What should the UK do now?

Gordon Brown tells us he is the man able to pilot us through the financial crisis and the economic downturn. So what should he do?

1. Interest rates. The US slashed rates which ran at 5.25% through most of 2007, to only 2% today. In the UK Brown’s MPC (all his direct and indirect appointees) kept interest rates below 5% from 2nd August 2001 until 9 November 2006, in order to stoke up inflation, and have now held them above or at 5% ever since, to intensify the downturn. Will the PM sort out the MPC and try to make it counter cyclical instead of reinforcing the pain of the cycle?

2. The government deficit. Yesterday’s newspapers at last examine the huge drift in the deficit which readers of this blog will be acquainted with. Many now agree that this year could see an overshoot of at least £20 billion in borrowing. Some think next year will be far worse, and have gone further than me in forecasting up to £100 billion of deficit in 2008-9. Will Gordon Brown start to get a grip on the public finances, and reassure us convincingly that the deficit will not go up by these huge amounts?

3. Transparency. The PM urges the private sector to be more transparent. Will he at least adopt the same degree of transparency in compiling the government’s balance sheet as all large companies have to adopt by law? This would mean putting the pension liabilities and the off balance sheet borrowings onto the UK government balance sheet, revealing that we are around 3 times as much in debt as the official figures suggest. If he is right that confidence comes from transparency this will help!

4. Preventing another mortgage boom and bubble. Is he going to propose detailed regulation of individual mortgages, with the Regulator having a view on multiples of income and proportions of value? If so, how will he prevent banks and Building Societies issuing top up loans in addition, or sending the loan request offshore?

5. Tackling the bad debts in the system. Is he going to follow the US and offer to buy up poor performing loan packages to relieve the banks? If so, where will the money come from, and how will he price what he buys? If not, how will he respond to the US treasury Secretary’s request to other jurisdictions to follow his lead?

6. He tells us he has been presiding over markets which need to be cleaned. Will he specify in what way they are dirty and how he intends to clean them. Is he happy with current bonus payments in the banking sector? If not what can he do about it? Is he happy with Hedge Funds that follow short as well as long strategies, or is he going to ban them, forcing them all offshore? Is the ban on short selling financials just temporary, or does he wish to extend it?

7. Does he think recent large sums put into markets to improve liquidity have been well spent? Does he intend to offer more?

8. Will he give the powers back to the Bank of England that he stripped away in 1997, so they can do a better job of managing the money markets/? Does he agree the money markets have been mismanaged in recent years? Does he now regret how loose money policy was in 2004-6? Does he regret the change of inflation target he pushed through?

Some of you are bound to ask me again what I would do. I have set that out on many occasions as the crisis has unfolded. To summarise,today I would still cut interest rates, take action to curb wasteful and undesirable spending and to control public sector costs, give the powers back to the Bank of England, and ask them to keep markets more liquid. I would seek talks to ditch the current Basel II regulatory structure for banks, and seek to negotiate a regulatory framework that considered liquidity as well as capital adequacy, and which tried to be counter cyclical rather than pro cyclical. If we don’t do this we will just start another cycle in due course.

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28 Comments

  1. Posted September 22, 2008 at 9:59 am | Permalink

    Sorry, don’t agree with point 1. Interest rates take up to two years to fully work their way through the economy so setting interest rates is always going to be more reactive and proactive, despite their best efforts.

    http://lettersfromatory.wordpress.com

  2. Stewart Knight
    Posted September 22, 2008 at 10:08 am | Permalink

    Tongue in cheek of course…but this is all very well, but Brown is not the Chancellor..is he?

    😉

  3. gordon-bennett
    Posted September 22, 2008 at 10:23 am | Permalink

    I think the ban on short selling is an empty gesture by a government trying to give the impression of taking action. In other words, a PR stunt which relies on the fact that most people don’t know anything about market processes.

    There was little short selling of HBOS shares (see: http://www.investegate.co.uk/invarticle.aspx?id=58407 and many other articles ) so short selling was irrelevant.

