Month: December 2008

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.

Every year since I have been an MP I have gone to my local Post Office around 6 am in the morning near Christmas, to thank the postal workers for their extra efforts over the Christmas season, and to wish them a happy Christmas when they reach it. Many of my colleagues do the same.

This year I wanted to go next week just before Christmas. My office was told it had to be today. I accepted and said I would arrive at 6.30 am, to catch the postmen and women before they left the Sorting office. We were told it had to be 8.30 this year.

At 8.30 I have to be at one of my regular Business breakfasts, when I brief local business people on the current economic situation and relevant matters from Parliament. My office explained this to the Post Office, and said it would be better to come early, or failing that later after breakfast, or some other day. We were told it was 8.30 on Friday or nothing.

So nothing it is then. Was it something I wrote on the blog I wonder?

At least I can use this blog to wish all the post employees a very happy Christmas, and to thank them for their work to get the post out in all weathers and at all times over the year. It’s just a pity that management would not allow me to do it person this year.

Jaguar does not need state subsidy. It needs more customers. Management needs to have more feel for the brand and for what people want from it. I want the management to fight successfully in the market place so the jobs can be saved. My thoughts are with the employees. There can be no future for their jobs if they need to rely on state subsidy rather than customer income.

When I was 36 I acquired my first Jaguar. I was appointed Chairman of a big quoted industrial group of companies. The large black Sovereign saloon came with a chauffer to pick me up for the first day’s work.

The only reason I got such a job was the Group had been bid for. During the course of the bid the Board had signed up to a stretching profits forecast for the forthcoming year. The defence worked, but shortly afterwards my predecessor as Chairman fell seriously ill. The Board asked me to take over, as they thought it unlikely anyone would want to come in from outside to deliver the profits we had promised. I recognised we needed to raise revenues and cut costs to meet it. I also realised I could guarantee to cut the costs, but could not guarantee the extra sales.

So I cut the Chairman’s salary, sold the company aircraft, placed the pilot with the new buyer of the plane, and sold the company flat in the West End. Armed with moral authority from cutting my own perks and pay, I then persuaded others to cut their costs in turn. We made the profits forecast easily and went on to hit 37% return on capital. The Jaguar was the one luxury which I kept. I asked the chauffeur to do other things for the company when I did not need him for company business trips, which had the side effect that I could drive the car as well. It began a love affair with Jaguars which lasted for a long time.

I was fortunate to inherit an older Jaguar saloon when I made it to the Cabinet. It wasn’t as good as the company one I had enjoyed, but it did have some style. I restrained officials from buying me a new Rover to replace it, managing to combine my enthusiasm for careful control of public spending with the happy outcome that I could keep a Jaguar in government that I had got used to in business. On leaving government I just had to find the money to own and drive a Jaguar myself.

At the end of the 1990s as Shadow Secretary of State for Trade and Industry I was asked to be one of the people who turned up to admire the then new Rover at the Birmingham Motor show. I did so, and gave favourable comments to the press. I also saw the new S type on the Jaguar stand. I was so glad they did not ask me which car I would buy. I thought the flowing lines of the S type were superb. Whilst it had a hint of the 1960s icon Jaguar, it was a thoroughly modern car. Place them side by side and they are very different.

Until recently I have been happy with the brand. I am now not surprised to read that Jaguar are struggling. They have made mistakes with the way they design, present and project their cars and handle their customers.

I was first mildly worried when I visited the Jaguar Formula One outfit shortly before they gave up. They were spending too much for comfort, but not enough to win. It was difficult to see why they did it for so long. Wouldn’t it have been better to have raced modified production cars in a cheaper competition, and achieved a higher standard?

The launch of the X type was not a comfortable time for the company. Many traditional supporters of Jaguar did not see it as a good addition to the range. Jaguar compounded the error by trying to persuade owners of more expensive Jaguars to switch to their new cheaper product! That was a great way of trying to cut the margins and turnover.

