Month: December 2008

The government thought the following would lead to more normal lending levels:

1. £37 billion of new equity for 3 banks
2. Nationalisation of 2 mortgage banks
3. £450 billion of short term loans and guarantees for banks
4. Much lower interest rates
5. A big increase in money market liquidity and substantial open market operations by the Bank of England

They thought all of this would bring LIBOR down close to the base rate, in turn leading to banks lending again to home buyers and businesses.

Now it is not working they have added:

1. The reflationary package, based on a VAT cut
2. Much higher levels of public borrowing
3. Lecturing the banks

So why isn’t it working?

1. The banks still have to write off substantial bad debts. HBOS last week revealed an additional £8 billion of write offs, three quarters of the new capital the government is supplying. If all or most of the new capital just matches losses it cannot be used to lend more.
2. The Regulator has chosen this bad moment to demand more capital and cash to sustain existing levels of lending. As a result new capital above the write offs does not necessarily allow any new lending.
3. Banks are lurching from being too confident to being very cautious about new lending. They are now reluctant to lend as they fear more losses.
4. Further big losses are emerging, as we learn today concerning a large US Investment fund. Such losses hit confidence and in some cases impose more direct losses on banks.
5. The Regulators are requiring banks to rely more on retail deposits and less on wholesale money. Retail deposits are dearer, making it more difficult for banks to make profits. Loss making banks are weak banks, unable to lend more.
6. The two nationalised mortgage banks are effectively winding down their mortgage books. This means far less mortgage money is available in the markets, leading to further falls in house prices. This in turn leads to more mortgage loan losses for the banks.
7. The sharp deterioration in business conditions in the UK, US and EU in the fourth quarter of 2008 will create more corporate loan losses. Bank executives are busy fire fighting problems in many of their customer companies.
8. The Regulator is going to require the banks to hold a lot more in gilts so they are more liquid. In other words the banks are going to be made to lend more to the government!

What can be done?

It is not easy breaking a vicious circle of less lending, more losses, less lending. The government should summon the Bank of England, the Regulators and the lending banks. It should say it wants to change the terms of its £450 billion package to make it more effective. The Regulator should be asked how it could be more counter cyclical to make it easier for banks to lend in difficult conditions. At the moment regulatory and monetary policy are pulling in opposite directions. That needs to change. The government needs to find a market answer to allow Northern Rock and Bradford & Bingley to lend again. It needs to find a way to limit taxpayer risk in RBS.

If they carry on in current mode we should expect more property price falls, more bankruptcies, more job losses and more bank loan losses. This is not a great backdrop for recovery. Whilst it is important the government stands behind the main UK banks to avoid another Lehman disaster, it must avoid feather bedding them. Taxpayers should not be subsidising six figure salary executives and their bonuses. The financial sector generally has been paying itself too much. The sooner costs and charges are cut, the sooner more normal business can resume.

The serious allegations about a large US investment fund show us how little a big Regulator achieves. The very least we should now expect is Regulator help to solve the current problems instead of making them worse. Putting in tougher controls to prevent the excess they allowed a few years ago just digs us deeper into our current hole.

We are told a big review of the Post Office awaits Lord Mandelson. The Unions are afraid it means faster rounds and more job cuts. Taxpayers are afraid it means more subsidies and underwriting the huge losses in the Pension Fund. What it reflects is the poor management of the company in recent years, cutting the quality of the service whilst increasing the prices and demanding more cash from the government.

What should be done? The first task should be to empower regional and local management, making them responsible for their own revenue generation as well as for costs, and putting them in charge of their property and other assets. It’s not much fun for local managers, constantly being told to cut costs and offered no control over assets and revenue to grow the business in more positive ways.

A couple of years ago I proposed a way of improving the service and releasing cash in my Wokingham area. The main Post Office in Wokingham town occupies a prime position. At the front is a handsome facade and shop space to handle the counters business. At the rear is cramped and inadequate sorting office space in assorted sheds and industrial style building, with a narrow access to the side across a busy town centre pavement and main street.

I suggested they sold off the sorting office and back land for what then would have been a lucrative office redevelopment, bought a suitable modern property on an industrial park with good vehicular access for sorting, and increased the number of counters by knocking the shop through into the store room within the main building to cater for increased demand. Local management thought this all made a lot of sense, but the idea got lost in the rambling central bureaucracy.

