Month: September 2008

The US Treasury has moved to support Freddie Mac and Fannie Mae, the two large mortgage companies that dominate the US housing market. In what amounts to nationalisation, the Treasury has pumped in new equity capital and offered guarantees.

Fortunately this action does not come straight out of the Northern Rock book of mismanagement. In these cases there was no run on the institutions forcing the hand of the authorities. They were thinking ahead. Nor will nationalisation mean halving the mortgages offered and financed by the companies, as it does at Northern! The aim is not to sack staff and reduce the number of mortgages, as in the UK, but to make cash available and to try to stabilise a tumbling mortgage and property market. To this extent it is good news, and accounts for the immediately favourable response of the markets.

I am glad I am not an American taxpayer. This is a huge budget commitment. The Treasury says that with careful management the taxpayer will have to put up very little. Let’s hope they are right. The fact remains that this is the biggest ever rescue, and the US taxpayer now effectively stands behind half of all American mortgages, offering to pay losses on them if customers default. That’s good news for all the other banks in the system but bad news for taxpayers.

It shows how serious the present crisis is that the US authorities think they need to take such drastic action. Who would have thought a Republican President would end up nationalising the world’s two largest mortgage lenders? I do not recall that in the manifestoes four years ago. What kind of message does that send out to bankers and mortgage companies about how they should behave?

It is true that existing shareholders in the two FMs may lose, but everyone else implicated in making too many bad loans will have the protecting arm of the Treasury around them. Is it perhaps time for Mr Darling to make another one of his speeches about moral hazard? Will be hearing anything on this subject from the Governor of the Bank of England, who used to be strongly against such an approach?

To all my readers who think I have been too ready to seek action from the authorities on both sides of the Atlantic that can help stabilise house prices, I plead guilty. Collapsing house prices brings down much else with the fall. Many families pay the price with lost jobs, shattered dreams, repossessed properties. No sensible person wants that. I also think there has to be some balance in action taken, to avoid a worse problem in managing public debt and the government deficit. The art of getting through a crisis like this is to say and do just enough to allow private sector solutions to emerge. Shunting all or most of the problem onto government balance sheets does not solve it. It just moves the problem on, to emerge in a different form on a different day.

If these institutions have lost a lot more than is so far reflected in their write offs, then the taxpayer now will have to pay for the losses. If these institutions were just suffering from too little overall liquidity in markets so that investors were being unduly pessimistic, there were cheaper and easier ways for the authorities to sort that out.

One way or another the governments are taking over the bad loans and the portfolios of debt where confidence has been damaged. The European Central Bank has been busily taking in such paper to keep its banking system liquid. The Bank of England has done more of the same. The UK taxpayer has taken on responsibility for all the Northern Rock book, and now the US taxpayer is the reluctant owner of a couple of huge mortgage houses. The taxpayer interest has not been as well looked after as it should be. Of course Central Banks should take in poorer paper and make money available when it is needed, but they should do so with large enough discounts and requirements for write offs that fully protect the taxpayers who pay their wages.

The government is now spending on average £10,000 a year on every man,woman and child in the UK. Or, put another way, we have to pay £10,000 a head on average to the government in tax to keep them going. As children do not pay tax, that means the average taxpayer has to pay well over £10,000 a year if you add up all the taxes you contribute to.

So what do you get for your money? Is it a good deal? I just get my dustbin emptied once a week, and am allowed to use some inadequate roads.
I don’t mind being asked to help pay for the neighbours children to go to school and I don’t begrudge my elderly neighbour a free knee op.
I am not so sure about contributing to all the government’s wars, and become livid when I have to pay for regional government, an army of spin doctors, the rising number of civil servants, and the glossy brochure industry that is a substitute for government action. I dislike having to bail out the odd mortgage bank and railway company, and resent the ever expanding quango state regulating every feature of our lives, at our expense

I would like to hear from more of you about which bits of public spending you think are worthwhile, and whether you feel you are getting your £10,000 worth today?

And why am I doing two blogs today, like yesterday ? Because the weather is so bad I have lost both cricket matches this week-end I was hoping to play in. That just about sums up this summer and this year’s rain sodden cricket season.

I guess I am relieved we were spared a posing Minister for drought three years ago, and an overexposed Minister for floods over the last couple of years. I would, however, like the Ministers responsible for water supply and water control to do something instead of just saying things.

Three summers ago it was hot and dry. We ran out of water, so it was rationed. I called for a new reservoir in the dry south-east, and backed the plan for a desalination plant for London to act as reserve supply for dry times. Neither project has got past the drawing board three years on. On the law of averages we will get a dry summer sometime, and clearly we will have one before this government has got round to building the extra capacity we need for all the extra people they have invited in and all the extra homes they are building in the south east.

