Please stop this nightmare spin

When you are in as big a mess as the UK is in, it is vital those in authority begin with an honest review of where we are, and honest analysis of what is possible. Instead every day I read in the media half truths and lies about the financial position. We need to start from an accurate base to get the diagnosis and prescription right.

Main myths:

1. The government will borrow £78 bn this year and 8% of GNP next year.
The government’s own figures (PBR) show it will borrow £157 bn this year, more than 10% of GDP. Why will no-one write that in the newspapers?
2. The Bank will consider “quantitative easing” after lowering interest rates more, if they do not work.
The Bank’s own figures show that it is massively into quantitative easing already, with a ballooned balance sheet that makes most hedge funds and investment banks look very restrained.
3. The problems came from the USA, and this is a global problem.
Most of the UK’s problems were home grown. UK Regulators and the Bank made the same type of mistakes the US authorities made, but they did not import them. Northern Rock was a British bank lending British money to British customers under a British Regulator. It was not brought down by sub prime US mortgages.
4. We will do whatever it takes to get the banks working again and to abate the recession.
Why then did the authorities demand the banks have more capital to sustain their lending at this point in the cycle? Couldn’t they see that would make the lending crunch worse? Why did someone brief the press that our banks were weak and needed more capital, at a time when confidence was low? No bank at that point faced a run.
5. Regulators are the answer.
Why then did the Regulators set capital requirements that allowed the excess? Why were Northern Rock Directors discussing how they could increase lending and cut capital on the eve of their disaster, in order to get down to regulatory requirements? (N Rock Report 2007)

6. Regulators cannot be expected to detect fraud and scams.
What then is the point of them? Why can’t they do some detective work based on the usual warning signs of companies likely to overtrade or worse? The signs are well known to people with experience in financial markets, but it takes the Regulator’s powers to go in and find out for sure. Not all those who show the signs are bad.

The plain truth is you cannot solve a crisis of over borrowing by borrowing more. The state is not big enough and rich enough to take over all the bad risks of banking and industry at the same time. The state has to avoid borrowing so much and printing so much that it too loses the confidence of people and markets. When is this nightmare going to stop? When are the authorities going to realise they are pouring petrol onto a fire that has gone out. Instead of pouring more petrol, they need to find a match and ignite a controlled fire again.

When you look at the massive amounts of money and liquidity they are pumping into the system , when you look at the growing government bond bubble, you must feel “Here we go again”. The authorities have forgotten – if they ever knew – that there are big lags in the system. It takes time for lower interest rates to work through, just as it took time for their high interest rates to work through a couple of years ago. Nothing will work without mending the banks, but once they have found a way of mending the banks they need to reverse the ballooning of cash and liquidity rapidly before they create a big inflation. As someone who pleaded for them to halve interest rates a year ago to stave off recession, I say to them, do not cut interest rates any more until you have worked how to get on top of the government debt problem and have done more to create a sensible and competitive banking system. Zero interest rates could make the poblems worse, not better. You need to think of savers as well as borrowers when we are trying to get the country out of debt, not more into it.

So what does it take to mend the banks? A sensible way forward would be to invite them in for private talks. The Regulator shouod be prepared to amend the capital requirements temporarily to get things started again. The government should be prepared to change the terms of its short term loans and guarantees to help markets. No more capital should be offered by taxpayers, and a route to getting the taxpayer out of share ownership, and certainly out of majority share ownership should be agreed.

This entry was posted in Blog. Bookmark the permalink. Both comments and trackbacks are currently closed.

22 Comments

  1. Howard
    Posted December 20, 2008 at 11:51 am | Permalink

    John

    I really appreciate your blog in fact it’s my favourite with ‘Guido’ and ‘Ian Dale’ not far behind.

    …just one very minor, constructive criticiism – please cut down on your spelling mistakes. Although quaint, they irretatte me.

    Howard

    Reply: I agree. This morning the power on the laptop was about to go down when I was about to edit out typing errors, so I posted and came back to a a mains machine to edit.

    • rugfish
      Posted December 20, 2008 at 1:07 pm | Permalink

      Personally I’d like to keep JR’s spooling mistakes as they make me feel slightly supeeria in my typing skills.

  2. Sue
    Posted December 20, 2008 at 11:51 am | Permalink

    Honest? Labour don’t know the meaning of the word honest.

    Lets be “honest”, if they told the electorate the truth (about everything), they are not only assuring themselves of failure in the next election but I wouldn’t be surprised if they were asked to step down.

