Month: April 2008

The message on the doorsteps has been the same for the whole of the local election campaign so far. People feel robbed. They want some respite from high fuel tax, high Council tax, high income tax and high public sector fees and charges. They would like better value for all their money spent on public services. They want some break from the endless surveillance into their daily lives, and from the ceaseless demands on the law abiding to register, comply, declare and remember all the tricky rules. It’s as if the government has designed ever more difficult rules with the intention of ensnaring the law abiding into mistakes from sheer exhaustion. There will come a form you forget, an answer you get wrong because you did not check it, a rule whose significance you had missed.

The doorstep message is poor for politics and worse for Labour. Some will not vote because they do not believe any political party can get a grip on it. Others will vote, and want to send a message to the Labour government. Some will even vote on local issues! My canvassing has been in Wokingham, never a source of much support for Labour, but the anti government mood is stronger than I have known it for the last eleven years.

People would like some honesty in government, some statement of what government can do to make their lives better, and some recognition that there are and should be limits to government power and intervention. Family budgets are being squeezed badly, and there is that gnawing fear that the government, unable to control its own spending properly, will be back for yet more tax increases at exactly the point when families can’t afford the taxes they are already having to pay.

Most commentators reckon the government is too optimistic in its forecast for UK growth this year. Let’s pray the government is right, because every shortfall in growth will be a bigger black hole in government finances. There are then two choices – borrow more, which is deferred taxation, or raise taxes – immediate taxation. Most of us want neither of those.

I have had one surprise. In the March edition of my local newsletter – paid for by the taxpayer – I offered to cut it out to save some public money if that was what people wanted. So far more have written in favour of keeping it. It will be interesting to see what the final score is. I was concerned that people are paying for too many glossies through the tax bill, but some do seem to like some of those publications.

Click here to see John Redwood’s presentation on the main priorities for Conservative controlled Councils.

Let me commit heresy today. I think tackling global poverty and hunger is more important than curbing carbon dioxide emissions. To those who tell me you do not have to choose I say two things.
As people in the developing world become richer of course they will burn much more fuel and push out much more carbon dioxide. If the UK could eliminate all its CO2 output it would only stop India and China’s growth boosting the total for a few months. They are not going to move directly to carbon free activity, as the west has not yet got there or anywhere near.
As some urge the world to grow its fuel, substituting renewable crops for fossil fuels, they put limiting CO2 in direct conflict with feeding the hungry. The extra demand for crops to burn as fuel drives the price of basic foodstuffs up, pricing out the poorest and the most hungry. We should remember the population figures. 600 million Americans and Europeans live to a high standard. 2,500 million Indians and Chinese are now taking strong steps to get nearer to that standard. The driving force of future growth in CO2 does not rest with the developed world but with the developing.
Of course I favour the west making more rapid progress with fuel efficiency measures, with renewable power from something other than crops, with new technology that can be kinder on the air we breathe and the waters we use. We should, however, be more worried about economic failure and world poverty.
Over the last 60 years there have been three principal rival systems tried out to tackle poverty and change people’s lifestyles. In the USSR, Cuba, parts of Africa, Asia and South America countries tried out state planning and control. Their communist systems sought to sweep away the “waste” of competition, and directed labour and capital according to a great national plan. In every case the country concerned ended up much poorer in income per head than those trying different systems of development by a big margin. They ended up less environmentally friendly, with far less personal consumption, as well as with far less personal freedom. In my youth I often met people who told me the communist system was superior to ours. When I suggested they went to live in the USSR to live their dream they were usually reluctant. When confronted with the poor figures – and the lack of liberty – in communist countries we were always told that that was because the countries that were communist were not doing it properly!
The second model has been the US one based on free enterprise, a balance of powers between individual and state, and more limited government. Countries adopting a more limited state and a relatively free and lightly taxed free enterprise sector have all emerged as the most prosperous.
The third model was the European “social market” model, which combined strong elements of US capitalism with more government intervention. Higher taxes were used to transfer more income to people and areas that were doing less well, in the name of reducing inequalities. This model produced slower growth and less overall prosperity than the US system – indeed over the last decade the US economy has continued to out pace the European ones despite starting from a higher average income per head. Nor has the European social market model worked well in its own terms, as it has generated higher unemployment than the US model, leaving more people dependent on relatively low incomes from benefits. Most of the regions in receipt of regional aid over the last 20 years or so are still the poorer regions.
Globalisation offers the scope of transferring the benefits of free enterprise to many more countries, if their governments will receive it. As China and India progressively liberalise their trade, finance and individual sectors, so they grow more speedily. It will be a model of economic development that others look to. China herself is now a big inward investor, and manager, in African companies as well as in Asia. We should recognise today that the advent of many more empowered consumers in Asia is putting an unavoidable upward pressure on food prices, as the new rich seek more meat and better diets. The very least we could do is to back off from the idea that at the same time the west ought to be growing more of its fuel.
The world needs more of its land under the plough to feed the billions. Today we need a simple priority – let’s tackle hunger.

