It’s not all going to plan, Chancellor

The UK authorities combine blood curdling statements with inappropriate action to handle the financial and economic downturn. Mr Bean, deputy Bank Governor, has gone further than the Chancellor and the Governor with lurid language. Do these people not understand that markets are listening to their every word, and moving prices on the back of their statements? Can’t they learn to use language carefully? They should tell us the truth in a measured way, always pointing us to a better tomorrow by taking action likely to stabilise rather than destabilise.

The question this morning is how much more bad news is it going to take to get them to do something sensible? How far does the pound have to fall to get their attention? How far does the Stock market have to fall to persuade them that current policies are not working? How far do the prices of bank shares have to fall before even this government says the potential losses to taxpayers of the bank share deal are unacceptable? When will they stop concentrating on trying to avoid the next credit bubble by the kind of tough regulatory action they should have taken 2004-6, and see that their immediate problem is not a credit bubble but a credit collapse?

I am constantly being asked what could they do? Here is my present list, containing some familiar items to regular readers.

1. Cut interest rates. Convene an emergency meeting of the MPC if they want to persist with the fiction that they are in charge, and don’t let them out until they see sense and back Mr Blanchflower.
2. Revisit the banking share package. Tell Lloyds to raise its own money anyway it sees fit. The taxpayer should not finance the merger. Sort out with HBOS and RBS a package which is fairer and lighter on the taxpayer, making them raise more of their own capital and cash by cutting costs and expenses and conserving more of their own cashflow.
3. Start to get more control over public spending, and give us revised forecasts of public borrowing which are credible and show a wish to get on top of the government’s own growing debt mountain.
4. Sort out the statements of the UK authorities. They should be sober rather than apocalyptic, and should concentrate on what is being done to tackle the problems of banking liquidity and capital, overborrowing and government indebtedness.
5. Produce new forecasts of the economy so we have a better idea of what the authorities really think about the length and depth of the recession they are now calling.
6. Work with the banks to get maximum benefit from the £400 billion plus package of loans, guarantees and money market assistance. The money needs to be supplied however it does most good to get banking markets working again, with proper security for taxpayers.
7. Deliver on the promise to pay all government bills within 10 days.

The magnitude of the UK debt problem is large but it could be manageable. UK consumers and mortgage holders have borrowed around 100% of National Income. UK companies have been more restrained, borrowing maybe half National Income. The government owes somewhere between half and more than 100% of National Income depending on whether you include pension debts in the government total as they make the private sector do. If we take as a very rough figure total borrowings and liabilities of say £3.7 trillion, the interest burden is still manageable. At 5% interest it works out at around one eighth of income, and at 10% at a quarter. Lower interest rates enforced in the market would clearly ease the pressures.

The danger for the government is that the interest burden on state borrowing will rise too quickly, both because the increase in the amount of debt is now so rapid, and because if they seek to borrow too much they will have to pay a higher rate. As this downturn began because the authorities decided they needed to reduce the total amount of private sector borrowing, and as it intensified when the authorities decided to tighten the squeeze by demanding banks hold more capital for a given level of lending, it would be odd to end up simply transferring the excessive borrowings from private to public sectors.

There was too much credit by 2007. The authorities have not shown a sure touch in deciding by how much they want to cut it and over what time period. In the meantime, instead of the public sector showing us how to restrain spending and borrowing, they are doing the opposite. That makes absolutely no sense unless your aim is to take more and more into state control.

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21 Comments

  1. Blank Xavier
    Posted October 25, 2008 at 9:09 am | Permalink

    The greatest threat in any crisis is not the crisis itself, but the Government response, which if correct, can do no better than the unfettered market could do and which if incorrect, plunges us all headlong into oncoming disaster.

    The free market responds to signals and behaves appropriately because each individual participant has at stake his own investment and each individual participant acts to protect that investment.

    The individuals of State have no such investments and indeed in the first place are willing to manipulate the investments of others for the "greater good" and so are poised to ignore all signals and act purely on what they *think*; and it is so easy to be wrong, and by being wrong whilst wielding power, cause immense harm.

    I am very much of the Friedman camp in holding that the original Depression was caused by the State response to the original crisis.

    Leave the market alone; don't interfere. It's a violation of individual freedom in the first place as well as being criminally reckless.

  2. Blank Xavier
    Posted October 25, 2008 at 9:12 am | Permalink

    BTW, it's not over.

    A round of hedge fund implosions has yet to occur. The Baltics have yet to collapse. (other collapses possible -ed)
    I could be wrong, but I think right now we're in a pause. There's a way to go yet.

