The G20, an expensive cup of coffee and too much borrowing

If Mr Brown needs to buy a coffee when he arrives in Washington he will discover what international investors and markets think of his economic rescue so far. Before he started buying up bank shares a $2.05 cup of coffee would have cost him £1. Today the same $2.05 cup will cost him £1.40.

Posing as the saviour of the world, and putting so much borrowed money into UK based bank shares has entailed paying a huge price in devaluation. The 30% fall of the pound against the dollar is mirrored in a similar fall against the yen. We are also at a new all time low against the Euro, which has been a weak currency as well. The Prime Minister, if wise, would ask himself why is this happening? He would ask himself how easy it is going to be to borrow all the money he needs to borrow to buy the bank shares and pay for the expensive recession we are entering. If his fellow guests at the Summit were unkind, they would ask him who he thinks is going to lend the UK the extra money he now wants to finance the tax cuts.

In Mr Brown’s world, state money is easy come, easy go. He assumes – if he thinks about it at all – that the Chinese on much lower average incomes than ours will willingly put up more cash to lend to us to maintain our higher living standards. He assumes that there are enough rich people and companies left in the UK to dig more deeply in their pockets to lend the state what the state is not taking in taxation from them. Why stop at the £43 billion he forecast for this year’s borrowing? Why stop at the £63 billion the downturn will probably make that? Why stop at the £120 billion needed when you add in the purchase of bank shares and the Bradford and Bingley transaction with Santander? Why not add in some tax cuts for good measure?

A sensible money manager would be asking himself some basic questions, when he saw the value of his currency drop by almost a third in a few months against two of the other three main currencies of the world. He would see the need to be more careful about the financial risks he was running, and more careful about the amount he thought he could borrow.It has always been odd that he thinks you can solve a problem of overborrowing in the private sector by overborrowing in the public sector instead.

The G20 do need to discuss what further action they can take to limit the length and depth of the recession. Countries in stronger financial positions than the UK should cut taxes. Countries should revisit the measures they are taking to sort out the problems of the banking system. The best thing they could do would be to agree that the lower interest rates and more liquidity are beginning to work. It would be better to leave it to the banks to sort out their capital positions, without committing taxpayers to stump up risk money. Big banks in trouble should have access to short term loans and guarantees whilst they raise the money they need one way or another. The Paulson plan is being revised for the fourth time. Why isn’t the British plan being revised, as it is not easily affordable for British taxpayers?

The decision by RBS today to announce 3000 redundancies is a crude version of what needs to be done. I would rather RBS had announced a complete staff freeze so natural wastage could go to work, coupled with no bonuses for 2008 and a downwards review of pay for those on six figure salaries. They do need to make a big reduction in their costs, and that would be a better way of doing it than picking on 3000 for potentially costly redundancy. Taxpayers now have to help pay to sack people, which is going to annoy Trade Unions and upset left wing Labour MPs who were so keen on bank nationalisation. They should not be surprised, as taxpayers are already paying for large redundancies at Northern Rock.

The G20 would be well advised to reach agreement on more capital for the IMF. More countries are going to borrow too much and reach a point in currency and state borrowing markets where they can no longer raise the money on sensible terms. They will need to borrow from the IMF who will in turn make them cut back and get their borrowing under control.

The Europeans will be pressing for more regulation. What they should be pressing for is regulation that works. Their regulators failed to curb the lending by European banks in the easy credit years. They are now curbing it too much. If they want to set up a system which always curbs it too much, then they make the recession worse. What we need are some central bankers who can set interest rates sensibly, and regulators who demand more capital when things are heating up, and less capital when they are cooling down. Why is that so difficult?

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29 Comments

  1. bernerlap
    Posted November 14, 2008 at 10:06 am | Permalink

    Thank you for that account. I was particularly interested in your suggestion that RBS should have a staff freeze. Is this also the way forward for the government in all but vital frontline posts?

    It would also be a way of using the recession to shrink a bloated state.

    Reply: Of course – part of the Economic plan I proposed in the Policy Report.

  2. APL
    Posted November 14, 2008 at 10:26 am | Permalink

    JR: "..cup of coffee would have cost him £1."

    The fact that one can say such a thing clearly illustrates the silent theft that government policies have accomplished over the last 30 years and longer.