Instead, the central management decided on the closure of two branch offices in Wokingham, claiming people could go to the main Post Office in the Town Centre instead. We objected, but they did not wish to hear us. I said they needed to increase the number of counters at the main building first, as there were already long queues. Instead they blundered on with the closures, causing worse queues and worse service in the main office as well as making it more difficult for the elderly to get there at all without a car.

The Wokingham example is just a small one, indicative of problems across the network. the whole thing is one big missed business oportunity, a great franchise that has been grossly mismanaged in recent years. We cannot afford the losses, and cannot afford the Pension losses. Both fund and business need new directions. Whatever the rights and wrongs of the speedy postman debate, the bigger problem the Post office has is the quality and power of management. There is some good local management, and doubtless some bad. None of it has the power to do the job. That’s why the results are poor, there are many missed property opportunities, and many missed opportunities to fire up the staff. They could start by giving them all a share in the business. That would help electrify it.

Green is so much last year’s colour for western governments. Now they have stumbled into a policy which will cut carbon emissions sharply, their policy of falling living standards and recession, they are all rightly trying to run away from it. So are their voters, who might tell pollsters they want to live in a lower carbon world, but not if it means they have no car and have lost their job.

Let me make it clear. I see myself as a sensible green. I want to stop overbuilding, leaving some green gaps and lovely countryside between English settlements. I want to clean up the water and air through better technology and some regulation. I think the biggest domestic policy error of the Bush regime was the failure to work away at energy self sufficiency, to cut dependence on unreliable supplies from elsewhere, and see the UK government’s failure to find new, more fuel efficient home grown energy solutions as one of its more important mistakes.

What I dislike are the authoritarian greens, who see the cause of lower carbon as a means to try to stop personal transport, who wrongly think trains and buses do not cause some of the problem, and who refuse to look at the audit of where the carbon comes from. They do not accept that for some journeys the car is the lower carbon alternative to the nearly empty bus or the inconvenient train. They never tackle the carbon excesses of the public sector – all that air conditioning and over heating in bureaucratic offices, and all that travel on “fact finding” and “diplomatic” junkets, whilst condemning the commuter who dares to try to get to work through their congestion loaded streets by car. It seems to be freedom they want to stifle, rather than carbon.

The German government has faced a dilemma. Representing a car ridden economy, where the automotive industry is a very important part of their activity, the government has lobbied and argued for less onerous carbon regulation at the EU level. They have decided automotive jobs matter more than the latest fashion in carbon targets.

The US government faces a dilemma. President Obama is not yet in office, elected on a green ticket, before he is letting it be known that saving the gas guzzling car makers of Motown is important to him. Yes, he will dress up help with programmes to encourage them to make more fuel efficient cars, but in the meantime he accepts the reality that too many jobs are riding on making grossly inefficient vehicles to be a rigorous green. He is not about to say “thank goodness these makers of fuel wasting cars are about to go bust or slim down. That will help me to hit the new targets I want to impose”. Once again in the USA we see those two bank nationalising, war fighting, high spending and high borrowing advocates of big government, George Bush and Barak Obama, united in their approach.

In the UK we have come to expect contradictory responses, and differing language depending on the day of the week and the nature of the audience. One day we are told in the House that tougher carbon targets are the order of the day. The next we are told that propping up the auto industry and trying to get the banks to lend more money to the companies that make the cars and the individuals who might buy them is crucial to our future success. Meanwhile, in Labour inclining Manchester they vote by 4 to 1 against Labour’s mistaken green policy of trying to switch people from carbon emitting cars to carbon emitting public transport at a £1.6 billion cost of borrowed taxpayer money, and £5 a day for those who still want to use a car.

The Manchester defeat should be seen as the end of an era. Labour’s whole transport strategy was based on the premise that if they spent more on trams and trains, and taxed people more for using cars, they would achieve a “modal shift” . Only the rich would be able to drive their own personal transport, alongside the Ministers in their chauffeured limos. The rest of us would willingly take the shiny new trams or crowd onto the already full peak hour trains, saving the money on the Congestion charge to pay the extra taxes for the losses the public transport systems usually make.