Now the Euro is strengthening against both the dollar and sterling some of the usual suspects are out and about suggesting that we should be part of such a “success” and reminding us it will be dear to go on holiday on the continent if the Euro keeps on going up.

Since the Euro was launched, it has had periods of weakness and strength. It will have more of both over the years ahead. The best economic argument against our joining the single currency is the volatility of the Euro against the pound. It has varied from 57p to 80p per Euro. This shows our economies are not coming together, and do need changes in currency rates to avoid more painful adjustments on jobs and activity levels. The idea of the Exchange Rate Mechanism was to give countries and currencies a period of years to try to bring their economies together. If they could do so, the changes of one currency against another narrowed and eventually petered out, showing the two nations were ready economically for a single currency, if they also wanted that politically. The UK’s rapid exit from the ERM showed we were not a similar economy to the continental one:the pound did not start to move in line with DM/Euro. More recent movements both ways of the pound against the Euro are a further warning, if one is still needed, not to venture into a currency arrangement or try to prepare for a single currency again.

Yes, it is true contiental holidays are becoming dearer. They need to, as they are one of many drains on our balance of payments, and we need to spend less abroad and spend more at home in substitution for imports – that includes holidays.
It is also true that the Uk is becoming more competitive as our prices overseas fall relative to Euro prices. That is one of the reasons why UK manufacturing is doing better at the moment ,despite the credit squeeze and the slowdown.

The strong Euro is the result of the better performance of German industry in recent months. It is causing problems to some of the peripheral countries of Euroland, who may still live to rue the day they entered a single currency before they had brought their own economies properly into line with Germany’s.

Al Gore and The BBC climate change propoganda machine tell us the science of climate change is settled – all sensible scientists believe in global warming, and think the major cause is human produced CO2.

This reveals an ignorance of the way science works. Science is never settled. One generation produce a theory that seems to fit the facts, only for it to be challenged or replaced by a different or better one by a subsequent generation. Newton seemed to have summed up the heavens, and his predictive models were good, but Einstein revolutionised the way scientists look at it. So it will be with climate science – measurement will improve, modelling will improve, and perceptions will change. Nothing is settled.

Bast and Taylor have just published a very useful survey of scientific opinion on climate change, which shows that scientists themselves are far from united in their view. The survey covered 530 climate scientists in 27 countries.

Most agreed warming was taking place, but a bigger minority strongly disagreed than strongly agreed with the proposition that it was mostly the result of human causes. More think current models cannot predict future climate change accurately than think they can. Only one third thought we could predict the next ten years, whilst more than a half thought we could not. The numbers thinking we can predict future climate change fell for more distant dates. More thought current models could not deal adequately with water vapour – the biggest greenhouse gas – than thought they could deal with it, whilst over 60% felt models could not handle clouds well, which have a big impact on temperatures. 70 % thought there would be some positive effects from global warming as well as 86% thinking there would be detrimental effects.