    If George Osbourne could expose this fraud in his conference speech it would be dramatic.

    What do you think?

  4. Johnny Norfolk
    Posted September 22, 2008 at 10:34 am | Permalink

    John
    He will never answer these questions, and the media should hound him about it till he does. We have a right to know about such things

  5. Posted September 22, 2008 at 10:45 am | Permalink

    The Maastricht Treaty and Bassell agreements which left the markets unchecked without social responsibility and are to blame for this crisis and they need to be scrapped to avoid another crisis.

    The FSA should be AXED, and the industry should self regulate itself within guidelines based on prudential finance not cumbersome bureaucratic interference as that’s the last thing the industry needs to rebuild itself.

    The mortgage industry should be given back to the MCCB and banks should be controlled solely by The Bank of England. These measures will help to end the bureaucracy which failed to prevent this crisis and will free up the system to get it working again.

    Financial crime should be dealt with by the courts system not through bodies which act outside the independent functions of the judiciary as is the case with the FSA.

    Interest rates should be reduced to stimulate the market.
    A standard Stamp Duty of 5% should be moved to the vendor.
    First Time buyers should have MIRAS restored.
    Government Bonds could back new purchases to within 80% of the loan value without incurring debts to taxpayers.
    This would allow lenders to create a saleable debt asset whilst guaranteeing 20% of the risk on those assets which reflects most if not all of the risk. This could be achieved through the lenders own balance sheets or by way of it taking insurance.

  6. Posted September 22, 2008 at 11:05 am | Permalink

    What matters the most is your last point on returning powers to the Bank of England. There is little point in writing a new rule book however if the referee doesn’t have full authority to enforce it. However he must also be completely without fear or favour and that means that the present situation, in which four of the members of the MPC are appointed by the Treasury must be scrapped. As for the FSA, a quick and painless death would seem to be the kindest thing.

  7. Nick
    Posted September 22, 2008 at 11:08 am | Permalink

    Some factual errors. Basel II does consider liquidity.

    However, even post LTCM, there are very few books (I’ve only found one on the matter)

    So, I’ll ask again. What are the Tories going to do about transparency.

    Will you remove all the Off balance sheet accounting from the government books?

    Somehow I suspect not, because you like Labour will have to use partial default to get out of some of the obligations

    Nick

    Reply: I did not say Basel II ignored liquidity, but its capital provisions lay behind Northern Rock’s wish to gear their balance sheet more.
    I am in favour of a Conservative government starting with an honest account of the balance sheet.

  8. Chuck Unsworth
    Posted September 22, 2008 at 11:20 am | Permalink

    The Conservatives should make a point of telling exactly like it is at their conference. There’s no point in wasting time with platitudes – we need real clarity as to the economic (and political) mess which this country is now in.

    It’s obvious that it will take many years to recover. Let’s not beat about the bush, we are in deep trouble and it is patently untrue to say that Brown is best placed to lead this country out of the economic meltdown. He’s has a decade of tinkering, failed to see anything beyond the Downing Street horizon, and now wishes to be seen as a global saviour. His delusions are beyond a joke, he is actually a danger to our national security.

  9. Tony Makara
    Posted September 22, 2008 at 12:35 pm | Permalink

    There must be a long term economic strategy, the development of an internal market for food and fuel and a revived manufacturing base, this will protect us from importing inflation and allow us to move away from pursuing a strong Pound policy ending the need higher interest rates to support the currency. Public spening must be reined in and money freed up to provide the stimulus of tax cuts, producing a tax regime that encourages profit making and job creation. Politicians need to reward savers, we must move away from the culture of casual debt. The housing market will function better once the inflation causing easy-credit is purged from the system, leading to more affordable property and people holding realistic expectations over what type of property and areas they can afford to live in. There can be no quick-fix because we have to change an entire culture that has developed over the last ten years or so. A back-to-basics economics policy is needed.

