Month: December 2008

This morning we learn that the government has hit a target it set for itself, by sending back some prisoners to their home countries. One cheer for that. The Conservatives have shown that many were let out early, and a lot are still not returned to their homelands. We also need to remember that the government is only talking about visitors from outside the EU, ignoring all the crimes committed by contintentals who come here. It’s a pity they threw away proper contorl of our borders with the EU that previous governemnts had carefully preserved.

I think UK taxpayers have plenty to complain about when we learn how many of the people our Borders agency lets in abuse our hospitality by committing serious crimes. Do they do no checks on criminal records of people before letting them in? Surely they don’t suddenly become drug dealers, murderers or sex offenders when they arrive here, having led blameless lives before? Why can’t we have arrangements with overseas governemnts to send them back for punishment in their own country? Can we at least make sure that anyone committing a serious crime here is sent home and never allowed back again?

The government is being criticised for not having enough jail places. It could help itself by being a lot tougher on how many criminally inclined foreigners it lets in and then puts in prison, and by reaching agreement with overseas countries concerning their punishment.

It also raises the more general question of does prison work? Most people want two things from prisons. The first is to lock up criminals who represent a serious threat to the rest of us for long periods of time to protect us. The second is the try to ensure that prisoners let out of prison are less likely rather than more likely to reoffend.

I am not sure putting so many people inside for theft and other financial crimes makes a lot of sense. If people are too greedy, let the punishment fit the crime. Why not make them stay at work or make them get a job, so they pay full reparaitons to the victims of their crime and pay full charges for the police and court work involved in finding them and bringing them to justice? I have never understood why, if someone is burgled, they not only lose their possessions to the burglar but then have to help pay to keep him in idleness in what can be a seminary for crime called prison. That only makes sense if the burglar refuses to co-operate with any sensible programme of rehabilitation, and refuses to work and pay recompense.

There will be no new posting tomorrow, Christmas day. I have a turkey to cook and a good wine to drink.
Normal service will resume on Boxing Day for those who are not rushing off to the sales, and for all who have already broken or consumed their Christmas presents.

A happy Christmas to you all. Thanks for all your comments. It’s good to know there are so many strivers after the truth in this world of spin.

I am pleased that the Conservative party has come up with more ideas for tackling homelessness, and understand their media savvy in launching them at Christmas.

However, as I have to remind people at this time of year, the Christian story is not about homelessness as the media implies. The Bible is quite clear. There was a hotel shortage in Bethlehem on that important night, brought about by the government’s insistence that everyone returned to their town or city of origin to register for some great new ID system, to be followed of course by some new tax.

It is typical of evil governments down the years that they think nothing of the convenience of their citizens. Poor Mary had to travel around the time of her confinement, just to satisfy some power mad government that could not be bothered to register her in Nazareth where we assume Joseph had a home, but required her to go somewhere else. I am sure the last thing Joseph wanted with a pregnant Mary and all the extra bills fatherhood would bring was to down his carpenters tools and travel to Bethlehem just to register and pay a tax.

As it turns out this was just the start of the evil of this barbarous regime. Hearing of the birth, their combination of insecurity, malevolence and incompetence made them decide to put all new born boys to the sword, forcing Mary and Joseph to flee. Is it, I wonder, because of the Roman influence that this ancient government escapes with such a mild press, when we should be condemning its brutal actions?

Wouldn’t it be a good celebration of the spirit of Christmas if instead our present government pledged not to carry on with new costly and inconvenient ID schemes, or extra taxes? That would show just how different it was, and show it had understood the true Christmas story of how good triumphed over evil, with the escape of Jesus.

I read that some senior clergymen want to lose their seats in the Lords, and some Labour MPs think it would be another glorious chapter in their modernising of Britain to abolish an Established Church in England.

I wonder if by chance they have at last been reading some English history, and have stumbled over what a money spinner the Reformation was for Henry and Cromwell? It would be an interesting question who owns the assets stashed away by the Church Commissioners, and who should have title to them if we are to have revoltutionary change in the nature of the Church.

Whilst the Bishops might think it would be automatic that the money and buildings should pass with them in charge to a new and differently structured Anglican Church, the Labour left might have other ideas. They might argue that the Church and state have been so intermingled over the last 500 years, that some if not all of the money and buildings based in England should rest with the state for good causes, a new kind of Lottery giving Labour MPs more power to borrow and spend. Or they might decide to let competition flourish, and split the Endowment between competing religious leaders making a case that they could run a better Church which reached out more than the current Establishment manages.