More recently the Group has been spending substantial sums on market research and questionnaires. I have bothered to fill a few of them in, but developed an increasing frustration when I realised they were not listening. They were not understanding the answers and were not communicating back. I explained several times that I was not yet persuaded by the design of the new XF. The windows are small, the back is very high, the width is narrow, and the radiator grill looks like a mini Bentley gone wrong. They have lost the classic elegance of many of the best Jaguar designs. I bought one of the last S types instead. Now I am being bombarded by requests to buy the XF as if I have never expressed an opinion on it.

Worse still, somehow the press picked up a negative line about those of us who had bought S types when the XF was launched. We read that the S type was old fashioned and stodgy. The all modern exciting XF was designed to sell to the younger executive, a new breed of Jaguar buyers, people who had been buying BMWs. Well if that is the case, why do they wish to sell one to me, having insulted me? What compelling deal or argument can they put to me to say sorry, if they want older Jaguar fans back? I did not see myself as old fashioned or stodgy for buying one of their cars.

The reason Jaguar is struggling is it does not have enough customers. Yes, it had to widen its customer base. No, it did not have to do that by upsetting the existing supporters. Jaguar does not need a public subsidy, it needs a stunning successor to the XJ, possibly a remodelling and relaunch of the XF, and some much more astute marketing to reposition the brand comfortably, so it can reclaim its old supporters whilst winning some new friends.

Political parties could tell them a thing or two about the need to win over new friends without losing the core support. Comments like “the new Jaguar is styled specifically to shed its stodgy British lines” and “No more for Jaguar the relentlessly retro approach that is perceived to have done the marque no favours at all in modern times” must have come from briefing close to the company. It is undermining perceptions of their previous cars, never a good thing to do given that many likely Jaguar new car buyers have probably owned one before.

It would be so 1970s to go back to subsidising car makers. In those days the more the government subsidised, the more the state aided companies lost market share. The car companies came to see the government as the main customer, as they sought cash from them, whilst the foreign competitors got on with designing and building cars that individual customers wanted to buy. It was a disaster. The UK fell further and further behind the best of modern car design.

Surely even this government must see the folly of subsidising a foreign owned company to make luxury cars to sell to people with good incomes or money in the bank? And can’t the top management of Jaguar start listening to their customers, instead of contracting that out to consultants who manage to make a former Jaguar addict like me hopping mad with the way we are being treated? I am all in favour of the company innovating, and recognising that time moves on and perceptions of beauty change. What I cannot accept is clumsy “repositioning” in a way which makes former friends uncomfortable with what the Group is doing.

I worried preamturely that the government’s wish to borrow so much would cause strains in the government debt market. Indeed, I underestimated their intelligence in this respect.

Forecasting a huge surge in government borrowing from the £43 billion for 2007-8 heralded in the Budget to around £120 billion, I discovered that the government now thinks the true figure is an eye watering £157 billion for this year, or more than 10% of National Income. (The government has of course got away with telling people half the story, with most journalists and commentators using the £78 billion figure they wanted them to believe). This could have been more than markets would willingly lend, creating new strains on our currency and long term interest rates.

Instead, the worry today is that despite the huge increase in government debt we will witness a further increase in the size of the government debt bubble. Government debt prices have been rising. How can this be?

The government has taken strong steps to ensure lots of buyers for their debt.
They are instructing the banks to buy lots of gilts (government debt) to “increase their liquidity”. Much of the money the government has put into the banks to “strengthen” them will be lent back to the government at a loss!

They preside over a pensions regulatory system which will force many more companies to increase their pension contributions, and will encourage Actuaries and other advisers to insist this new money is stashed in gilts.

Taking interest rates down to very low levels will undermine the returns of most savers in normal deposits. Some of them will be tempted into government debt through National Savings and related products.

Injecting huge quantities of money into the system through the Bank of England will also create large amounts of liquidity to let institutions buy government stocks. They are creating a huge money go round, where the Bank of England bloats its balance sheet, to create the cash to power the government debt bubble.

