Month: October 2008

I went to the shops today. In one leading retailer there was a queue at the returns counters where staff at three tills were busy refunding the money. Many tills in the leading stores were unmanned, and there was no queue at most of the other tills that were being used. There were not that many people out on the High Street, and those that were bnought a coffee and maybe ended up with just one bag of goods, or none. Lots of staff were standing around with nothing to do.

I bought some glasses because they were marked down by 60% from their usual price, putting them below the 50% off sale offers I have paid for in the past for similar merchandise. I had in my mind the question would there be further price cuts in the next sales? The deflationary psychology puts people off buying, as you think if you leave it it might get cheaper.

It is usually dangerous when the Establishment unites behind a single policy and says there is no alternative. The last time that happened in the UK we were lumbered with the Exchange Rate Mechanism which gave us a rapid inflation followed by a recession.

Recently in the USA the Republican and Democrat leadership united with both Presidential candidiates behind the Paulson plan. That plan turned out to be bad politics, failing its first vote in Congress, and bad economics, leading to subsequent modification by its own author.

It ws therefore a relief that this week David Cameron and George Osborne signalled that they do intend to be critical where criticism is warranted, and to offer an alternative. That is called democracy. Criticism of George Osborne is fashionable and unfair. It was George who thought up “Tax con not tax cut” to characterise the unsuccessful 10p tax band budget. It was George who rightly pointed out that the government did not mend the roof when the sun was shining, and George who is now using colourful language about a house burning down to draw attention to the problems.

The Opposition now needs to flesh out its alternative strategy to see us out of the current severe dfficulties. They can draw on the Economic Policy Report they commissioned. We called for a stronger Bank of England, making better decisions over banking capital, liquidity and interest rates.We warned against lurching from too easy an approach to credit and money to too tough an approach. We sought better control over public spending, an effciency drive throughout government, less useless regulation, and concentration by government on a limited number of things that government did have to regulate well – especially money and credit levels. We recommended a big increase in infrastructure spending, mainly privately financed.

Today I suggest a threefold aproach to the crisis.
The first is to amend the government’s way of handling its approach to the banking crisis.
I fully support the privison of liquidity and longer term loans to the banks. They must take full security for these advances to protect the taxpayer. The withdrawal of too much liquidity at times over the last fifteen months has intensified the crisis.
The government should not spend £37 billion it cannot afford on buying bank shares. It should refuse to finance the HBOS/LLoyds merger, leading to LLoyds going it alone in the private market for its capital needs. The Regulators should give HBOS and RBS time to increase their capital ratios, whilst the government makes it clear it stands behind both banks with loans and cash if needed. They could both improve their capital ratios by stopping dvidend payments, cutting very high pay and bonuses, reducing staff through natural wastage and other cost reducing measures, and reducing their loan books. It should be their choice which combination of these measures they adopt.
The government and Bank are right to experiment with other ways of lending and using guarantees to get the banking markets moving again.

The second is to get control of the public finances. Cancelling the £37 bllion will help. There are many other ways of starting to control public spending, whilst keeping every nurse, teacher, doctor and teacher and other important public service workers.

The third is to take action to stimulate the private sector, which is crashing downwards rapidly. That means cutting interest rates by 200 basis points or 2% immediatey, with the prospect of more to come if needed. It means working with the energy, water and transport industries to see which larger investment projects can be brought forward to provide some work for the construction industry. It means redoubling efforts to help people back into work who lose their jobs as the redundancies build up this winter.

I am glad the Prime Minister has reaffirmed his support for free enterprise and markets, whilst calling for proper regulation. This echoes our calls in the Economic Policy Review for better regulation of banks and the credit they extend by the Bank of England, when we warned of the dangers stemming from the loose monetary controls exercised in the early years of this century. We need the Bank of England to get its old powers back that this government removed. Then it might be better able to judge conditions in money markets, and avoid the excesses of easy money and tight money we have witnessed in recent years.

We also need to call today for proper control of government. The government should not have stepped in so clumsily with new capital for a couple of Scottish banking groups. If the government and Regulator wanted a bank or two to increase the capital required because it thought one or two banks were in a weak position, it could have done so through private discussion with the affected banks without letting their share prices suffer through leaks. If the Regulator wants to raise the minimum required capital for all banks it should make a statement about it, and give banks a period of time to adjust.They could do much more to remedy their own positions, without having to rush to the state as their new paymasters.