    • Derek
      Posted October 27, 2008 at 4:17 am | Permalink

      Absolutely not over. The parlous state of the real economy is unprecedented in living history. I could provide endless examples, but Mr Redwood won't like careless talk so I'II stick to a couple of recent examples in the public domain (although I don't think his readership is populist enough to have much effect on general sentiment). Volvo truck sales in Europe have plunged 99.7% from 41,970 in the third quarter 2007 to just 115! this quarter. In China more than half of all toy factories have gone bust, these figures are not a small decline in demand. In the business I work in we bale up our waste plastic and cardboard for collection and usually receive a sizeable cheque for a truck full. Now it is stockpiling rapidly because no-one will take it away for free, or even with a payment from us, as there is no demand. Councils will be busy collecting up and sorting recyclables, but nobody wants them they'll end up landfilling it whilst council tax bills soar with the cost of the landfill tax. I predict that the banks will only be the first in a long line of large corporates to go panhandling to the government and it will now be very difficult to turn them away.

  3. Prodicus
    Posted October 25, 2008 at 9:19 am | Permalink

    'Unless'. Quite.

  4. Stuart Fairney
    Posted October 25, 2008 at 9:25 am | Permalink

    That maybe the most sensible, restrained and practical analysis of the situation yet published. If Mr Darling is still keen on adopting tory policies he could do much worse than printing the Oct 25th Blog making a speech based on it, then implementing it without delay. Too much to hope for I fear. Perhaps then Mr Osborne?

  5. Johnny Norfolk
    Posted October 25, 2008 at 9:32 am | Permalink

    I still dont think Labour want to face up to what they or a new government are going to have to do.

    When you are in debt the first thing to do is admit it and face up to it.

    You then need to take action to change your previous behavour that put you into debt.

    Labour have totaly failed to do this and as far as they are coincerned its our problem not theirs.

    All they have done is bury their head in the sand rather than cut spending. They need to do it now to send out the right message to the markets.

    Great free advice for them John, but they never listen to anyone.

  6. James
    Posted October 25, 2008 at 10:59 am | Permalink

    I wonder what the government and banks' advisers,auditors and accountants have been doing for the past few years.
    Now, they look back in hindsight whereas yourself and Vince Cable had the foresight to see what was going to happen.

  7. Nick
    Posted October 25, 2008 at 10:59 am | Permalink

    The government owes somewhere between half and more than 100% of National Income depending on whether you include pension debts in the government total as they make the private sector do.

    This is completely wrong. The latest figures from Watson Wyatt put the government liabilities for its own workers at 1 trillion. 100% of National income.

    However, that ignores the elephant in the room. If I pay NI, the government tells me that its for my state pension. Ditto with people paying for the state second pension.

    Where is that on the liability side? Or is it that you plan to default on the promise?

    Nick

  8. John Moss
    Posted October 25, 2008 at 11:10 am | Permalink

    John,

    Have you seen the comment at Coffee House about the risk of net being able to raise the £100bn plus predicted PSBR this year?

    Also, a figure to throw in the mix. All the Government's revenue from the North Sea, ever, totals £150bn, roughly Labour's borrowing requirement this year and next!

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

    The government needs to get a grip and urgently. We're less than ten weeks away from Christmas and the consumer economy is flatlining and is in urgent need of resuscitation. Production lines, other than cars, are now being switched off and if we're not careful all momentum will be lost. The BBC is hardly helping, allegedly it's avoiding the r word, but I notice it's produced a special 'downturn' logo which hardly suggests it expects us to come out of it any time soon.

    The government needs to take action in the real economy. It's all very well reabilitating the banks, but I don't think they'll start lending again. Their priority will be accumulating enough to buy back the government's share and get the devil off their back. I also noticed that the woman from the the British Bankers Association said, without any sense of self-irony, that banks won't be able to lend to unviable businesses and these will have to be let go. This from an organisation whose, virtually, entire membership has had to be bailed out from unviability with the future earnings of the British public. I suspect that history will view the Northern Rock nationalisation, which started the bailout ball rolling, as the most egregious piece of pork barrel politics by any British government.

    • Posted October 26, 2008 at 11:06 pm | Permalink

      hmmm …. pedantry rules but if we are spending a fortune of our money in 'rehabilitating' the banks I think we should at least use the right word … 'baled' out.

      Why do people worry about Conservative policy. We must presume the next election is 12 months away at least. Who the hell knows what the world will be like at Christmas?

      Today Parliament is just an elected dictatorship with a supine vassal feu paying left wing TV looking on, and an ill educated electorate soporosed on Strictly Come X-Factoring On Ice and incapable of reading anything but the funny pages of the newspapers.

      Conservative policy is not the point. Policy will be dictated by events – its laughable to think anyone will have any choice – better to have an unsullied hand manning the pumps and deciding who to throw overboard.

      • Derek
        Posted October 27, 2008 at 3:54 am | Permalink

        I'm glad Lynne Truss has popped by. I'II concede I've missed the 'h' from rehabilitate, but not so fast. It is the bank depositors who have 'baled-out'. The banks themselves have been the recipients of a bailout, that is the government has paid a security for their release. I'm unaware of 'bale' ever being paid to a court.