In the short term the government has designed a system which will allow it to borrow collosal sums at low rates of interest. At some point this will have to be unwound. Just as the property bubble burst and the commodity bubble burst, so one day the government debt bubble will burst. In the meantime, enjoy the show.

Yesterday I met people in the West Midlands, to take the temperature of manufacturing.

The sound of very little going on was eerie. My journey to and from by the M40 was all too easy. The inadequate roads were for once more than adequate for the reduced traffic. The Birmingham ringway gave me unusually free passage around the conurbation.There was a worrying quiet about the place.

The mood was of one of people waiting for the news to get worse in the new year. The crisis which hit sixteen months ago in the City of London, once a remote matter affecting people on high salaries in high finance, is now all too real. Orders have contracted, some lay offs and a lot of short time working have already been announced.

There is a worrying expectation that as the world’s factories close for extended Christmas and New Year breaks, to contract output in line with much lower demand, so there will be knock on effects throughout manufacturing. Today maunfacturing is global. Cuts in one country soon transmit to cuts elsewhere.

Even migthy China is now experiencing a savage downturn in parts of her manufacturing heartlands, as the much reduced demand for Chinese goods in the west hits a country which has been such a successful exporter that she has $2 trillion in the bank.

I wanted good news to tell them, something to raise spirits. All I could say was the US authorities, somewhat late, are now doing everything they can think of to try to turn their economy around. Let us hope something works soon. It is like watching someone in front of a huge board of electricity switches in a dark room trying every switch, but so far none turn the lights on. We just keep hoping the board is still connected to some power.

Metals, oil and food prices have tumbled on world markets. As predicted here, the story of early 2009 will be price falls, disinflation, deflation. The Central banks were so wrong to worry about inflation earlier this year, as they tightened the noose around the necks of easy credit. It’s making it so much more difficult to kick start the economies, as the damage to the banking sector is severe.

So why is US inflation well down, and UK inflation still too high? There are two simple reasons. The first is the pound is very weak whilst the dollar is strong. The UK has lost a lot of the benefit of falling raw materials and energy prices through the devaluation. Chinese imports are now also a lot dearer. The second is the cost of government. In the UK petrol and diesel taxes are so much higher than the US, with a large element that does not go down when the oil price falls. Items like Council tax always seem to go up (unless you live in Hammersmith and Fulham) whatever the economic circumstances. Many public sector fees and charges also exceed inflation on a regular basis, whilst the state monopoly post and the semi nationalised railway industry have recession defying price policies which sting the consumer.

UK inflation will come down next year. Looking at the range of government policies they are aiming to rekindle inflation again once they do manage to turn the economy round. The amount of money being printed, the low level of interest rates, and the reduction of competition in crucial areas like banking all point to a lot more inflation in due course, once they have worked out how to mend the banks enough to avoid a long and deep recession.

In this new world where the all powerful state can take on any financial obligation, I guess nationalising the Post Office pension fund deficit is small beer. After all, a one percent loss on the gross assets of RBS is three times the size of the pension fund obligation we read we are about to take on.

For those of us who still think governments too have t to control what they borrow, spend and guarantee, it is yet another large sum that taxpayers, sometime, are going to have to pay for. Pensions have become shrouded in jargon and regulatory complexity. Actuaries and experts exchange complex sums, attempting at any given date to come up with a figure for the “deficit”, the shortfall of money in the scheme to meet its future liabilities.

These deficit figures can be very volatile. They are the product of two very difficult forecasts. The expert needs to work out how much all the pensions are going to cost. That is a moving feast, as no-one knows for sure how long the pensioners will live, or how much their pensions will increase by in an inflationary world. Then the expert needs to decide how much the fund will make on its investments, an even more difficult matter to estimate.