I was pleased to hear a BBC programme on Sunday pointing out that adaptation to climate change was a sensible response in addition to or rather than trying to cut carbon emissions.

It is important to bear in mind some figures on the relative role of UK humans in greenhouse gas totals. CO2 is only 3.6% of total greenhouse gas – water vapour is by far and way the dominant one. The Uk is only 2% of total human activity on the planet, and human activity only accounts for 3.4% of the CO2 emitted – the rest comes from natural sources. This means that the UK human contribution to total greenhouse gas in the world is 0.0025%.

As readers of this blog will know, I do favour taking action to cut our demands for fuel, and to limit environmental damage, for a variety of good reasons. Eliminating NOX, SOX and particulates is a good idea to improve air quality, and cutting fuel burn is important as it is scarce resource coming from politically unstable areas in many cases. Those reporting climate change should report it like all other areas of human thought and activity – subject to disagreement and to changing perceptions as people learn more about it.

It’s April 9th and there’s frost on the ground. Once again there is no Parliament to go to, as Parliament has been sent away for another fortnight off. It means we cannot cross examine Ministers on falling house prices, the continuing credit crunch, the IMF downgrade of their UK economic forecasts, the unseasonal weather, the squeeze on people’s incomes, Northern Rock’s business plan, the availability and price of mortgages or anything else on people’s minds. We can hear and see some Ministers on radio and TV, blog away and then go canvassing for the local elections. On the doorsteps we hear about high taxes, rising mortgage payments, and many complaints about the state of the nation.

This morning the Chancellor told us he is reviewing mortgage finance. I had a feeling of deja vu. This government has endlessly reviewed the housing market. They used to tell us housing was not affordable, implying they wanted house prices to fall, although they always ducked the question when I asked them by how much they needed them to fall to make housing affordable. The first Barker review considered house prices mainly by looking at number of new households forming compared to numbers of new homes being built, and concluded the answer to making homes more affordable was to build a lot more. As one of the few critics of that piece of work, I pointed out that you need to look at the supply and demand for mortgages as well as for homes – that interest rates and credit availability are crucial in working out where house prices will go, and working out how many people can afford what kind of homes. The government in its second consideration of housing came to agree that mortgages and finance were also an important part of the complex equation. They have to understand that unlike most markets, where the price of the new product offered makes the market, in the case of housing it is the price of second hand product which dominates, so you cannot control or run the market simply by working on the housebuilding side.

They are now learning the hard way that there is one thing worse than rising house prices with some people prevented from buying because homes are dear – and that is falling house prices, with even more people prevented from buying homes because there is a shortage of finance. With rising house prices most of the people in their own homes are content – save those worried about the prospects of an immediate family member getting on the ladder – but that does not mean they want their own home to fall in value. With falling house prices most homeowners get worried. As their wealth falls, so they become less inclined to spend money and less able to take risks. If at the same time many more people are excluded from buying a home of their own because deposit requirements are raised substantially and mortgages are made scarcer and dearer, it removes any potential feeling of wellbeing for families.

What are the options for this review of mortgages and housing at the government’s disposal? They boil down to the following:

1. The Bank can cut its recommended interest rate. Whilst market rates often detach from this in current circumstances, a lower Bank rate will tend to create lower mortgage rates than otherwise, so it could help. The Bank is likely to cut rates at the April meeting.
2. The Bank of England could move more in the direction of offering more liquidity to the banking system. It should accept as collateral a wider range of assets, but demand sufficient asset cover to protect taxpayers. The more liquidity it offers, the more mortgages can in turn be offered by the credit creating commercial banks.
3. The government can subsidise more people to buy homes, along the lines of the small schemes they have announced this week. This is heavily constrained by the poor state of the public finances where more public spending is not readily financed, and by the unfairness of helping a limited number of people and not everyone with their mortgage problem.