    To suggest thirty five years ago that a cup of coffee would cost 20 shillings, would have had you committed to an asylum.

    Here you are, worrying about an abrupt 30% devaluation of sterling, rightly so, I agree. But the HUGE 1000% devaluation (to pick a figure from thin air) that governments have happily presided over goes with out a word.

  3. Tony Makara
    Posted November 14, 2008 at 11:04 am | Permalink

    Now that Gordon Brown and Labour have trashed the brand of Sterling, perhaps people might now give some thought as to whether floating currencies are indeed the panacea for ailing economies. When we think about it logically floating currencies actually allow nations, to buck the market and punch above their own weight for a while, until they are eventually forced to come crashing down, a scenario we are witnessing currently with Sterling.

    This is the apotheosis of boom and bust, national economies overachieving through currency manipulation, only to be brought down to earth with a bump. Some may claim this is only the market correcting itself, mathematically that may be correct, but these economic highs and lows ruin peoples lives. Surely we would all settle for a steady economy that just ticks over, one in which people keep their jobs, their homes, and do not have their savings destroyed by savage currency devaluations? Perhaps the floating currency has had its day?

    • Acorn
      Posted November 14, 2008 at 12:20 pm | Permalink

      Tony, currencies that float or peg, have to be considered in parallel with those currencies convertibility. Iceland has proved the point that having banks that are worth a lot more than your economies tax base, can play hell with its currency. There are commentators saying that the UK may be in a similar, but lesser, situation. The Chinese new of this risk and have a currency which has limited convertibility.

      Instead of doing the crossword this morning, try getting your head around this one. All the best. Another nutty Acorn post.
      http://globaleconomicanalysis.blogspot.com/2008/1

  4. backofanenvelope
    Posted November 14, 2008 at 12:14 pm | Permalink

    We are not going to get out of this hole because in the middle of our economy is a huge blob – the public sector.

    They are carrying on as if nothing is happening.

    I suggest the Tories announce they will cut public sector spending by 10% – £62 billion pounds.

    The civil service can work out what to cut. I can think of a very short list that would save £62 billion.

    • Lola
      Posted November 14, 2008 at 3:42 pm | Permalink

      "..cut public spending by 10%" a year for 10 years?

  5. Posted November 14, 2008 at 12:20 pm | Permalink

    Gordon Brown should consider the lessons of an earlier government’s attempt to borrow and spend its way out of a financial crisis. In February 1972 unemployment had passed the million mark; something that had caused the then Conservative administration under Heath considerable embarrasment. Anthony Barber was then Chancellor and in his budget statement in March of that he year announced both tax cuts and the establishment of an Industrial Development Corporation into which millions of pounds was injected to boost the private sector. Government expenditure on capital projects had also been brought forward as had investment in nationalised industries. All of these measures were largely financed by increased borrowing. Within months however Sterling had collapsed causing inflation to soar while interest rates rose in response. The unemployment which had triggered this had actually managed to increase meanwhile. In December 1973 therefore an emergency budget; this time deflationary in character was forced on the government, including a wage freeze. Two months later the Conservatives were out of office.

  6. Posted November 14, 2008 at 11:46 am | Permalink

    It's not difficult – it just doesn't fit with the left-wing agenda of using the financial crisis that Brown et al helped to create to attack the profit-making ability of banks and bankers alike.
    http://www.lettersfromatory.com

  7. Posted November 14, 2008 at 11:52 am | Permalink

    Mine eyes have seen the glory of the coming of the Lord:
    He is trampling out the vintage where the grapes of wrath are stored;
    He hath loosed the fateful lightning of His terrible swift sword:
    His truth is marching on.

  8. Andrew Forbes
    Posted November 14, 2008 at 12:17 pm | Permalink

    The slumping pound is an important symptom; it's a measure of how one country is doing against the othes. If this were a truly global problem that Gordon was coping manfully with, as he says, then one would expect the pound to be improving against all the other currencies. However, since the pound is heading south at a terrifying rate, one must conclude that Gordon's past stewardship of the economy has got is in a terrible position, and that his current management of the crisis is not particularly good either.