Trustees responsible for the schemes are then faced with the issue of how they will fill in the deficit, if that is what their experts tell them they have at any given time. There are three ways of “correcting” a deficit, if all the assumptions in the deficit calculation are accepted and do not change over time. The trustees can improve the investment returns, above the Actuarlial assumptions in a way which persuades the Actuary. The Trustees can obtain more contributions from the company and the members. The Trustees can agree lower benefits with the members.

If the government is planning to take on the Post Office pension fund, it should first reach agreement with all involved on how it is going to tackle the deficit. Is the future semi privatised body going to increase employer contributions? Are members going to accept higher contributions or lower benefits? Can the investment strategy be improved? Or is the long suffering taxpayer simply going to pay whatever it takes to fill the present deficit, with no guarantee that there might not be another deficit in a few years time? If they go on getting the investment strategy wrong, or offer more generous benefits, will the taxpayer be expected to stump up?

Financial businesses are different from most other types of business. They entail sending your money to someone else to look after, on the promise they will give it back to you at a later dtae, preferably with some improvement in its value.

Because of this I have always favoured two types of regulation for financial businesses. The first applies to deposit takers. They should be required to meet overall standards of capital and cash reserves. The Economic Policy review I helped produce in 2007 demanded stronger requirements in these important areas, as we could see the banking sector was grossly over extended under the then current regulation, which could make it difficult for people to retrieve their deposits from some banks if many wanted to at the same time.

The second type of regulation should apply to all financial businesses. It should be a policing system designed to find the thieves amidst the large financial community, and take early action to prevent them trading or to wind them up rapidly where theft or fraud is occurring.

Instead, what we have witnessed is a a big growth in the regulation of the many honest businesses, in the strange belief that if you put in enough complicated rules to “prevent” some past way of carrying out a fraud, you will prevent fraud. This is never likely to work, because of course if someone is going to commit theft, breaking a few Regulators rules and lying to the Regulator is just a subsidiary part of the task in order to steal all the money.Fraudsters will break regulators’ rules as well as pocketing the cash.

I am not surprised that a large fraud may have taken place in the US. They like the UK have box ticking regulators who create ever more rules in substitute for being detectives seeking out the mercifully small number of bad apples in the financial barrel. The danger of the US system is the regulators concentrate on a wide range of honest businesses who fall foul of the increasingly complex rules owing to human error, disagreements about what the rules mean, and through misreading the complexity of all the process issues the regulator seeks to control. At the same time invetsment managers can be losing their clients billions legally, and a handful can be stealing billions of their clients money without the regulator being able to see it.

When I was the UK’s non banking financial Regulator, in the days when that role resided in the DTI, I drew up a list of things regulators should look for to try to detect crooked businssses. I told them to concentrate on that, as I was quite sure the public, like me, primarily wanted their regulators to find the Maxwells before they had taken too much money from clients or pension funds, and stop them.

Included in my list of warning signs worthy of investigation were: returns that are too good to be true;promised returns out of line with the asset returns they said they were buying; frequent changes of year end and auditor; complex company structures;lack of independent people on the Board and at the top of organisations;lack of independent custodian arrangements; market rumours.

I favoued using the invetsigatory powers, in private, when our suspicions were aroused. A public investigation, or worse still a press briefing before enough evidence had been amassed ran the risk of breaking a perfectly good business if it had good reaons for the warning sign.

In the hue and cry that will follow the Madoff case there will doubtless be the demand for yet more process regulation to “stop” someone else doing what it is alleged he did. Instead the cry should go up for a detection based approach to regulation, instead of yet more box ticking for the largely compliant and the wholly honest. People should rememnber that it is only the honest who do the box ticking honestly. Crooks can tick boxes too, and can make up the things to put in them. It’s just the same with money laundering. Money launderers doubtless have passports and gas bills. Making sure every financial business has all its clients passport and gas bill copies does not mean the end of money laundering.

According to the news media, RBS may have lost £400 million in the Madoff investment funds.

That’s not quite how I wanted the government to spend the tax money I and my constitutents send them.