The Archbishop miight find that opening up the issue of establishment takes the debate in ways he will find less comfortable. There might be no automatic right for him to lead the new Church, which would presumably wish to exercise its new found freedom in unpredictable ways. It would certainly mean an end to the present system of choosing the Bishops and Archbishops with an involvement for 10 Downing Street in the appointments. Who knows, people might even want an elected Archbishop, to create someone with more political and moral authority. Whatever method of choosing a religious leader which the new Church decided upon might result in a different bench of Bishops once it was properly up and running.

Sir John Gieve’s interview with Robert Peston was very worrying. There should be no instant history from the participants fighting the banking crisis, as the problem is not yet resolved. Anything they say could damage confidence further. They need to give us the figures and make the official statements they need to make, but they should not wander off into risky analysis and self justification. When it’s over, when they write their memoirs they can do that.

Sir John wanted to get over the fact that in his view the UK banking crisis in the week before the re-capitalisation was severe. I guess he wanted us to know this, so that no-one would try to argue they had over reacted or made the problems worse. At one point he wisely said he would not mention individual banks, but comment on the system as a whole. He subsequently broke his own sensible rule, and told us RBS and HBOS were especially in need of treatment. Both these banks are open for business and should expect decorum and support from their Central bank.

So what was the nature of this crisis that the authorities suddenly decided they needed to tackle? There are 4 possibilities.

1. There was a run on the deposits, the disaster which brought Northern Rock down.

There was no visible run, although the authorities’ leaks were far from helpful in maintaining confidence. It is difficult to believe it was a prospective run on retail deposits that led to the action.

2. The authorities suddenly discovered the loans these banks had made were far worse than they thought, so they became fearful for their solvency without more capital injections.

There is no evidence that the authorities suddenly became more alarmed by the banks assets. Indeed, when I asked in the House if they were carrying out proper due diligence before buying the shares, I was told they were not, implying they were not especially worried by the then value ascribed to the assets they were buying on our behalf. They did not insist on any immediate additional write downs.

3. Certain banks were unable to gain access to money market funds in sufficient quantities which would force them to contract rapidly, too rapidly for comfort.

Sir John implied it was partly this. Why then didn’t the authorities get on with supplying the ample liquidity to money markets they have subsequently supplied through the Bank? That can explain the need to make the loans and guarantees available through the package, but does not explain the need for more capital and the sudden request of the regulator for higher ratios of share capital to loans. That would only have been a sensible thing to do if they were worried about 2 above.

4. The share prices of leading banks were falling.

Yes, that is true. However, a falling share price does not bring a bank down. RBS is just as able to trade with its share price around 45p today, as it was with its share price many times higher before the crunch. A low share price does not stop a bank doing anything, unless it reflects a general loss of confidence by depositors and other providers of cash.

Whatever the rights and wrongs of these four points, two points should be incontrovertible. Firstly, any sensitive discussions between banks, the Bank, the Chancellor and the Regulator should take place in confidence and in private. Bankers do not have to be invited in dramatically over a week-end to the Treasury through the front door. We live in an age of conference calls, emails, webcasts, working in normal working hours, and there are side entrances. There are not many top banks, so each one could have been sorted out individually. It does make it worse for the authorities to show how worried they are in public.

Secondly, any action should be based on revised figures that are as accurate and well based as possible. Confidence building in banks requires the banks and the regulators to put out credible information in a timely way. It is no good denying things have changed from the heady days, nor does it make any sense to overdo the gloom by suddenly marking everything to a market which does not function. Working through this is about access to cash, and having the right amount of patience to minimise the losses on all the positions the banks have taken.

I do not believe they had just a week-end to save the world or the banks. Their actions increased the pressure to do something, and the leaks made action imperative, but that does not mean it was a good way to handle the situation. Nor do I believe they then in a single flash of the government cheque book solved the problem. The nationalised banks still have a cost level out of line with their earning potential, and probably more to write off. The sooner they recognise that reality and get on and sort it out the better. I see no reason why taxpayers should have to tip more money into these banks, when they are still employing too many people on high salaries and big bonuses, and still have a gap between what they charge and what it costs them.