  3. oldtimer
    Posted December 20, 2008 at 12:10 pm | Permalink

    I agree with your analysis and share your alarm at the prospect of the evil genie of inflation being let out of the bottle. If deflation is bad for us, then so is rampant inflation.

    According to Mr Robinson, of the BBC, Mr Brown is adopting the language of a “war leader”. No doubt the PM is attempting to adopt the language of Churchill to his own cause. For me he sounds and acts like one of the donkeys from Joan Littlewood`s “Oh What a Lovely War”. Your keen analysis confirms to me my own view of Mr Brown.

  4. Adrian Peirson
    Posted December 20, 2008 at 12:14 pm | Permalink

    Maybe you can reword this better than I but the Govt has set us adrift in a Globalist sea in a ship that has no watertight bulkheads.

    We should look after our own interests first, ie shipbuilding, manufacturing, armed forces, we are at the mercy of Global problems.

    We are also at the Mercy of Global corporate interests who have so much money and influence they can manipulate events and markets to further their Coprporate Fascist agenda over the world.

    I have just heard that the Govt has now sold Aldermaston to the Americans, meaning we now have no control over our Nuclear deterrent.

    The Pro EU Regime in Westminster is doing everything I would expect of a foreign invader to destroy this nations ability to remain a soveriegn Nation.

    How long are our Generals going to wait or have they been bought too.

    Are we going to have to recapture our country the old fashioned way.

  5. Kit
    Posted December 20, 2008 at 12:31 pm | Permalink

    “So what does it take to mend the banks?”

    Some banks are beyond saving. Unless some banks are allowed to fail we will have a legacy of Zombie banks holding back the economic recovery just as Japan experienced in the 90s.

    The best advice I have heard was from the economist Tyler Cowen:

    “Spend less, save more, be poorer for a while.”

    I doubt we will ever hear a politician say that.

    • mikestallard
      Posted December 20, 2008 at 10:25 pm | Permalink

      Well, it was said on this very blog.
      And – wow! what a lot of horrified people attacked our host personally for his “utterly negative attitude at a time when we should be supporting our country etc etc.”

  6. Ed
    Posted December 20, 2008 at 1:07 pm | Permalink

    Great points John. And let us also not forget the fact the government’s own borrowing is draining vital liquidity from the market, creating a vicious merrygoround.

    Additionally bank lending to the Government (specifically to the DMO boys in Philpot Lane) consumes zero risk weighted assets, so what incentives do banks now have in lending to SMEs which do consume precious risk weighted assets.

    One way of overcoming this logjam is for the Government to implement something like the National Loan Guarantee Scheme being proposed by the Conservatives. An additional benefit of such a scheme is that monies would start flowing to the productive parts of the economy, rather than to the various pet projects in the unproductive parts of the economy that nuLabour promotes.

  7. Adam-
    Posted December 20, 2008 at 1:22 pm | Permalink

    Spot on analysis, as usual, John. I would go further and announce a surprise interest rate hike of maybe half a percent or so to bolster confidence and strengthen the currency, which is, in my view, now undervalued due to that lack of confidence.

    It would be fun to see short-sellers rushing to close positions.

  8. El Sid
    Posted December 20, 2008 at 1:36 pm | Permalink

    “Why will no-one write that in the newspapers?”

    Stop whinging about it – get out there and make your case! One of the most depressing things about the last six months has been the vacuum where an Opposition should have been. Even more depressing was seeing Theresa May claim that “we have shown ourselves to be highly effective in opposition”. That’s just delusional.

    Where are the attack dogs? Who’s comparing that £157bn to the £150bn that is our all-time (nominal) tax revenues from North Sea oil? (http://www.hmrc.gov.uk/stats/corporate_tax/table11-11.xls) Let alone the folly of borrowing >£30bn in the 12 months to July 2007, at the very peak of the boom before the crunch hit. When Labour go on about how other countries are more in debt, who is pointing out that the difference is represented by our “sovereign wealth fund” from the one-off benefit of North Sea oil? Brown has spent that legacy in one year. Where’s the second North Sea we’ll need to pay for next year? And the year after?

    When’s someone going to call Brown on his befuddled energy policy? Dithering about nuclear power until we have to panic-buy some CCGTs, which will be ready just as we become the world’s biggest gas importer. Trying to boss OPEC around so that they treat him with contempt. I know he assumed oil prices of $83.80 in the 2008 Budget, but do we know what kind of oil price he thinks would be best for the economy? All I could find is the _joint_ press conference with Sheikh Hamad bin Jassim last month, where the Qatari ruler said “The price level that _we_ think is fair is between $70 and $90.” Was he speaking for Brown? Actually there’s quite good reasons for saying that the price of Brent needs to get up to around $70 to stimulate the investment we need now that we’re having to extract oil from places like ultradeepwater Angola and western Uganda (see quotes from Inenco in today’s Telegraph). But is Brown adult enough to admit that? No, he pretends that he’s in favour of low oil prices, whilst relying on high prices to support his spendthrift ways. You barely hear mention of the fact that Britain is still a major oil producer in all the debate about oil – nor of the fact that our production has almost halved under Brown.