  10. Posted September 22, 2008 at 1:36 pm | Permalink

    The financial crisis is caused by a productivity crisis. The western world has been outsourcing all the actual making of things & just relying on the paper looking good. that can only go so far.

    We should build new, price competitive, electrical capacity, cut regulations, particularly "environmental" ones & ones in the costruction industry which is particularly enmeshed, we should cut corporation tax & we should improve education & training in science & technology & we should offer X-Prizes. Do all those & the fincail industry would have real hi-tech stuff to invest in & wouldn't have to go for pyramid selling property schemes.

  11. Posted September 22, 2008 at 2:26 pm | Permalink

    Today the Chancellor responded to a BBC question about income tax increases with the reply that now is not the time to take money out of the economy. Reading this post of yours again
    http://www.johnredwoodsdiary.com/2007/08/18/alast

    I presume he means that he has ruled out tax cuts!

  12. michael, islington
    Posted September 22, 2008 at 2:55 pm | Permalink

    So you would offer a policy framework which would almost certainly drive the economy into recession with huge levels of unemployment in tow which would almost guarantee a political collapse of support just in time, five years or so, for a reinvigorated Labour Party to say it's all your fault, get back in and hit another spending binge.

    The first bit sounds a lot like Hilda's first term.

    Are you suggesting another discrete and doable war in some God-forsaken place, by any chance?

    Reply: What nonsense – No to all the above in your contribution

  13. Patrick
    Posted September 22, 2008 at 6:09 pm | Permalink

    John,

    There are 2 broad lessons here, one relating to wider economic management and one relating to markets:

    Broad Economics
    STOP VOTING FOR SOCIALISTS! How many times does a country have to re-experience bankruptcy before the notion that it's possible to tax and spend a country into a better standard of living dies away? Labour governments always end in debt fueled tears. Look at all the grief Palin gets from believing in creationism – shit I reckon believing in tax and spend is way more stupid and way more damaging. I really do not understand the 25% or so of the UK who would apparently still vote for Brown. Are they on drugs?

    Markets
    It's not morally sustainable that profits accrue privately (mostly to hired employees and not inept shareholders – usually also paid employees not directly interested) but that losses are the taxpayers problem. If I were Chancellor I'd legally divide financial institutions into those that will and will not be allowed to fail. The 'not allowed' group would have to accept strict limits on capital adequacy, gearing, lending practices, trading practices, bonuses, etc – and therefore ultimately on their profitability. Dull but safe. The 'allowed to fail' group could do what the hell they liked but as soon as their trade books grew to a size where they they posed a systemic risk then they would get recategorised.

    Oh – and I think 'mark to market' needs a fundamental rethink. Works OK in stable or rising markets but serves to accelerate a crash. Are packages or troubled mortgages really worth nothing? Of course not. Even with a 15% default rate the DCF would be worth 85% of nominal. Nuts.

  14. Bazman
    Posted September 22, 2008 at 6:24 pm | Permalink

    What should the UK do now? Stop corporations/banks, businessmen and the City taking us all for mugs would be start. The rest is just nuts and bolts.

  15. mikestallard
    Posted September 22, 2008 at 6:48 pm | Permalink

    8 excellent thoughts – and, of course, to us on this blog they are in no sense unexpected!
    Today I watched two half hours of TV. In one Paul O"Grady handled interruptions and even disapproving shouts from the audience. Everyone laughed. It was fun, if a bit rude. I did not see this in the Labour Party conference, which was the other half hour. Most of the (elderly) audience seemed to be fairly restive, I felt. there was little communication between them and the Chancellor.
    Yes, I sat through the whole of the Chancellor's speech! There was one joke (I think). If I had been, say from Mars, I would have thought that everything in the garden was lovely, there was no debt, no crisis much in this country although things abroad were pretty rough, and there was no need to do much anyway because the Great British people would sort it all out.
    Meanwhile the brooding Gordon Brown sat and looked, well, slightly like a huge unhappy labrador.