As for Robert Peston, he was the recipient of information that should not have been released in that way. Some of the things he broke to the BBC audience looked like price sensitive information that should under the rules have been released to the Stock market as a formal announcement in the usual way, to be followed by all news outlets handling it at the same time. Whilst one can admire his journalist skills in getting hold of such a fount of stories, one is left to wonder who leaked the information, and for what possible reason? It is also curious that so far no Minister has made a big issue of the leaks in the way they did over immigration figures.

I suppose it is progress of sorts that the Bank of England now admits it got it wrong in 2003-6, when it allowed excess to build up in the banking system by keeping interest rates too low.

When will they also admit they got it wrong in 2006-7, when they kept interest rates too high, bringing the pack of cards tumbling down?

And when will they admit they are still getting it wrong, pushing huge quantities of money at ever lower interest rates into a system which is still broken, but which one day may ignite inflation again?

I would be far happier if they confessed to current sins than long gone ones. It is difficult to fathom how bad they can be and can remain, when they seem to get every important call about banks and markets wrong. If this were a private sector business the management would have been changed a long time ago. When are they planning to hit any of their targets and forecasts for the economy?

In the final analysis a subsidy is a subsidy. We are in that phase at the moment when governments are trying to dress it up. Let’s look at two such schemes – the German employment scheme and the putative UK R and D scheme.

I have been told that in Germany there is a current government scheme to keep skilled workforces together. Apparently an employer can announce that a large number of workers are no longer needed and send them home. The state will then pay between 60 and 67% of their wages, depending on their marital status, for as long as they are doing nothing. The theory is that the downturn will be temporary, and the worker will go back to their company when normal demand resumes.

Such a scheme is not necessarily a good idea for the company concerned. After all, they still have to pay a substantial amount to employ someone who no longer does any work for them. There can be no guarantee that “normal” demand will resume any time soon so they need them again. Nor can there be any certainty that the employee will come back to work for that employer. They may change their mind and resign many months into the enforced period of no work.

It can be an even worse deal for the German taxpayer. Big multinationals could decide to lay off more German workers rather than taking action elsewhere, if someone else paying two thirds of the wages is enough to sort out the cost problem. The scheme could become very expensive, as it is very expensive to cut the size of a German workforce so this could be attractive compared to the full costs of redundancy. It does nothing to resolve the underlying business problem that some German companies are facing. They have too few sales, and need to cut all their costs.

We read that the UK is thinking of an R and D subsidy scheme for certain car makers. The thinking here is that we wish to keep R and D in the UK auto sector here in the UK, and therefore taxpayers should pay to do so. This well intentioned proposal would also be fraught with difficulties when it comes to sorting out the detail.

Spending is spending. Accountants can have long arguments about which part of an auto company’s spending is R and D. How much of the Board’s costs is R and D, as they spend time talking about future products? How much of the CEO and the rest of the executive overhead, as they too are heavily involved? Is investigation of a complaint or a technical problem with the product R and D? Is market surveying and customer contact R and D? How much of the engineering overhead is truly future oriented?

There is no easy way of indentifying and ring fencing all R and D spend. Nor is it magic spending, clearly better than other spending. The government will discover, if it presses on with this, that a subsidy is a subsidy, by whatever name.You keep R and D here if we continue to produce good people who want to innovate and engineer new solutions, and they are affordable.

BUSINESS IS VERY SIMPLE. If the money you collect from your customers exceeds the money you spend delivering the product and service, it works. If the money from customers falls below the costs you are in trouble. Borrowing to pay the losses cannot solve the problem. It makes it worse, as you have to pay the interest as well. You end up losing more jobs, as BL proved in the 1970s.

Good Boards of Directors saw this downturn coming months ago and told their CEOs to cut costs to get ready for it. Good CEOs did so. Bad Boards looked firmly in the rear mirror, accepted the authorities view, and did not ask their CEOs to take evasive action. Bad CEOs failed to alert their Boards, and carried on spending as if there was no recession. They deserve to lose their jobs.

Companies in automotive manufacture have one major cost – bought in materials and components. When you hit a downturn it is vital to cut back strongly on the amount of raw material and component you are buying. You need to cut back by more than the anticipated drop in your sales, as you need less stock to maintain lower production. In this downturn there is the added bonus that the price of the raw materials has collapsed at the same time as you need less of them, so if your buying department is any good there will be a huge decrease in the cash cost of your supplies.