    Who’s coming up with positive alternatives to what Labour are doing? OK, you can debate the merits of a stimulus package, but at least something like the LD’s Green Road Out of Recession (http://www.libdems.org.uk/home/nick-clegg-launches-the-green-road-out-of-the-recession-98449610) has the merit of investing in the country to reduce our future “running costs” and playing to the green theme, rather than a token reduction in the cost of imported tat. And if spending is going on our children’s credit cards in any case, there must be stuff that can be quickly brought forward at relatively little long-term cost, but providing stimulus now. For instance, spending on the carriers should be brought forward, not put back.

    How about providing short-term salary etc incentives for civil servants to switch to money-purchase pensions? It would put money into the economy now, whilst reducing some of our long-term liabilities. There must be others.

    I could go on – don’t even get me started on FSMA and the FSA – although the Tories should do something about the meme that is gaining circulation that it was Big Bang that caused all the current trouble, and not the disaster that is FSMA. I know it’s tough trying to explain stuff like how the customer funding gap didn’t open up until after FSMA and in anticipation of Basel II, or how Northern Crock probably wouldn’t have happened under BoE supervision pre-FSMA, but someone’s got to do it. Seeing Osborne suggesting that we need more Basel II-type rules for banks to arbitrage their way around was a bit depressing.

  9. savonarola
    Posted December 20, 2008 at 1:50 pm | Permalink

    There is no quick fix. The ten year binge of leveraged consumerism and eight years of a Govt carpet bombing NHS, Education and assorted quangos with cash whilst spending billions on management consultants and other’advisers’ has hit the buffers.

    By definition the recession that follows must be longer and deeper than others before. The idea that Govt action can solve this crisis by fiscal and monetary action is plain daft. Until personal and Govt balance sheets are brought into balance, it is not possible for any meaningful recovery to take place.

    A key element in this recovery is the housing market. The bottom is two or more years away.

    In meantime the burden of Govt reckless policies will fall on the prudent. Those who have saved. Those who have tried to provide for their old age by investing in the stockmarket. The Govt is rewarding the feckless which is understandable given their membership of this group.

  10. Stuart Fairney
    Posted December 20, 2008 at 2:38 pm | Permalink

    It is possible to have an honest political disagreement, indeed this was the very nature of the House of Commons. But what we are seeing now is not a matter of politics, it is a matter of financial recklessness and theft on such a grand-scale as to indebt my as yet unborn son. If a board of directors plunged their company into ever more debt, yet were not honest about it in the accounts, they would face jail, such as in the case of Enron.

    Messrs Brown and Darling are doing exactly this, plunging us into near bankruptcy causing debt and singly failing to tell the truth. They should not go off into a gilded tax-payer funded retirement. If we pass laws that control the conduct of execs, why not laws that control the behaviour of people with the ability to do way more damage such as the chancellor?

    I pose this as a serious question because I regard the actions of those driving us headlong towards the abyss as morally if not legally criminal.

  11. Brian Tomkinson
    Posted December 20, 2008 at 3:11 pm | Permalink

    John,

    Excellent. Can you get this published in all the newspapers please?

    Reply: I doubt if any will print it. They have been briefed and have access to this site.

    • Stuart Fairney
      Posted December 20, 2008 at 7:06 pm | Permalink

      We can however, put our respective friends onto this site and geometric progression being what it is, the word will get out.

  12. Atlas shrugged
    Posted December 20, 2008 at 4:29 pm | Permalink

    For those interested to know who those that can not be mentioned are. I am sorry but those that can not be mentioned must continue to not be mentioned, as I promised John I would not mention them. Also because it really is very easy for any one seriously interested to find out for themselves.

    Here are some silly clues apart from the very good ones above.

    Do not expect the media and especially the BBC to give you so much as the tiniest of a clue. They never have and never will be allowed to in the future either. Ditto Sky.

    Do not expect many publications especially any found in our schools and universities to give you any better type of clues. As those that will remain unmentioned, not only decide which books the educational establishment purchase and therefore circulate. They also indirectly own all of the main, and many of the not so main publishing houses. While also being very generous with grants for academics that study the ””CORRECT”’subjects and then come to the ””CORRECT”” establishment required always SOCIALIST/COMMUNIST or in other words FASCIST solution.