  10. adam
    Posted October 25, 2008 at 1:36 pm | Permalink

    At PMQs the Prime Minister attacked the conservatives for talking down Britain and the economy

  11. Posted October 25, 2008 at 1:39 pm | Permalink

    Why don't you offer to take over the Treasury because it's obvious Labour aren't going to do much to improve the economy. Perhaps you and Lord Lamont could give them the benefit of your experience?

  12. Cliff
    Posted October 25, 2008 at 3:23 pm | Permalink

    John,
    A very thoughtful and interesting piece.
    As I have stated before, I know nothing of economics other than this, if I earn a pound and spend nineteen shillings I am OK, if I earn a pound and spend a guinea, I am in trouble: It seems the current, along with all the previous Labour governments, have failed to realise this one simple fact.
    I also know that when I have a glut of anything, one saves some of it for a time of drought, be that financial or otherwise.

    I do feel we are talking ourselves deeper into the crisis and it has become, in essence, a self fulfilling prophesy.

    Perhaps you can answer this that has been troubling me now for sometime, we were told that HBOS was a sound business and we were told the Lloyds was a very sound business that had been very prudent in their risk policies. What actually happened, virtually overnight, that turned these two sound businesses into being on the verge of collapse?
    Why, if the state is giving aid to the banks, does the merger of Lloyds and HBOS have to go ahead, surely it makes more sense to spread the risk over two businesses, rather than put all the taxpayers' eggs in the one large basket? It also does not allow the state via Lloyds/HBOS to operate a virtual monopoly within the mortgage sector which would be likely to stifel competition.

    As I say, I don't understand banking or economics, but I do find your threads interesting and I thank you for them.

    Reply : I don't think the taxpayer should pay for a merger of two such large businesses. B Nor do I believe them to be as weak as some suggest – the regulator was clumsy in demanding extra capital at a difficult time.

  13. mikestallard
    Posted October 25, 2008 at 5:36 pm | Permalink

    What worries me so much is this.
    Up till now, I hoped that the Conservatives would come in and try desperately to put the damage done by this awful government right. Sort of like Mrs Thatcher, except that there are now different dragons to slay (debt, waste, too big a state, too much noseying into people's private lives).
    I must confess that I am now having doubts.
    (Piece re Mandelson left out).
    But, just when we were all waiting for a statement like yours above, all we get is derision. Did you listen, for instance, to the news Quiz today when the BBC under Sandy Thingummy wittily told us all about how George had been sent to bed without any supper? Or the Simon Heffer who also got in his threepence in the Telegraph?
    Apparently Gordon Brown lost his temper when he saw Mr Osborne smirking on the front bench. That was why he promised an investigation.
    I do not know what the official Conservative policy now is.
    Does anyone?
    Meanwhile the Liberals are saying that there ought to be tax cuts to help small businesses. I understand that.
    Please don't let us all down in our hour of need!

  14. Bazman
    Posted October 25, 2008 at 11:11 pm | Permalink

    So? Where have these "markets" got us? Fat fantasy of the "Muddle Classes" Idiot right wing philosophy even. Is it paid for? You've got to laugh. Bailiffs are quite right wing I am lead to believe. I could join in at higher level, but if you are not affected, then it all could be a bit academic…

    Reply: Markets got us a lot further than communism got China and Russia – pity about the Central banks and Regulators.

    • Bazman
      Posted October 26, 2008 at 11:03 pm | Permalink

      Not to mention the politicians John. Don't forget them in this story.

  15. Posted October 26, 2008 at 12:49 am | Permalink

    In the same way that government needs to acknowledge its past profligacy and face up to the need to cut spending, so do many households. New flat-screen tellies and optional electronic wizardry will not be on the budget for some time to come. A slow and steady reduction in available credit will ease the recession only if the credit that is available is taken up. I suspect demand for credit will fall dramatically now that we are "officially" in recession. If this is correct, there will be precious little the government can do to manage the fall in consumer spending and, therefore, to manage the depth of the recession.

  16. Donitz
    Posted October 26, 2008 at 2:16 pm | Permalink

    John,

    The more I read your blogs the more I realise that my perception that many politicians are spineless and full of self interest could be wrong. I am not jumping on the band wagon of blame here, it is just the impression I am often given.

    We need action, urgent action. We need a great leader, an orator to inspire, drive and to dish out the "ruthless economic medicine required". Thatcher in the early 80's is an example or even Hitler in the 30's. (For the avoidance of doubt I am not a Nazi).

    Have you considered that your party leader may need a bit of prompting?

  17. Adrian Peirson
    Posted October 26, 2008 at 9:28 pm | Permalink

    People need to realise that the Government Knows exactly what it is doing.
    All of this is Deliberate, we are headed for a One World dictatorship, One ( divided ) People, One Bank the World Bank ( those loans come with provisos ), one Governement ( the UN ), one Army (NATO).
    All of this is deliberate.
    They do not believe in private property, they want your house paying rent, and they want us all working for them.
    The Iron curtain is falling once again and this time, we are on the Inside, this time it will be much worse, because this time, there will be no one on the Outside to challenge them.
    http://www.infowars.com

  • 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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