This policy has recently suffered a defeat in London. Some Londoners voted Boris in to get rid of the anti car policies, and to scrap part of the Congestion zone. The consultation the new Mayor carried out was clear. The voters wanted the western zone scrapped, and he has said he will do so. Now it is defeated in Manchester.

The people are right. This very expensive switch will not make a huge difference to carbon output, but it will cost large sums of money and may make the journeys of many even more inconvenient. We need instead a positive policy of sensible investment in the railways to get more capacity out of them, and road improvements to cut congestion and improve the safety and flows at junctions. Motorists have had enough of taking all the blame for carbon output, when there are so many other sources of it from the inefficient domestic boiler to the old fashioned power station. The government needs to work away at improving the capacity and technical performance of much of the infrastructure, without inventing new taxes for people already groaning under the burden of wasteful government. 11 years have failed to deliver the modal shift, and the modal shift was not going to solve the carbon problem anyway.

The government is discovering that wishing for housing to be more affordable, as they did for several years, creates an uncomfortable world of negative equity, weak banks and mortgage famine. They by now should have worked out that their theory that you needed to build more houses to bring house prices down was completely wrong. We today have plunging prices at the same time as large cuts in new building.

So when will housing be affordable? There is no single good price level, as it all depends on what price level the mortgage banks will support. They, under strong regulatory influence both ways, have lurched from believing very high prices are affordable, to working with much lower prices. What is affordable when banks will lend 5 times salary is not affordable when they will only lend 3 times salary. What was affordable with a 100% mortgage may not be affordable with an 80% mortgage.

The boom was so overdone in London that even people on good incomes were priced out of the London housing market unless they already owned a property or had some other windfall to help them. Still today, after considerable falls in the market, a new MP on £63,000 a year would be hard pressed to find anything more than a studio flat he or she could afford north of the river near the office. A professional, middle manager or Doctor on around £100,000 would have little choice of anything other than a one bedroom flat in the central districts if they were starting out with a mortgage and not much else. Pity anyone on average wages, they do not have a chance in inner London.

I fear this all means the fall has further to go. The government has not yet found a way to help mend the banks. The mortgage market is still far from happy. Northern Rock is in effective run off, so Northern’s mortgages need refinancing elsewhere as they fall due. On current policies we have not found a base for the property market. That means more losses at the taxpayer financed banks, in line with the deteriorating loan experience revealed by HBOS in their figures yesterday. Taxpayers are currently losing more than £7 billion on the bank shares the government has bought for £37 billion at current prices.

This week I asked the Foreign Secretary why it appears that Northern Rock cannot offer competitive busniess rates in the market owing to EU competition rules, but this constraint does not seem to apply to RBS. He said he would write to me with an answer. I think we need to know, as it seems odd that the smaller bank is prevented from writing much new business, whilst the bigger bank is unaffected.

Every time the public is allowed a vote they show their scorn and dislike of current EU and UK government policies. The French, Dutch and Irish all voted against the ghastly EU Constitution and its renamed look alike. The people of the North East voted against regional government. The people of Manchester voted against more surveillance cameras and a further tax on motoring. In the latter two cases it was not a marginal decision or a small vote. The feeling was overwhelming, in carefully chosen Labour areas. The people had been beaten up by the Labour propoganda, yet they still voted No.

The frustration with governments is now intense, as they seek more ways to annoy us, and to thwart the popular will. Why will they never learn? They spend a fortune of our money on polling and researching our views, yet when they give us a vote they ignore the result. They should get the underlying message. We want more freedom. We want to keep more of our hard earned money to spend as we see fit.

People are so often great. This time they have voted down the Congestion charge in Manchester. They dared to vote down a £1.6 billion “bribe” – more public spending which of course would all be borrowed and which the people of Manchester and elsewhere would have to pay back with interest sometime. Great news.

All this will come as a huge surprise to many of my MP colleagues who still bellieve people want all this public spending on the never never, more than they want more money in their own pocket to pay the gas bill, the mortgage and for the family car. Labour especially is always complaining if Conservatives do not approve every extra penny of borrowed money, even when it is being wasted in a most obvious way as with the VAT cut, unelected regional government, ID computers and the like.