    Do not expect much help either from anyone in an high establishment position within the educational establishment. Because the only essential qualification for becoming a History PHD, is not actually knowing anything really important about history,. But is knowing absolutely masses that is either not entirely true or not important at all. Or more importantly if they do know something really important. Being of the ‘right sort’ that can be trusted not to tell ANYONE is the most important qualification of all for just about ANYTHING to do with either big business or politics, especially for being selected Prime Minister. Least of all telling their own students, any really important historical information, that they would only have been told about UNDER OATH in an important high masonic lodge.

    The New World Order is effectively a world wide essentially communist socialist government, with maybe a little free market thrown in at the lowest of levels, if we are lucky.

    It is FASCIST for many reasons. One of which is because it is a collection of national twigs bound together, with a rather nasty Pol-Pot type SOCIALIST/COMMUNIST axe running through the middle of it.

    You see I can use the word IMPORTANT as many times in one essay, as Gordon Brown says “you can all trust me to do my best for the country and its people.” in one speech. As if much or anything has anything to do with him. A puppets puppet with a soon to be deflated ego the size of a planet, is our Gordon Brown. Whether he knows it to be so, or not.

    You can almost imagine Gordon Brown standing on something just about to blow up shouting in glee. “TOP OF THE WORLD MOM.”In true Jim Cagney stile.

  13. mikestallard
    Posted December 20, 2008 at 10:35 pm | Permalink

    Another excellent analysis which even I can understand. Well said!
    I have been looking up (http://en.wikipedia.org/wiki/Zimbabwean_dollar)
    the inflation in Rhodesia/Zimbabwe. It did take years to start rolling. But when it idid, it was unstoppable.
    Argentina sort of welled up and then went down again over decades, with severe crises in the meantime. It seems to have been stopped dead in its tracks by – guess what? – sensible management of the economy, cutting back on the bureaucracy, fair taxation, admitting there was a problem…….
    Turkey’s took place over years too.

    Gordon Brown was second in the Spectator’s Parliamentarian of the year after Boris Johnson. They respected the way he lies so fluently, apparently. What he says is simple: he repeats the, yes, lies, which you list above and then says what the Tories would do about it. This, of course, he has no right to do at all and it is usually wrong. But it sticks.
    Juicy lies travel much faster than poor old modest truth. And they make far better copy in the Media too.
    One reason why I am becoming more and more Conservative is that nobody in that party seems to be coming down to Gordon Brown’s level – yet!

  14. FatBigot
    Posted December 21, 2008 at 3:24 am | Permalink

    I fear Mr Rugfish is incorrect in suggesting the fire should be lit beneath the dormant housing market. That would just ignite another credit bubble.

    • rugfish
      Posted December 21, 2008 at 12:03 pm | Permalink

      Hmmm, I can see how you'd think that, but surely a housing bubble can be avoided if less demand occurs as a result of building more houses. Couple that with placing something of a controlling factor on the mass purchasing of Buy To Lets by fraudsters and naive people who stand to lose countless £000,s as a result of a government sat on its hands in both areas, then I think the bubble will rise proportionate to the natural progress of people's ability to afford them.

      The question of course can never be answered if not tried, and we just keep a government which keeps sitting on its hands and tinkering with VAT of all things when it should actually be 'steering' the economy away from John Redwood's aptly described brick wall.

  15. rugfish
    Posted December 21, 2008 at 10:06 am | Permalink

    Thank you Very Much Mr Scrooge:-
    http://rugfish.blogspot.com/2008/12/thank-you-ver

    Gordon Brown is set to place INTEREST on the £500 million it currently advances each year under Emergency Funding to Britain's poorest 1.2 million benefit claimants. It is proposing to place this money into the hands of Credit Union's which operate locally within communities and which charge interest of between 12.68% and 26.8%.

    Firstly, I have an issue of security and regulatory control which the government has proven time and time again to be totally incompetent when dealing with either. Taxpayers cash shouldn't be left in the hands of 'good citizens' who appear to have a benevolent helpful Good Samaritan streak, they need to be CONTROLLED.

    Secondly, I have an issue with busy bodies knowing these people's circumstances and holding such information that Mrs Smith from number 23, next door to the chippy, is on the bones of her arse and has a loan from the taxpayers in order to keep her oven, lights and heating on because she's struggling to pay the extortionate bills which carry TAX on the poor to fill the fat pockets of "LABOUR" Government Ministers and MEP's in the European Union and "LORDS" which lord it up at our expense on DOUBLE expenses !