Any bank short of capital should as a high priority take action to keep more of the cash it is generating from its operations. Dividends should be cancelled. Bonuses to staff should be cancelled if the bank is running out of cash and capital. People on high salaries – say over £200,000 a year – should be asked to take a pay cut in a bank in need of state aid. If they prefer to move on that helps cut the costs. There should be a staff freeze on new recruitment, and discussions with staff about smarter working to see the bank through the troubled period. There are many ways of conserving cash and generating more profit in a large business. In the UK it is wrong to expect the taxpayer to finance a big merger between two banks. If the banks concerned can only do the merger with public money, they should be told they cannot do it. It is no business of the taxpayer to finance huge deals to reduce the amount of competition in the banking market. The total dividends paid by the three banks seeking public funds amounted to a massive £7 billion in 2007.

If the government presses on with its plans to nationalise RBS I can only see problems ahead. The pay levels, lending policies, attitudes to customers and much else will become legitimate matters of public debate. The rest of the public sector will be jealous of the special treatment highly paid bank workers receive.Taxpayers will be bemused at what is happening to their tax money.We will all be angry if the nationalised bank then proceeds to large write offs and losses. These banks are too big for the taxpayers to own and sleep easily at nights.

Any bank in need of help should receive loans and assistance in the normal way from the Central bank. The taxpayer should be protected by taking sufficient security for such lending.

Some analysts and commentators think there are two different problems, the banking crisis and the threat of recession. Now large sums of public money have been offered throughout the western world to increase bank capital they imply that the first crisis is on the mend, and maybe sometime we can start thinking about the second problem.

Unfortunately these two problems are all part of the same crisis. The banking crisis began when people in the USA were unable to pay their mortgages, and in the UK when a mortgage bank was unable to meet the demands of its depositors. The banking situation deteriorated this summer as forecasters came to see that it was not just US sub prime mortgages that could destabilise banks.

It is now important to make sure that the measures taken to restart the inter bank and money markets do not make handling the recession more difficult. If the economies of the west fall too far and stay down for too long, the banks will lose a lot more money on bad loans. It will not just be the UK and US mortgage books that cause problems, but the outstanding loans to companies will also be a source of weakness.

It is also important to ensure that public finance does not become overextended. In the days of the credit boom the UK government helped stoke the fires by its own activities. It borrowed huge sums under the Public Finance scheme and through Public Private partnerships, as well as through traditional borrowing. It added the loans of Network Rail to the taxpayer’s account. It is now about to add further huge sums through its bank nationalisation scheme.

The problem with a sharp slowdown or recession is that it damages the financial position of most people in the country and it greatly increases the strains on public budgets. Tax revenues fall. In this downturn Stamp Duty has been hit severely as the housing market dries up. Taxes on company profits, especially those on financial sector companies, will be greatly reduced in due course. Income tax on high incomes and bonuses will fall as a result of the job losses and lower profits. Spending on unemployment benefits, housing support and other government measures to handle the human misery that comes from a downturn will rise.

Gordon Brown used to call such spending the “costs of economic failure” which he rightly wished to reduce. Containing its increase should now be the prime concern of the government. Public finances are in a weak shape going into the downturn. We need to limit its depth and duration to keep government borrowing in some check.

My critics still complain about my support for lower interest rates. Savers understandably do not want their interest rate reduced, and tell me that we need to encourage savings because we have saved too little. Encouraging more savings by higher interest rates would have been an excellent policy three years ago to reduce the extremes of the boom, but is not the right measure now. Today we need to limit the downturn. That requires more spending. The danger now is there will be too little spending, cutting the money people pay to companies for goods and services. That leads to a bigger downturn, a more expensive burden on the state and more people out of work. In the end it also damages savers, because in the end in a big downturn interest rates have to be slashed to very low levels to try to get activity going again and to save some businesses. Savers cannot earn a high return with no risks. If savers want too high a rate of interest there will be more bank and savings institutions struggling, as the borrowers will be unable to cope. There are limits to how many risks the government can underwrite and how many financial institutions it can take over.