They need to think again. Or will the people of Manchester have to vote again, as they got it wrong.? Will Labour adopt EU style democracy, where you have ballot by exhaustion till they get the result they want? Or will we have Lab style democracy, where you vote down regional government one day, and are told they will keep it on an unelected basis the next !

The outrageous decision to make the Irish vote again shows the EU is thoroughly anti democratic. The Irish voted No, and that should be that. I hope the Irish vote it down even more heavily next time.

It also appears that there are changes to the Treaty, over the number of Commissioners. This means it should be put again to the people and Parliaments of the EU everywhere. This time the Uk government should honour its promise to give us a vote.

When the Prime Minister misunderstood the comment on this blog which said that on the policies he is following there will be pay cuts and lower living standards, he showed how out of touch he has become with what is happening in the economy.

This week the Trade Unions at Corus are discussing a 10% pay cut for steel workers in the UK. JCB we hear on the BBC have already done a deal to save some jobs by cutting pay. At the other end of the remuneration spectrum some amongst the unloved Hedge funds and derivatives businesses are reducing their fee levels and bonuses and shedding employees. In many companies the cut in living standards is being made by making large numbers of people redundant to cut the overall wage bill. In all too many cases the choice is stark – sack some to save the others, or ask all employees to take a pay cut to save more jobs.

In the USA the same thing is happening. There the Democrat politicians in charge of the Congress demanded action from the Unions to cut the costs of employment before they would agree to put in temporary aid to the three ailing car giants.

I repeat, I hate recessions and want to see living standards rising. It is the result of the huge errors of their respective Monetary policies and bank regulations in the last six or seven years that the UK and the US have lurched from boom to bust. In this downswing companies are struggling to survive and are posing their workforce with the cruel dilemma. Do some lose all their earned income, or do all lose some of their earned income? Why can’t the PM grasp that?

Perhaps it is because he lives in the cosseted public sector, where he thinks he can carry on increasing the numbers of box tickers and administrators with salary rises and pension increases well above the private sector average, all to be paid for by borrowing more or taxing the emaciated private sector more. Surely given the sacrifice so many private sector workers are being asked to make, now is the time for the government to show the way to controlling public borrowing and costs, by asking for a pay cut from all public sector employees paid more than £100,000 a year, starting with cabinet Ministers? I thought this group of Labour politicians believed in justice? Is the relative treatment of the high paid in the cabinet and the upper levels of our nationalised banks fair when compared to the Steel workers?

Yesterday when the PM made his howler about saving the world, the desired headline inadvertently popped out from the supreme regulator of our financial sector and monetary policy in a way which brought the House down. Far from saving the world, Mr Brown has not even got the banks to work. David Cameron was right to challenge the PM on why his banking package is not working, and to ask him to amend it. I predict that for all the bluff and bluster, the government will now look again at it, because under the surface they must be alarmed at what is happening in the real economy.

Meanwhile Mr Brown is learning an expensive lesson in how the EU works. When the UK is told it ought to be more engaged to have more influence, it does not mean the UK has a licence to dictate policy to the rest. Mr Brown lurched from being gently sceptical of the value of all those meetings, to thinking it would provide him with a great mezzanine stage to play “saving the world”. He went with his prepared lecture on reflationary packages, and the dodgy policy of cutting VAT. The Germans rightly took fright at such an idea. They saw the danger of expanding public borrowing to offer a modest price cut on discretionary items at a time of falling prices and lost jobs. Mr Brown misunderstood the mood and pressed his case too far. This week he is being badly scalded by the German Finance Minister, who has launched a severe attack upon the Brown economic policy and gained great publicity for the public put down.

It takes diplomatic bungling on a grand scale to get into such a row when you clearly did not intend to. Mr Brown should now wake up on this issue, and realise that the EU does not want the UK to be engaged and influential to take the EU in a different direction. They want us to go along with what Germany and France have decided. On this occasion it just happens that Germany is right, and ironically it is now Germany that is arguing for the EU to keep out of economic policy and leave it to individual member states at a time of crisis.

So I add one cheer for the German Finance Minister, to my one cheer earlier this week for Ms Merkel. Which reminds me – yes I do back the Telegraph’s campaign for a tax break to help savers. That would be possible if Mr Brown cancelled his unloved VAT reduction and started to get to grips with public sector costs.