  16. Bazman
    Posted September 22, 2008 at 7:22 pm | Permalink

    I have always been sympathetic to the romance of the bank robber whatever the reality. ‘My Daddy Was A Bank Robber’ etc. The adrenaline rush, the timing and planning, the little guy winning. The money would be so sweet and walking into a bank would never be the same. I have not become less sympathetic in recent weeks.
    Get some!

  17. Nick
    Posted September 22, 2008 at 7:43 pm | Permalink

    Thanks for the reply John. I’m looking forward to your speeches on the matter. You could start at the PMQ and ask Brown if his attack on OBS accounting at the banks applies to the government.

    The problem with trying to ban Basel II is that Basel II is the best approach to the matter. However, you have to remember that a lot of banks still are on the old regulation system. It’s clear then that it isn’t Basel II that is at fault.

    More CDS trading is needed. That frees up lots of credit lines.

    Having clearing systems to net off trades reduces capital requirements. That improves the capital bases of banks.

    Investors aren’t going to invest. If you nationalise just after begging investors to invest, you are going to be laughed at.

    If banks won’t lend to each other, depositors who are also loaning to banks aren’t unless they get insurance. That means that you need to up the insurance guarantee in order to get more money into the system.

    Nick

  18. Jonathan Bryce
    Posted September 22, 2008 at 10:11 pm | Permalink

    I'm not convinced that reducing interest rates would help. The base rate may be 2% in the US compared with 5% here, but if you look at the rates charged for mortgages, they are actually more expensive in America than here.

  19. bandyman
    Posted September 22, 2008 at 11:09 pm | Permalink

    I sense a glaring omission from any of the commentary that I have read relating to the state of the economy.
    It appears to me that Great Britain, a nation proud of its banking and consulting expertise and a country that depends heavily on exporting its wisdom, should consider some medium-long term solutions to make certain that it retains this edge. Would you agree that the countries finances would be greatly boosted, as would the quality of life (and services) and the general wealth of the nations citizens would improve, if we the people, became a more valuable asset to the rest of the world? If a greater number of UK citizens had exceptional skills and knowledge, earnings would increase through improved exports of services, increased entreprenurialism, improved efficiency etc. This would drive the nations revenue, improving the incomes of the populous, simply due to their increased value and effectiveness. Would it not make sense to take incredible steps to ensure that over the next 10-20 years, that all children are provided with a truly world class education, with excellent careers advice and longer term, part-time training possibilities that remain available and encouraged throughout an individuals career. Increased value and employment opportunities would evolve at all levels and a significant shift in attitudes would follow, leading to a positive spiralling effect. This would result not only in the increased value of our people, and therefore improved economic worth and greater revenues, but perhaps to a society that is more respectful towards each other, communities that are safer and a dramatic improvement in the attitude of the youth from a greater sense of hope for the future, which is certainly missing in many communities today and especially within much of the current youth population. I'm led to believe that the current annual spending on education is 74biilion for 2010-11. I believe that we must recognise and accept that we currently risk losing our competitive edge and that a truly unprecedented increase in education spending, perhaps even as bold as 50% increase, could be a wise investment with outstanding long term returns. Reductions in the costs of unemployment benefit, prisons, healthcare, crime etc. plus increased foreign investment, corporation tax, income tax, vat, and export revenues would surely follow.
    In commerce, if you want your employees to improve performance and/or adjust to new situations, you have to train them. UK PLC needs to take the same approach.

    • mikestallard
      Posted October 2, 2008 at 7:46 am | Permalink

      Michael Gove wants to encourage smaller schools which are more or less independent of government. The danger here is that, if you are stuck with a lousy teacher in a small school, you lose out. (Sentence left out)!
      Even so, in smaller schools, everything becomes more manageable. Children are known for what they are and so the teachers can develop them. Teachers, too, are known for what they are and respect comes – if it is deserved. Both of these things can happen in Comprehensive Schools. But then the children go into the corridor……
      Lots more independent (free to parents), competing schools might well (as in Sweden or Holland or the USA) drive standards up and, if religious schools (of all kinds) were encouraged too, they might well end the "whatever" attitude of many of today's teenagers and school leavers.