This crisis began because the banks lent too much to the private sector as well as the government borrowing too much. Between them they created a debt mountain. The Central bank and Regulator allowed this to happen, and even encouraged it by keeping interest rates low and drawing up easy going rules on the capital banks need. The Crunch began when the central banks decided to tighten conditions, with higher interest rates and less money available for the banks. Now the authorities seem to want to cut private sector lending sharply, by requiring more banking capital for a given volume of loans. Some of the strain will be taken by cutting bank lending to the private sector. If this has to be more than matched by more borrowing by the public sector to keep the banking system going and to pay the costs of recession, it is difficult to see what we have gained.

Two news items today –

The Audit Commission (public body dedicated to getting value for money for taxpayers) placed £10 million in a couple of Icelandic banks and tells us this accorded with its investment guidelines. Wouldn’t an apology and a mea culpa have been more in order?

We learn that they might close the Commons for up to three years to spend lots of money on modernising it! That would a fitting tribute on this government’s grave – “We closed Parliament so we could spend more of your money on modernising it”. They do say we might be able to meet somewhere else – that’s quite a concession! They have also sent out the Parliamentary holiday dates for next year. They amount to some 145 days.

It would be helpful to have a positive statement from the authorities about banking capital. I assume all banks currently trading have enough capital. That after all is one of the main tasks of the Regulator, to ensure they do. It appears that recently the government has required banks to have more capital, leading to the discussions over whether taxpayers should put up some of this. It would be helpful to be told by how much the government has decided to lift the capital requirement at this juncture. It is an odd time to seek to increase capital ratios with a public dialogue implying the banks do not have enough capital, when we need to increase confidence in the banking system. If individual banks are thought by the regulator to need more capital in case of future losses, that should be done in strictest confidence.

I am distrubed to hear the government use its current support for the banks as part of its political argument with the SNP. The two main recipients of taxpayer cash for capital happen to be the Royal Bank of Scotland and Halifax Bank of Scotland. We are now being told by a triumphant government that the large sums proposed for these banks show why an indepednent Scotland would not work, because such sums would be too much for Scottish taxpayers’ pockets without the help of English taxpayers. As the Glenrothes by election hoves into view we can expect more of this sabre rattling rhetoric for the Union.

It is in the national interest for the government to go back to the commercial banks in private and seek to work out how they can meet higher capital standards without recourse to taxpayers funds. This may well include telling them firmly the taxpayer will not finance a bank merger. It is not good for taxpayers that this matter is now connected by some in politics to a Scottish by election.

My theme for many weeks has been simple – the authorities should fight deflation, not inflation. recession is the new enemy, just as inflaiton and excess credit was the enemy two years ago. Every word and aciton of government and regulators should be examined with this in view. So how are they doing?

In order to fight recession you need to have low interest rates, provide plenty of liquidity to the banking system, ensure all statements are positive and confidence building, and use what public spending you can afford to maximise the beneficial impact on people’s employment and incomes.

The UK authorities are giving a very mixed performance judged by these simple standards.

They have kept interest rates far too high for too long. They should cut them to 2% today, which would still leave scope for further cuts if the economy does not respond well. Market rates are well above the indicated rate and will remain so. That’s all the more reason to cut the indicated rate, to relieve some of the pressure. If interest rates remain too high more people and companies will default on their payments, leaving banks in a weaker position and savers worried about the security of their funds.

They are now supplying large amounts of liquidity, which is good. Previous attempts to withdraw liquidity from markets have been disruptive. They need to supply as much as it takes for as long as it takes, ensuring the taxpayer is protected by taking proper security for the loans.

The authorities have made too many statements and allowed too many stories to escape that undermine confidence. If they think any bank needs more capital, they should sort that out in private with the bank concerned. We should know nothing about it until the bank announces to the market how it is raising the money, when the problem is largely solved.

Douglas Craswell MP and Daniel Hannan MEP have produced an interesting book enttitled “The Plan. Twelve months to renew Britain” I recommend it to anyone who wants to see democracy restored and people empowered in these islands.

The Plan includes a proposal for a big repeal Bill, to get governemnt off our backs in those many areas where it has strayed without good reason. The authors want us to reassert Parliamentary sovereignty by clarifying the power of Westminster vis a vis Brussels. They want to legislate to make every school independent, to give schools, parents and pupils more freedoms. They want to transfer more power to local government, and more power to families and private institutions.

It is gripping material , and well worth a read.