Part of the key to the mortgage problem in the UK lies with the government’s nationalised mortgage bank. I had several reasons for thinking this a wrong decision. Two of them relate directly to getting out of the mortgage famine we now find ourselves in. The Bank of England and Treasury needs the £24 billion back it has lent to Northern Rock, to give it more cash to use to make the general market more liquid. Requiring early repayment means even fewer mortgages available in the market, as each of the Northern Rock mortgages repaid so the taxpayer can be repaid will need refinancing by another mortgage company. Secondly, because Northern Rock is nationalised it cannot offer too much competitive product in the market, because it would then break EU competition rules. So we have to live with a situation where the need for repayment coupled with the competition position means that a previous large lender has withdrawn from the market, fuelling the scarcity of mortgages. The government needs to work out what the optimum balance between repayment of money owed to the Bank and mortgage withdrawal by Northern Rock is in such circumstances. It also needs to find a way to offset some of the negative effects of Northern’s withdrawal on the rest of the market.

The best combination of responses is to concentrate on freeing the wholesale markets for banks more by Bank of England open market operations and interest rate cuts. It will be the quickest acting. If market interest rates can be brought back to their old relationship with Bank rate we will know we are moving in the right direction.

Today someone of the radio told us that the credit crunch was easing in the UK wholesale markets, and intensifying on the High Street.

That’s what you should expect to happen. Banks and Building Societies are getting the message from the money markets that they cannot carry on lending so much. That’s why they are withdrawing their attractive mortgage offers, putting up rates and demanding larger deposits. They need to rebuild their margins (make more profit and protect themselves from loss) at a time when they cannot borrow cheaply in large amounts on the money markets, and cannot sell the same volume of mortgages on to others in the way they could in 2006. They need to husband cash and make more profit to deal with the write offs on past business and to combat the changed conditions they are experiencing for raising money to lend on.

As they withdraw their High Street offers, or ration them by price and deposit requirements, so their demand for extra funds from the money market declines. As a result, money market rates have started to come down, to get closer to the Bank of England’s rate that has been an academic irrelevance for much of the time since the crisis struck.

Some of the money market reaction is a question of timing. Banks and mortgage companies need to be more careful at a quarter or year end, and can relax a bit mid month. Some is more fundamental, reflecting the big decline in credit being offered to consumers, reducing the banks’ total need for cash.

It is by this mechanism that the credit crisis will move from hitting the financial sector, to hitting the consumers. All those who took pleasure in some well paid City types getting into difficulties and maybe facing cancelled bonuses or something worse, will now see that this is a crisis that will hit others too who were nothing to do with the credit explosion. The first casualties of the UK credit crunch will be first time buyers who will not have access to the same proportion of the selling price of a property on the same favourable terms as their predecessors in 2006/7.

There is a two way pull in the UK housing market at the moment. The price falls of the last few months have been small on average. The epicentre of the decline so far seems to have been some new flats in some city centres where developers had done well with their selling prices not so long ago, and where there is now excess supply. Some say the continuing pressure from new households, and the shortage of new build will keep prices up. They point out that interest rates are still much lower than in the last housing price decline. Others point out that whilst interest rates are lower, house prices are so much higher so mortgage payments are also very high. A one percentage increase in the mortgage on the base of say a 5% rate is a 20% increase in interest cost for the individual or couple concerned. If that is charged on a high house price and mortgage that can be very painful to the mortgage holder.

Whilst it is true that there are more people who want to buy a home here, that only keeps the market up and prices rising if it can be translated into effective demand through such people obtaining mortgages. There are always more people who want a first home or a bigger and better home than there are homes available. Prices sort out the imbalance in the market, limiting most people’s ambitions by the reality that the house they might like most is simply too dear. We are entering a period when more people are going to have more limitation placed on their ambition to own a home or a better home, because there is going to be a painful shortage of mortgage funds.