  20. T. England
    Posted September 22, 2008 at 11:49 pm | Permalink

    The UK is waged by America, so as far what should the UK do, Um! Hang on tight! Hope America includes some of Britain’s financial companies in its bail out?
    Britain has to wait for America to come out of recession before we can see any light & as America is still unbelievably not really in recession but seriously heading there, I believe Britain has a long way to go!
    If we look at it that from America coming out of their recession it could take us two to three years from then to come out of ours then, hey!

    So! This bail out!
    Is it going to be the package they hope it will be?
    Of course not!
    If those in Congress can all agree on a package that doesn’t have too many “add on’s” & kill it off, then it will probably be the mechanics of implementing such a package that will cause so much trouble it (the plans!) becomes unworkable.

    Let’s say the package helps (if they could get it to work), it can only help the companies that don’t have too many debts & so can make plans for the future without having to borrow money at a high premium?
    I wonder how many companies that need to borrow to survive will be around this time next year?

    The public in America seem to be slowly realizing that this big amount of cash Congress are paying out on their behalf isn’t really going to help them pay their mortgage any time soon.
    The best tax paying American’s can hope for is a good deal when Congress buys those bad debts!!!!!!!!!!!!!!!!!!!!!!!!!!

    I believe the cost of the mortgages in trouble is around two trillion, if that figure is to be believed then the bail out is falling short to start with anyhow!
    Some experts are saying that the true cost of this crunch to just Americas economy is going to be around fifteen trillion dollars!!
    Now, that’s a lot of work putting that kind of cash back in your system.

    One thing I believe will help is when big foreign companies start to put big amounts of money into certain companies to show their confidence with them, now this will just probably be a gesture of good will, as much as helping themselves in the long run! But hey, beggars cant be & all that!
    But! What will be the downfall of that? Britain gets owned! Well!!

    What about if more of our banks become “unsound”!
    What about if the newly formed super bank realize’s it’s in trouble, then what?
    Will we be happy to see more foreign banks on our high streets offering loans?

    So! What should Britain do?
    I dunno!
    Stop Brown giving our money away over seas when we need it over here would be a start! That’s just a particular hate of mine among many!
    Lower the population & become a more self sufficient country by growing our own crops & making our own “stuff” again.
    Pull together as a country! As a unit! Help each other like we have never before!
    Just a guess!

    There are lots of things Britain could do! But as for doing the right things!!
    I dont think Labour knows how!

    • mikestallard
      Posted October 5, 2008 at 10:27 am | Permalink

      Yes, we're all DOOMED!
      But I thoroughly liked the last paragraph. Are we the only two people on earth who want to see a small Britain with a manageable population, a human size banking system that actually cares about the people who use it and farms that actually produce food instead of biofuels?

  21. T. England
    Posted September 23, 2008 at 10:51 am | Permalink

    I take it I'm wasting my time posting here!
    And that did take a little time.

    Thanks! :o(

  22. backofanenvelope
    Posted September 23, 2008 at 11:54 am | Permalink

    How about Brown/Darling doing absolutely nothing?

    Houses over valued – prices falling.
    First time buyers can't get on the property ladder – see above.
    Lending rules too lax, now being tightened.
    We are using too much expensive energy – rising prices take care of that.
    MPC concentrates on primary aim – getting inflation down to 2.5%.

    The only useful thing they can do is cut public expenditure to finance tax cuts and benefits increases for the bottom 20% of the people.

    They won't of course, it will all be loft insulation, school for 2-year olds and broadband connections for people who can't afford a computer!!!

  23. T. England
    Posted September 23, 2008 at 9:03 pm | Permalink

    I understand!
    It's because I made you look silly when you tryed to laugh off the fact that America was going into recession isn't it?
    Or is it other points that I have predicted & you haven't!
    Anyhow!
    As this is my last post here I'll leave you with this!
    I can now laugh when I hear people like Guido say your know your money!