Click here to go to the book’s website and purchase a copy.

I have opposed bank nationalisation in any circumstances, and have asked authorities to work with the banks to recapitalise themselves through private money rather than public. I find it bizarre that Mr Paulson is going to require US banks to take public share capital when some of them have not asked for it and do not need it.He himself expresses his distaste for the policy. He should follow his instincts.

A bank can boost its capital in many ways. It can raise new share capital from existing shareholders or from new shareholders. It can sell assets or businesses accumulated within these large groups. It could pay its high earners a lot less for a year or two to keep more of the cash. It can cut its dividend payments to shareholders. It can reduce the numbers of employees, sell branches, increase the amount of fee earning business it does or otherwise boost its profits and cashflow. I do not believe for one moment that the banks of the world have done all these things as much as they might where they need stronger balance sheets.

In the UK it is unclear why the government wants to allow the merger of Lloyds with HBOS. That just adds more risk to taxpayers, as Lloyds could go it alone like Barclays without the merger. It is unclear how much of the extra capital proposed for RBS and HBOS is now a regulatory requirement, and why the regulatory requirement should suddenly have increased. If ever there were a time for the government and Regulator to be working quietly behind the scenes with these two banks to ask them to raise more capital through any of the ways open to them over a realistic time period, this was it.

At a time when governments are correctly preaching to banks that they should not borrow too much and be overextended, they should be ensuring that governments themselves do not become similarly overextended and over borrowed. There are limits to what the US and UK taxpayers can afford. Giving banks too easy an access to public money is not a good idea. What we need is tough regulation, in private , to get the weaker banks into shape. If some of them need loans and gurantees to tide them over until they have raised more money privately, so be it. That is what a Central Bank is for , as lender of last resort. The taxpayer should always take full security for loans, and charge a fee for guarantees. That would be a much better way forward than requiring all main banks to take taxpayers money, or encouraging mergers which then leave a large bank that needs taxpayer support.

To many people the bank share purchases by the government is the last straw. They see it this way: the government takes money off us in taxes, gives the money to the banks, who then might lend some of it back to us for interest and a fee if we are lucky.

Yesterday in Parliament I pointed out to the Chancellor that the 3 banks he is considering buying shares in have combined balance sheets of £3 trillion. Yes, £3 trillion. That’s twice our national income for the year, and five times our annual tax revenue.

I urged the Chancellor to try to get more private capital into these banks, to cut the risks of the taxpayer. If the taxpayer is to stand behind £3 trillion of bank assets, it puts us at great risk. If the assets turn out to be worth just 1% less than the current value, that loses the taxpayer their share of £30 billion of loss.

As readers of this site will know, I have supported the proposal to put more cash into the markets. That certainly worked yesterday. I have supported the proposal to lend more money for longer to the banks to tide them over, as long as the taxpayer is given full protection with proper security for the loans. I also support the efforts made to increase the banks capital from the private sector, and am glad that 5 of the 8 banks concerned now have more than enough capital or can raise it privately.

That leaves us with RBS, HBOS, and Lloyds. When the government acted as midwife to the birth of a new mega bank through the merger of HBOS and Lloyds, that was to provide a private sector solution to their financing. Both now have access if they need it to public capital. The shareholders of both HBOS and Lloyds have to vote on the merger before it can happen, and have to vote their approval to seek new capital from the government. Some Lloyds shareholders may now take the view that it would be better not to merge, and that Lloyds could go it alone without government share capital.

Yesterday one bank announced it would cut its dividend, and raise more capital from existing shareholders. Its share price went up. RBS announced it would (subject to shareholder approval) raise capital from the government and its share price fell.

The government should do some more work on the capital raising part of its package, with a view to cutting the risks to the taxpayer and cutting the requirement for taxpayer funds. Banks have many ways they can use to increase their cash and their capital to lending ratio. They can cut their dividends to keep more of their profits. They can sell assets. They can reduce costs and retain more of their income as profit.They can reduce their lending activities. The meetings need to be reconvened to see how they can do more of these, to cut the burden on the taxpayer.

Three weeks ago the Regulator was happy with the capital adequacy of the major banks. It appears that in the last three weeks it has demanded more capital to support existing lending. It is more evidence that our regulators are tightening long after the credit bubble has exploded. They should have done that several years ago to choke off the growing bubble.