 80% of the disastrous lending having been made by HBOS.

Do not expect the men responsible for this deal of the century to admit they were wrong. At least ITV has faced up to the fact that it made a mistake in buying social networking website Friends Reunited.

The site was put up for sale in March and ITV finally got out this week, taking a £150 million financial hit rather than continue to pump money into a bottomless pit. DC Thomson, publisher of the Beano and Dandy comics, is the buyer. Desperate Dan is not as desperate as ITV.

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