Now we have had two of the coldest and wettest summers I have ever had the misfortune to live through in a row. Fourteen months ago all too many people were flooded in their homes. We have had fourteen months of memos, lawyers letters, arguments over which public body is responsible in each case, Ministerial statements, a major Enquiry and Report, but very few men in diggers actually improving the ditches and digging a few more where there is too much water flowing.

What people want is some solutions. Public sepnding is now racing to £10,000 a year for every man, woman and child in the country. Why can’t they, within these huge budgets, afford just something to improve our land drainage, and to collect enough of the water so in drier times we don’t run out? Why is this just impossible for them to do? Why does everything take so long, cost so much and work so badly? Why does the Environment Agency define its job as warning peopole they might be flooded rather than helping ensure they will not be flooded? And why yesterday did Ministers give up on talking to the media and leave it to an official to do so? Are they at last embarassed by their lack of action?

The BBC in its report on UKIP said with some glee that the Conservatives will face a challenge from the right at the European elections because UKIP will demand a referendum on Lisbon.
Why is it right wing to want to ask the people about such a crucial matter? Were Labour and the Lib Dems being unacceptably right wing when they promsied one in the last General Election? Did they become left wing when they ratted on their promise (Yes, probably! That’s a delightful unforeseen consequence of the BBC nonsense).

What the BBC should have said in its report was this. The Conservatives promised a referendum on Lisbon in the last Election. We kept our promise, moving an amendment to get one, and voting for it, when Lib Dems and Labour let us down by failing to keep their word. I seem to remember there were no elected UKIP MPs available to help us secure that referendum, and fewer Consrevatives than we needed because UKIP and others had stopped some Conservatives getting elected on the promise of a referendum.

Conservatives have made clear we will give a referedum if Lisbon has not been ratified everywhere when we come to office. It seems unlikely it will have been ratified, so there will be a referendum. If by any chance it has been ratified we will be taking other actions to sort out the EU mess, as we cannot live with Lisbon, or with other parts of the accumulated Treaties and powers of the EU.

The Stock market fell badly
House prices are falling quickly
Bentley announced a three day week
New car sales are well down
Second hand car prices are low and falling
Property specialists are getting gloomier even after a 20% fall in commercial property values
The pound fell further
There are fewer jobs on offer

Some of my readers seem pleased that house prices are falling. Some still think we should be fighting inflation because the pound has fallen and imports are dearer. All the evidence is that the big problem now is the downturn. Inflation will fall rapidly next year. Fewer and fewer companies will have any pricing power. The Stock Market is waking up to the profits squeeze that will now follow the squeeze on family incomes.The government still refuses to cut back itself, intensifying the squeeze on the rest of us.

Some of my readers ask why keeping house prices up matters to politicians. It matters to them because it matters to most of their electors. Most people’s main asset is their home. They do not want it to fall in value. When it does it not only makes them feel worse off, but it limits what they can borrow to sustain their lifestyle. Of course rising house prices on the scale we have experienced in recent years is bad news – it creates a bubble which will burst. It would have been better to have controlled the economy so house prices rose gently. There is one thing worse than house prices rising too rapidly, and that is them tumbling. Many people will pay the price of that. It will mean lost jobs, shattered dreams, repossessions. Do not curse us to even bigger falls in house prices. It just means more economic misery ahead. It means people thrown out on the streets, and it means many others tightening their belts even more whilst big government spends on as if nothing had happened.

The last couple of weeks have seen confirmation of the downturn on both sides of the Atlantic. House prices continue to fall in the USA, and the UK. Latest figures show UK house prices market now down by 12.7% over the last year, with a big fall of 1.8% in August. UK Car sales fell by 18.6% in August, always a poor month for them anyway. Fears are growing of bad profits performance ahead in the US and the UK. Surveys of confidence and purchasing intentions are in negative territory.

None of this should have been news. My forecasts of falling house prices, slowing activity, poor confidence levels and squeezed profits were not out of line with many other commentators. It’s just the British government which refuses to give us sensible forecasts to help guide markets. Those Ministers who lecture the private sector on the need for transparency are unable to give us any themelves on these important economic matters.

There are two necessary conditions for a recovery. The first is a fall in oil and other commodity prices, to relieve the inflationary pressure. That should in due course enable Central banks outside the US to cut interest rates, and reduce the need for rises by the Fed. As predicted, this is now happening, with oil down substantially on its high.