In these conditions prices on average are likely to come down. That is also part of the painful process of adjusting after a long period of inflationary credit has been let loose in the system. Falling house prices bring other economic problems in their wake. If fewer people move the demand for carpets, curtains and new furnishings will take a knock from that source. If people feel less rich because their main asset is no longer appreciating, then they will spend less on luxuries. As people pay more interest on the mortgage, so they have less income to spend on other items, as the mortgage interest is like a tax – you have to pay it or else. It’s all part of the economic slowdown most economists are now forecasting.

PS: Since writing this post I have seen the Halifax house price index for March. That shows a 2.5% fall on average in March 2008, taking the annual average increase down to just 1.1% despite the strong start to the last twelve months. It also reveals that the West Midlands and Wales are leading the market down, with London overall still up. I can’t see house prices suddenly reversing this downturn in the national average that has shown up so strikingly in the last month in this index.

I look out of my window to see my garden frozen solid, covered in frost and snow. It is April 7th, and I have just turned the heating up.
Will the government please give us some accurate figures of temperature trends over the last 100 years, given the disputes we read about over the very simple question “Has it been getting warmer or not?”

Big money talks. One of the richest football clubs in the world, Manchester United, is at the top of the Premier League. Ferrari, the first of the big spenders in F1, came first and second in the most recent Grand Prix. The Conservative and Labour parties raise most money in British politics and are likely to come first and second in elections. US athletes receive substantial financial backing for training and are likely to win more medals than the athletes of other countries at the Olympics that can afford less.

When I visited an F1 team (Not Williams that I have written about before on this blog) that had failed to win races and asked the obvious question, I was told disarmingly that they would never win an F1 race as they were so heavily outspent by Ferrari. The largest companies in the world pay the highest salaries to attract executive talent. The establishment view in science is reflected in the pattern of grants and payments for research projects. All this leads many of my Parliamentary colleagues, both Labour and Conservative, to adopt a kind of financial fatalism, and believe that elections, like many things in life, are just a question of who can get hold of the most money and the hire the best people to do the job.

And yet. And yet. The four clubs who made it to the FA Cup semi final matches did not include any of the top group of super rich elite teams of multi millionaire footballers and their mutli millionaire coaches. 3 of the 4 teams do not even manage to play in the Premier League at all. 25 years ago IBM was the runaway success in the world of computing: few would then have predicted the rise and rise of Microsoft and Google, Yahoo and Facebook against the apparently impregnable dominance of IBM with all the money and expertise at its disposal. Many a large corporation has watched as small rivals have arrived in the market to do something faster, cheaper, better, and have succeeded in doing so despite having only a fraction of the resources available to the market leader. In international sporting contests sometimes the underdog wins, and the participants from poorer countries often perform with distinction.

What some people fail to realise is that having money can help, but you need to spend it wisely. This government has fallen for the loads of money fallacy. Public services must be better because we are paying more for them. If you simply put the pay of existing managers up hugely but don’t ask or expect anything more from them, you will not get any improvement for your cash. If you hire more managers and administrators, rather than better ones, you may end up with a worse service, as the bureaucracy trips over itself. If you do not inspire commitment, loyalty and a more professional approach, it does not matter how much you spend – you will waste most of it.

The reason Ferrari wins a lot of grand prix is not just that it spends a lot – it spends the money on engineers, managers and drivers who want to be the best and go the extra mile to be the best. The reason Manchester United have stayed at the top of the Premier most of this season and last is the commitment of their Manager and their players to excellence – the wish to perform for their fabulous pay. The reason four clubs without huge money managed to take the top four places in the FA cup was that on the day their players showed more professionalism, more hunger and more commitment than the top clubs they were playing.