  9. Gerald Cheshire
    Posted November 14, 2008 at 12:28 pm | Permalink

    Is all this leading to the UK converting to the Euro by the "back door"? I remember reading a couple of years ago that once parity between the pound and the euro was reached………
    The suggestion regarding RBS is one of common sense in my humble opinion, therefore no chance of being considered.

    • daniel1979
      Posted November 14, 2008 at 3:15 pm | Permalink

      I agree. Strange that Conservative Policy has been to see what happens next rather than set out what has clearly gone wrong. They have been buying into to Labour vocabulary and have not set out an alternative strategy (for fear of being seen as "nasty" no doubt)

      Now, there is a push for Ken Clarke to Shadow the treasury. The £ is dead if Ken Clarke is influencing Conservative Economic Policy.

      If it looks like it, smells like it….

  10. michael, islington
    Posted November 14, 2008 at 12:54 pm | Permalink

    You would be well advised to read Professor Buiter's latest posting on the FT's Maverecon.

    Buiter presented a private paper to the Icelandic authorities three months before the banking collapse in which he predicted events exactly as they unfolded.

    His current analysis of the UK's sterling problem is frightening.

    • Posted November 14, 2008 at 6:59 pm | Permalink

      In July however, he was predicting oil at $500 dollars a barrel (see 9th July blog).

  11. Rose
    Posted November 14, 2008 at 1:55 pm | Permalink

    Dear Tax-Cutter-In-Chief

    I would like you to have another go at the excesses of local government: the frontline services are now almost non-existent in our city – filthy and collapsing surroundings, parks which are no longer kept, police who have become invisible, primary schools shutting, post offices ditto, traffic grid-locked, public transport a bad joke, etc. etc. – and all as the population is soaring. Meanwhile the various and diverse “Development Officers” in the Council House are proliferating. It appears to be a very secure class of job, and one for which they are always advertising. The work seems to consist of sitting at their wordprocessors rewriting their jargonridden PC titles and producing glossy pamphlets extolling their practices, processes, and procedures, while occasionally manipulating the more public spirited council taxpayers into doing voluntarily some of the necessary manual work which is no longer being managed or monitored by all those officers – because there are no longer anything like enough manual workers. Despite their high salaries and many trained assistants these officers can’t even keep their own jargon up to date as they are still banging on about “equalities impact asssessments” and don’t seem to have noticed we are in the “sustainability impact assessment” century now.

  12. Acorn
    Posted November 14, 2008 at 12:56 pm | Permalink

    John, I am too depressed to blog today so, I will leave it to Nadeem. As a "letter to the governor", this is premier league.
    http://www.financialsense.com/fsu/editorials/wala

  13. Deborah
    Posted November 14, 2008 at 1:05 pm | Permalink

    "a downwards review of pay for those on six figure salaries"

    Now there is an idea that has found its time. Apply that to the public sector and the savings could be quite significant.

  14. Posted November 14, 2008 at 3:04 pm | Permalink

    Please forgive me for an off-topic response, but am I alone in finding Mr Balls response to the fact he was warned about failings in Harringey, utterly pathetic?

    If he were some low-level clerk, then one would expect the response (basically 'I followed procedure') if not condone it. But for a minister of the crown whose very raison d'etre is child safety, not to take responsibility, not to set out and monitor an action plan, not to demand weekly if not daily progress reports, not to go to the council if necessary in person and bang heads together, not to take responsibility when warned, for that which he is responsible, and ultimately to not prevent this, is simply unforgiveable.

    This is a combination of rank ineptitude, mind-numbing incompetence, carelessness and the simple inability to do the right thing and resign on a point of honour and admit your personal failing.

    You would not publish what I really think of this person.

  15. DiscoveredJoys
    Posted November 14, 2008 at 6:11 pm | Permalink

    It gives me no pleasure, but I wonder if Gordon Brown is deliberately angling for IMF intervention?

    If you look at his positioning as:
    * Britain is a successful country, victims of a global recession
    * Gordon Brown as the saviour of the banking system
    * Reporting UK as well positioned to ride out the recession
    * Asking Saudi Arabia and others to strngthen the IMF
    * Proposing more borrowing as a way out of debt
    * Presiding over a severe Sterling crash
    * Gloomy comments slipped out by Alistair Darling
    * No more Tory boom and bust

    … It seems to me that he actively working to "swoon" into the arms of the IMF who he can them blame for the stringencies they will impose, stringencies that he is unwilling or unable to impose himself.