The second is the creation of more liquidity in Western banking markets, as the banks recapitalise. Recent market events imply this has not yet happened sufficiently. Substantial sums have been put into banks by existing and new shareholders, but banks are now being very cautious and regulators are reinforcing the caution long after the inflationary credit bubble has burst.

Both the ECB and the Bank of England kept their interest rates up this week. They are still fighting inflation more than recession, which does not help bring forward recovery.

Over in Euroland the economy is sinking, shrinking in the second quarter GDP figures. Each main central Bank has now taken lower quality assets from banks as security for cash. Market participants are asking how much more of this can they do, and will they roll these facilities over? It reminds us there are now issues to work through in returning markets to normality, arising from the short term measures the authorities took when the crises were at their height and individual institutions were under threat.

It is still important to watch interest rates and banking liquidity. I am still more worried by prospects for the UK economy than for the US, in view of the large government deficit in the UK and the importance of house prices to the economy as a whole. When the government’s mini package was announced on housing many rightly said it was far more important to know how much liquidity would be supplied to mortgage banks, and how would the Bank of England handle its existing scheme?

The one bit of good news is even this government in the short term seems to realise the money is running out. There may be no additional special scheme to help people with their energy bills this winter, and no windfall tax on the energy companies at a time when we need them to invest more in future capacity. This will disappoint many of the government’s own supporters, but is a whiff of realism after many special increases in public spending. Even the housing scheme contained elements of juggling within existing budgets. Gaining control of public spending is crucial to recovery. Getting priorities right within it to cushion the impact on the most vulnerable should also be part of the government’s response to the economic downturn.

The contrast of McCain and Palin worked well for the Republicans. The Obama camp is driven back onto attacks and disparaging comments whilst McCain tells the world he wants to work with Democrats for the change America needs and Washington will have to accept.

I heard McCain speak at the Conservative Conference when he joined us there. His speech made me appreciate how good David Cameron is as a public speaker! Last night he performed so much more effectively. His quiet lack of oratory was persuasive, followed by a crescendo in his credo which stirred the audience to enthusiaism.

The problem with all moderrn politics is Who will deliver? So much money is raised and spent on judging and polling the public mood, that you would expect both sides to know what the public wants. Of course electors want change, because the economies of the world are weakening and people are getting hurt. Of course many electors want politicans who will stand up to big government, and tame it to work for us. Of course sensible people are against war, and want the West to win more friends to its causes without having to exchange bullets. Mc Cain captured all that, thanks to the great words he and Palin delivered. They can afford the best in speech writers – as can Obama. The issue for both camps is can they deliver the policies that will make them come true?

Obama’s early brilliant rhetoric of change is looking stale, as the reality of more spending, more laws and bigger government emerges from beneath the noble aspiraiton to improve the lot of the people. Palin’s language that she will help tame the Washington bureaucracy looks fresher, because she has just arrived on the scene. McCain promised last night to unleash Palin on Washington. He promised smaller government and lower taxes. Can they deliver?

The race is still close. Both sides show what you can achieve in politics if you research the mood well and use words well. People can become interested and enthused. Whoever wins then has a far more difficult task. How can they make modern bureaucracy bend to their will, to get more out of it for less cost? If the winner cannot do that, the public will feel let down all over again. Can either side make a difference to the Credit Crunch and the economic troubles? Neither has so far come up with a plan which makes any sense. At least McCain’s wish to curb spending and the public deficit would help.

Sarah Palin gave a great performance to the Republican faithful. I am not myself swayed to favour a candidate because they go hunting, have five children, are married to a Trade Union member or defend the citizen’s right to carry arms. But then I’m not an American and I do not have a vote in the Presidential election. I don’t think the behaviour of children is a more relevant considersation for a female candiate than for a male one. What matters is how the candidate would behave in office.

I do like brave interesting politicians who aim to curb the excesses of big government. Mrs Palin came over as a feisty and fresh face on the international stage who has been doing just that in Alaska. I liked the way she began the spending controls by selling the Governor’s plane and doing without the personal chef. I enjoyed her telling the audience that you just have to use the veto as Governor to stop less desirable spending. Her intention to go to Washington to serve the people rather than the “liberal” media commentators was a novel idea in this age of spin. Let’s hope it catches on.

It was even more fun hearing the hissy fits from Democrat women, still smarting from the rejection of Hilary. They came over as unpleasant, tearing into a member of their “sisterhood” because she dared to have popular views on putting government back into its place as servant of the people rather than as a life support machine for the elite, cutting back its size and arrogance. It seems some Democrat ladies only want the glass ceiling broken as long as the whole of the rest of the big rambling building of government remains intact and is voted more money by the winning women.