What any sporting outfit, political party or company needs is a combination of commitment, passion and professionalism. Big money can help you buy people more likely to have those virtues, but it can lead you to pay them too much so their hunger fades for success. Big money may find people who intend to remain professional and are the best, but they will still be vulnerable to challenge from people who are not yet well known, but have an even bigger hunger, passion and professionalism – who have more time to train and perfect their task because they are not distracted by the lifestyle and requirements that big money anything brings to its practitioners. The smart multi million pound footballers know their financial success ultimately depends on their ability to become and remain the best footballers of their generation. They know there could be someone practising many hours a day in a back street or on a field with a ball to topple them in a year or two’s time. The smart multi million pound F1 teams strain every ounce of intelligence and every muscle to make sure tomorrow’s car is better and faster than today’s even when they are winning. The sensible political party ,even when it finds raising money easily, should know that its success depends on harnessing the energy, enterprise and enthusiasm of a big army of volunteers and on mobilising its candidates who need themselves to put in great effort and show a professional approach. Elections cannot be won by a team of highly paid strategists and spin doctors on their own. The Clinton team had all the money before Obama arrived with the passion and the vision.

I am glad big money anything can be challenged, and share the English pleasure in seeing an underdog teach the assumed winner a few lessons. I also take pleasure in well paid professionals, when they show that we are paying for great qualities, and when they earn their generous pay. The multimillionaires of the Premier league clearly let their standards slip in the FA cup this year. It should give hope to all those taking on better paid and better financed rivals. It should remind us in politics that big money does not always win. What matters is spending it wisely, and allying it to a winning professionalism.

On 6 April 1780 one of the most famous motions ever passed in the House of Common was carried by 233 votes to 215. It was an Opposition motion, tabled by Dunning, which stated “..the influence of the Crown has increased, is increasing, and ought to be diminished”.

The background was the unpopular and unsuccessful war being waged by Lord North’s Ministry against the American colonists, and the perception that George III and his household held too much sway over his Ministers who in turn got away with too much in the Commons. It successful passage did not lead to immediate fundamental changes, but it was part of a process which finally undermined the North Ministry and the pursuit of an unpopular war against the Americans on very questionable legal and moral grounds. There were many MPs who felt the Americans had been right to resist monarchical and arbitrary power, and who saw the War of Independence as a painful and foolish civil war.

I mention it today because I feel we need another set of Dunning resolutions. Indeed, I would welcome your contributions to recast the old motion in the most topical way. There are some obvious ways of bringing it up to date:

“..the influence of the EU has increased, is increasing, and ought to be diminished”

Or “..the influence of quangos has increased, is increasing and ought to be diminished”

Or “..the influence of big money politics and spin doctors has increased, is increasing and ought to be diminished”

Just as in 1780 many people felt the government were not listening to their worries and taking action to deal with their concerns, so there is that same feeling today. Just as in 1780 the government was fighting a war it could not win against the wishes of many electors and MPs, so today the government is engaged on a couple of wars which leave the public feeling uneasy. Today it is not the Crown that has too much power, but the EU, the quango state, and some Ministers who use office to damage free institutions in our society.

Maybe the catch all resolution for today should be

“..the influence of unelected and unaccountable bodies and people has increased, is increasing, and ought to be diminished”

This does not have the same flowing simplicity of the original, but today it is not the Crown or just one body that causes the problems. It is the combined aggregation of power to government, and its exercise in undemocratic and unaccountable ways, which is so frustrating for electors and so corrosive of democracy.

I hear this morning the BBC have commissioned Will Hutton to explain why nationalisation can be a good idea, following hard on the heels of the BBC’s endless interviews of the Lib Dems to propose nationalisation of Northern Rock.
If this were a balanced broadcasting outfit, after such airtime for the pro case and such a foolish nationalisation, they would commission someone to make the case for privatisation, and explain why so many nationalised indiustries have lost so much money and sacked so many people down the years. They have no sense of irony – I doubt if Will Hutton will tell us how Northern Rock as a nationalised industry has immediately moved to act as Labour’s nationalised industries usually act – by announcing three years of actual and prospective losses, and a cut of one third in the workforce!