    He then has over a year to rewrite history as the noble statesman who struggled against economic fates to bring Britain back into economic balance – and continue after the general election as the next Prime Minister.

    I usually favour the cock-up theory over the conspiracy theory, but it is difficult to imagine that so many of the recent events are all the results cock-ups.

  16. mikestallard
    Posted November 14, 2008 at 6:39 pm | Permalink

    One of the best things about this blog is that, Mr Redwood, you can see things coming. You warned us about the banks. Now that prophesy is coming true.
    The next question, of course, is what happens when the pound sinks even lower. We have already had Iceland going under. Us next?
    The other possibility, of course, is another IMF bail out, as happened the last time the Labour were in power.
    Since a bail out by the IMF isn't that likely any more, maybe Gordon Brown is hoping to set up an even bigger fund with Arabs, Chinese and Indians. Maybe if every Western country goes into debt, they will come good?
    You have already said how impossible that is, although Mao certainly stole all the food from his peasants to buy nuclear technology from Eastern Europe. Millions died.
    Regulation by the banks themselves, as you suggest is impossible because it flies in the face of what everyone believes – especially in Europe. The technocrats in Brussels know best. The bankers are Evil, Selfish, Fat Cats who pay themselves Bonuses instead of Expenses! Would you let the criminals run the prison?
    I am getting a new sense of gloom from this blog.
    Never mind – it's nearly Christmas!!!!!!!

  17. Robert
    Posted November 14, 2008 at 10:14 pm | Permalink

    I expect this government will be forced to go cap in hand to the IMF – a rerun of the '70s, because they will have completely underestimated how quickly tax revenues will fall and costs rise. I would put a 25% + probability on this outcome. I do pray that I will be wrong but I suspect not!

    • mikestallard
      Posted November 15, 2008 at 11:26 am | Permalink

      But who will fund the IMF? At the moment, all the countries which once used to seem to be in the same kind of difficulties: they are in recession themselves and going broke too.

  18. Derek
    Posted November 14, 2008 at 11:10 pm | Permalink

    I only normally post when I disagree with something, but thought I'd say you put on a jolly good showing on Any Questions. And it seemed to be well received, in Scunthorpe of all places.

    I've not heard anyone previously underline the severity of the sterling crisis on the mainstream media. If this country was a bank it'd be Northern Rock all the rest of the world is withdrawing its deposits.

    • Rose
      Posted November 17, 2008 at 7:54 pm | Permalink

      Hear, hear

  19. Matthew Reynolds
    Posted November 15, 2008 at 12:17 am | Permalink

    Why not just give all basic rate taxpayers a £500 rebate in January 2009 to stop retailers having a chronic Christmas due to low confidence , weak spending , job losses , low disposable income etc ? Inflation is not the main risk – even the ever cautious Mervyn King would admit that for Heavens sake !

    Winter fuel payments for the over 60's could be effectively doubled as they could get the same money again in January 2009 & families on child benefit could get a £300 lump-sum then as well .

    That would get £15.6 billion to those who need it most meaning that much of that would get spent as the least well off are most likely to spend any extra cash – that should nip the downturn in the bud or at least minimize it . Or failing that if people serviced their debts then those going broke would be diminished in number – that is not bad is it ?

    Either way a stimulus package worth 1% of GDP would be hailed by retailers and could boost Christmas spending and thus save jobs and help those who can least afford this recession.

    Interest rates are down to 3% and cannot go much lower so if deflation is threatening a major slump then borrowing should rise now to cushion the economy at this dire time. Then from 2010-11 onwards spending on regional development agencies , QUNAGO's , civil service numbers ( by freezing recruitment ) , welfare ( by axing tax credits for the wealthy & replacing JSA & IB with one sort of payment to slash economic inactivity ), government procurement costs ( by greater usage of market forces ) and payments to the EU ( their accounts have not been signed off for over 10 years ) can go under the knife to make the UK solvent again. Smaller government & cuts in the budget deficit during a recovery will help economic stability.

    I think that interest rates must be cut by 1% to 2% ASAP and that the Prime Minister & Chancellor should get £15.6 billion into the economy in January 2009. After Christmas job losses & vast personal debts caused by poor retail sales in turn caused by low levels of confidence could tip the economy into a serious decline.