  24. Adrian Peirson
    Posted September 24, 2008 at 2:03 am | Permalink

    John, you must know how fractional reserve banking works.
    For every £1000 pound on deposit, the bank lends out £10,000.
    They worked out yrs ago that only one in ten return for their money at any one time.
    This is fraud is it not, they are lending something out, either thin air credit, conjured up as a debt, or worthless paper money.

    This is also hy Bank runs must be stopped, otherwise people wil realise their money no longer exists, its been lent out and the Bank has lent out TEN TIMES more money than it ever had.

    This is the root cause of our Problem, Money is part of the trading system, if one part of the BArtering process is fraudulent then the whole thing will sooner or later collapse, which is exactly what is happening.
    Irrespective of the spin and outright lies told to us by govt and their GLobal banking Elite Paymsters, Money should have value.
    Our Banking system is a fraud, they are lending out what they do not have, they deliberately lower interest rates, ensnare borrowers then raise them again to trawl in the assets of those who have been ensnared.
    The Banks then convert these assets to cash and ultimately to Gold (they are not going to fill their personal vaults up with worthless paper are they.

  25. Posted October 5, 2008 at 11:50 am | Permalink

    The entire economy rests on the rises in equitable values of house prices. The remortgage industry has a clamp on it for a number of reasons here and these are the areas which should be dealt with first.

    1 – Sellers not Buyers should meet the costs of stamp duty. The cost of which can simply be added to the sale price and will automatically either fall to borrowing or be offset by a discounted price. It is an anathema to place a TAX on people who are trying to buy a home. It is not so with a person choosing to sell.

    2 – Stamp duty should be raised to 5% across the board so as to remove complicated bureaucracy and gain further revenue.

    3 – Builders, would pay stamp duty on sales of homes not the buyer and this would reflect in offset in their accounts.

    4 – First Time buyers could be promoted with the re-introduction of MIRAS. Thus enabling discounted tax and a direct influence into the market to offset higher lending rates.

    5 – Regulation of the advice process of the mortgage industry should be placed outside the auspices of FSA regulation and into the hands of the body it was taken from – MCCB. Thus, enabling an easier, less complicated, less bureaucratic way of conducting 'business', with a responsible approach which is sufficient and not over bearing for the industry, the seller, the buyer and the remortgager 'to actually do business'.

    These simple tasks are easily achieved and will set the ball rolling to restart the economy.

    As for fiscal controls I agree with David Cameron and George Osborne. A separate panel should be made to control it instead of some numpty at Whitehall who spends money like it's going out of fashion.

    The Maastricht Treaty needs to be either dumped or re-written too, same as the Milton Friedman monetary system which is without social conscience and a great danger to economics and to the political decision which are forced to drive for growth as a result of it.

    Financial markets should regulated by the Bank of England and the FSA should either be held responsible to the Bank of England, or it should be scrapped and a new body should regulate financial markets like it used to under the Personal Investment Authority.

    Government meanwhile should concern itself with delivering jobs and helping to restore manufacturing and trade.

    I suggest a new "Department for Trade" is geared up within the DTI to actually enable it to focus on trade, jobs, industry, and all that goes with it in terms of employment rights and wages. So too, a new enterprise scheme with the ability to grant business an array of preferential starter loans to businesses to enable good ideas to flourish in our economy rather than perish under the present system which is at the behest of banks which have squandered their own capital resources.

    We should also get out of the European Union and re-join EFTA.

  26. Nick
    Posted October 12, 2008 at 12:00 pm | Permalink

    Another more taxes solve the problem.

    More taxes are the problem.

    Nick

  • About John Redwood


    John Redwood won a free place at Kent College, Canterbury, He graduated from Magdalen College Oxford, has a DPhil and is a fellow of All Souls College. A businessman by background, he has been a director of NM Rothschild merchant bank and chairman of a quoted industrial PLC.

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