It is sad to read that in some places in the UK as well as in politics in the USA the glass ceiling still impedes talented women. I want them to break through by their efforts, as some have so successfully. I speak as someone whose best boss was a woman. Margaret Thatcher was a good boss because she listened, weighed your advice based on how well thought through it was and how well you defended your case. She was prepared to do difficult things that did not poll well if they were right for the country and right for the longer term. Her successors in office have not had that combination of longer term vision and impatience to get things done which she had. Even those who disagreed with some of the things she was doing admired her dedication and tenacity in doing them. Her worst critics in Labour have come to defend important parts of her new settlement of the Union and privatisation issues, as they have come to see how some of these reforms were crucial to advance people’s living standards.

In the USA the Republicans have done more to advance the cause of talented women in government in recent years. Miss Rice is, arguably, the second most powerful person in the world after the President. Now they have placed a female Governor on the ticket for the White House. As Mrs Palin hit out at Mr Obama, it was amusing to hear her remind the audience that she had much more executive experience just by being a small town Mayor than the Senator, let alone her experience as Governor. My advice to Mr Obama is “Don’t make experience an issue in this election”

The Bank of England meets this week to decide interest rates with its policy in tatters.

Its sole aim is to keep inflation down to 2% per annum. The reason behind that instruction is to uphold the purchasing power of our currency. Neglect has led to a big devaluation of the pound, meaning our purchasing power if we wish to buy goods and services from abroad has been slashed.
As overseas trade represents a susbtantial slice of our economy, this is a serious assault on our living standards. Indeed, many of the luxuries and extras are imported, leading people to feel much worse off when their prices rise on the back of a devaluation.

The Bank’s problem is there is no easy way for it to restore the value of the pound at home and abroad. Raising interest rates would be the traditional response to a sinking currency, but in these conditions that might be seen by the markets as short term, leading to a bigger decline in economic output and worse problems next year. Markets could take fright rather than buying pounds, as they would not see it as a sustainable policy.

Cutting rates in the way we need to stimulate activity could also deter people from buying sterling, for the obvious reason that it lowers the return you make from holding the currency.

Leaving things as they are, the likely decision of this week’s meeting, just delays sorting out the mess, and may not help either. It looks like dither.

So what should the Bank do? If it were serious about rebuilding confidence in our currency, and defending its value, it would send a public letter to the government demanding they take the action needed to restore confidence. If the government produce new sensible forecasts, takes action to rein in its wilder and less desirable expenditures, sorts out Northern Rock and did one or two other things to show it wanted to get on top of the financial crisis, then the Bank could cut rates.

When the US took concerted action to improve the US economy, Fed and Administration combined, the Fed was able to cut rates and the dollar rose. It is the weakness of the UK economy that is adding to the fall of the pound.

Yesterday saw a government fight back on the economy savaged by events.

The pound dropped to a new all time low against the Euro – a Euro is now worth more than 81p, 14% more than at launch.

The pound dropped again against the dollar. It has fallen from $2 to $1.77 in les than a month, making all items priced in dollars more than 10% dearer.

The latest report on the jobs market said there had been a sharp contraction in jobs on offer.

Many people said that the government’s encouragement to first time buyers to buy properties when house prices are still falling at around 1% a month was bad idea

The OECD came out with a surprising forecast that only the UK of the major economies would plunge into recession in the second half of 2008.

The fall in the pound and the changes in the job market matter more than the forecasts and statements. The devaluation has made us all a lot worse off. It’s time to think of cancelling the holiday in the USA if you were planning one. It means dearer oil and food. It means a bigger squeeze on our spending power generally.Now we are imprting inflation, it will put the Bank off action to cut interest rates quickly enough.

The fall in jobs is not all bad news. Wages are under reasonable control, as I have been forecasting. There is not going to be a wage inflation against such a gloomy jobs background. The fall in jobs also implies companies are taking action to avoid financial disaster. It means more companies will survive the downturn.

Even the government’s housing package was mercifully small, and included some spending that was already in budgets. Is that the first sign that the government realises there are limits to how much it can borrow?

Unfortunately the government has already committed itself to unrealistically high spending plans, and will not come clean on how much worse the deficit now is, thanks to sharp slowdown. It remains vulnerable to the mauling given it by the OECD forecasts, because its own forecasts are so obviously wrong. No-one believes the government’s figures. If they wish to reassert any kind of authority they should re forecast now.

And whilst they are about it why not recall Parliament to discuss the various rescue packages? I am sitting in my office this morning, but as always in September the place is a building site. Whilst most MPs are away from the place, they just carry on spending!