    Thirdly, I take exception, and would take some convincing, that this amounts to state benefit, rather than a despicable act by government of Scrooge proportions, to take the last burning embers out of our 'socially caring and responsible society' ( PAH ).

    The Tories are seemingly as mad as hell about it. – GOOD !

    Chris Grayling said: "These proposals are simply outrageous.

    "Thousands of people are losing their jobs every week, and it is nothing short of extraordinary that the government's answer is to propose abandoning interest-free emergency loans, and start charging 27% a year instead.

    "Gordon Brown and [Work and Pensions Secretary] James Purnell are behaving like loan sharks."

    Liberal Democrat work and pensions spokeswoman Jenny Willott said the proposal was "totally unacceptable".

    "What the government is proposing would have people in dire financial circumstances facing an annual APR which is more than twice the current rate of a sub-prime mortgage," she said.

    "Providing advice and information about savings and money management is all well and good, but when people are so desperate that they need a crisis loan, it's just not the right time."

    I stand in total disbelief of this horrible uncaring and irresponsible wicked incompetent government and I really hope this proposal is put on the fire in parliament when it returns.

    Even Ebeneezer Scrooge would be turning in his grave at the prospect of opening Browns Xmas 'gift' to Britain's poor, and it is plainly obvious that Brown is an utter anus and a conniving money grabbing bar steward if he introduces this as a policy!

  16. Sava Zxivanovich
    Posted December 30, 2008 at 9:37 pm | Permalink

    The only solution is to cut all expenses HM Government and local governments.

    1) Cap benefits and military budgets.
    2) Cap all kind of benefits for state and para-state employees.
    3) Cap salaries for state and para-state employees.

    I believe it is possible to cut current budgets by £100 billions annually. That savings should be used to:
    1) Stabilise economy by stabilising property market.
    2) Invest in R&D.
    3) Cut tax.

    Banks should be not nationalised, but taken over by their creditors, in the same way NTL (now Virgin media) was taken over. Or as Eurotunnel was taken over. New owners will ensure better management.

    • mikestallard
      Posted December 31, 2008 at 5:57 pm | Permalink

      This is not the problem.
      We all know the public sector has to be cut hard back.
      Who will persuade that fraud Mr Brown, however, (the man who, as you rightly say falsified the CPI), that the finances are in anything but excellent order?
      You see, he does not seem to see the dangers.
      That is why he is truly frightening.
      Happy New Year!

  17. John
    Posted January 19, 2009 at 9:02 pm | Permalink

    We have to have Conservatives back in Government and I was formerly lifelong Socialist.

    Brought up on a tough council sink estate, no one can accuse me of not knowing about homelessness or deprivation, but its just gone too far.

    Now with a pension of just £5,000 a year and a flat I let, the occupant rents of an authority and instead of benefits being a safety net, it is now producing a standard of living that some of us can only dream about.

    Decent home standards, for some tenants who are anything but decent tenants, yet afforded all of life’s further luxuries that many cannot afford, and where they wreck them in a few months.

    The demand culture has to be replaced by a culture of rights = responsibilities and Labour will never do that, and rose tinted spectacles about what causes deprivation, however well meaning are so far removed from the real world that those on sink estates laugh their heads off and wonder about what next demand they will make…that will surely be satiated.

    How weird a society where those who are motivated are punished, whilst those who are not and many who don’t contribute at all, are treated as if they are the most valuable commodity this country has.

    We are fast hitting another Harold Wilson Brain Drain ere, and my children who are now in really good jobs, would be best advised to move abroad.

    Only today I have been working at a social tenant’s flat, where I should imagine me cleaning it after doing work, is the first time its ever been done, but where no doubt I’ll be asked to make even more improvements that I can’t afford in my own property.

  • About John Redwood


    John Redwood won a free place at Kent College, Canterbury, and graduated from Magdalen College Oxford. He is a Distinguished fellow of All Souls, Oxford. A businessman by background, he has set up an investment management business, was both executive and non executive chairman of a quoted industrial PLC, and chaired a manufacturing company with factories in Birmingham, Chicago, India and China. He is the MP for Wokingham, first elected in 1987.

  • John’s Books

  • Email Alerts

    You can sign up to receive John's blog posts by e-mail by entering your e-mail address in the box below.

    Enter your email address:

    Delivered by FeedBurner

    The e-mail service is powered by Google's FeedBurner service. Your information is not shared.

  • Map of Visitors

    Locations of visitors to this page