The cost of labour is much smaller than the cost of parts and materials. Nonetheless you will need to take some action to curb it. The first thing to do is to stop all recruiting. Next, you ask all temps and short term contract labour to leave. Third, you offer voluntary redundancy packages to those who might wish to go. If you still need to cut costs more because your sales have collapsed, then you need to discuss with the workforce whether they would prefer to all go onto shorter time to keep the jobs, or whether they want to sustain the incomes of the many at the price of a compulsory redundancy programme for a minority. No sensible person likes doing all this, but one thing keeps you going when you have to do it – the knowledge that if you do not shed some jobs you could end up presiding over the loss of all the jobs if the business goes bust.

You may need bank bridging finance if you were slow to make the adjustments, but that can be no substitute for controlling the losses. You cannot ask future customers to pay more for the product to pay for the subsidy you gave to current customers. They will not be prepared to do that. State loans can be an excuse to put off the necessary adjustment. They are also a massive diversion of top management time from tackling the reality that costs have to be slashed to survive in dreadful conditions like the present.

I read in the Labour press this morning we all need to go out and shop til we drop – but showing suitable responsibility at the same time.

I ventured out this morning to buy a couple of newspapers and some fresh bread. I added seasonal marzipan to my basket so I could ice the Christmas cake later. Was that enough, I wondered, to meet the new patriotic requirement to be a cheery shopper? The marzipan was certainly dear enough to make a difference to the Sunday bill. It didn’t mean, however, that I needed to up the mortgage.

Therein lies the dilemma. The authorities visited this crunch on us, because they judged we were collectively borrowing too much and spending too much. They hiked the interest rates and later told the banks to lend less for the level of capital they held. Now they don’t like the results that come from jamming on the monetary brakes so spectacularly. They want us to be both prudent and to spend more. Given many families personal circumstances they can’t do that.

The spectre at the feast this Christmas is not just cash strapped banks reluctant to lend. It is many people worrying about whether they will get any overtime in the New Year, whether they will be on short time working, or whether they might lose their job altogether. Unemployment is the spectre stalking the land. If you fear loss of job you are not going to go out and buy big ticket items. You are going look carefully at the price of any inessential you would like to buy. You might buy some decorations and some Christmas lights, but preferably on the day the shop has cut their price by 25% to promote them. You won’t buy the new plasma TV, even when it is £300 off, because it’s still a large commitment. As for a new car, well you can forget it.

Companies are in an even worse plight. If people don’t spend enough in the shops, they feel it first at the factories making the goods. The stores soon turn off the suppliers. Companies cut out buying new cars for their staff, cut back on corporate hospitality, and review the prices they are paying to all who work for them on contract. You soon get into a recessionary psychology. Why buy it today? It might be cheaper tomorrow. Why buy it today? We might not be able to afford it tomorrow. Why buy it today? We can make the one we’ve got last longer.

After years of fulminating against the throw away society, after years of moral condemnation of the have it now pay later society that fuelled the boom, the government has come to the conclusion there is one thing worse than such a society. That’s a society where people are so careful with their things and their money that they throw others out of work with their parsimony. Did I do enough with my marzipan? No I didn’t. Should I do more? No, I don’t think so. What’s the point of buying food you cannot eat, only to throw it away, or buying things you do not need. Besides, many are saving up for the tax bill in January, as the government does want to spend so much for us.

HSBC, a typical large regulated bank, in 2007 had a balance sheet showing total liabilities of $2,354 billion. Shareholders had put up $5.9 billion in capital, and had accumulated total share capital and reserves of $128 billion. In other words, the bank was able to gear itself at around 20 times its shareholders capital. That left it comfortably within the Regulator’s limits on how far a bank can gear up its capital to lend and spend.

There is today another well known UK bank whose shareholders put up just £15 million, with total shareholders funds of £2.3 bn at end February 2008, which on December 4th 2008 had total liabilities of £259 billion. In other words it was able to gear itself more than 110 times its shareholders total capital.

That bank is the Bank of England. It is true the assets of the Bank of England are on the whole lower risk than those of commercial banks. It is also true that the government and state stand fully behind it. Last week was down a bit on the 4 December level. It does go to show, however, that they are not just thinking about quantitative easing. I wonder how much further they are prepared to go in expanding the Bank’s balance sheet?