    The £ & FTSE would rebound sharply if investors thought that in the longer term that fiscal policy via a public sector economy drive would tighten a great deal to curb rampant public borrowing while in the short term a boost worth 1% of GDP was in play to limit the scope of a further decline in the economy.

    People on lower incomes than most MP's are suffering and it is high time that our political classes sorted this out . Are they not supposed to be in business to help their electors or am I just being silly ? We need more MP's like John Redwood…..

  20. Adrian Peirson
    Posted November 15, 2008 at 1:38 am | Permalink

    Do we have any Gold left and would backing Sterling with Gold help save it's value.
    Seems self evident that it would, but do we have enough left after Browns Sell off.

    Does he even want to save Sterling or is he going to force us to accept the Euro, I suspect the Latter.

  21. Posted November 15, 2008 at 8:45 am | Permalink

    Gordon Brown gave a warning to America yesterday at the inauguration of the G20 Summit in Washington.

    In a veiled slap down of the incoming American president Obama, Brown said that a return to protectionism of the 1930's will lead to "ruin".
    FT Francis Elliott in Washington, Suzy Jagger in New York and Gary Duncan, Economics Editor TIMESONLINE appear to think this is a direct reference to Obama's plan to save the American car giants General Motors, Ford and Chrysler, which between them employ 3 million people.

    The EU said that it was ready to take action against the US at the World Trade Organisation if aid for the stricken US car industry was judged by the European Commission as illegal under international rules. The US Congress approved a $25 billion (£17 billion) aid package for American carmakers in September, although no timetable was fixed for payments to be made.

    Republicans on Capitol Hill oppose plans championed by Nancy Pelosi, the Democratic Speaker of the House, to use taxpayers’ money to rescue the big three car companies, General Motors, Ford and Chrysler. The industry employs about three million people across the country, and iconic of the American Dream. Wall Street is scared that should the aid be delayed, General Motors, which gave warning last week that it would run out of money by Christmas, will go bust.

    The Commission for the European Union ( which is referred to in WTO talks for legal reasons as the "European Communities" ), has made its position and therefore the position of every member, unequivocally clear in that it ( all EU members ), does not want America to have any influence in its own economy or to take unilateral measures which could save millions of jobs.

    Whilst Bush is in office I doubt we'll see much change there then, and going by the FT report, which says the car giants will be "Bust by Christmas", it is very unlikely that Obama will be able to arrange his rescue plan.

    If the European Union are saying this to America, and show no intention of "saving jobs", except those in the higher echelon's of banking, then it makes me wonder since there is no benefit of job protection for the ordinary man and woman in the street, why they feel being a member of the damned EU is in their interest !

    Like everyone else with any interest in this matter, I am waiting for the voice of America on this issue, and also that of Russia and China, which will undoubtedly see things differently and will together have a lot more muscle than a few unelected EU commissioners which speak for a European "Community", but clearly not for the people.

  22. Posted November 15, 2008 at 8:58 am | Permalink

    As always Mr Redwood, you present a very clear direction on financial matters which undoubtedly makes a lot of commonsense.

    Brown's championing of the free market as if it were his invention, has overlooked the fact that Chinese, American and European imports will be much more expensive and that they may be wondering how Brown's actions which lead to the drop in exchange rates of sterling, is not in itself 'protectionism'. Has he engineered this I wonder so our exports are better positioned and foreign goods become less attractive here ?

    I wonder whether China, Russia, the U.S and Europe will also be wondering ?

  23. backofanenvelope
    Posted November 15, 2008 at 10:34 am | Permalink

    It is no good the Tories just saying they will tackle waste and efficiency, although they should, they also have to promise to cut public expenditure and lay out how they will do it.

    The promise to scrap the National ID card scheme is the way to go. And the RDAs. Keep listing what is going to go and how much will be saved.

    How about an emergency 10% cut in all Quango budgets? Stop giving overseas aid to nuclear-armed space-faring nations like India and China. Postpone expenditure on Trident, the twin-carrier project and downsize the NHS IT scheme.

    The Tories should be questioning the government hard every time they announce new expenditure. What was it the other day – spending £400 million to stop us all being too fat by 2050!!!!

  • 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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