Month: January 2009

This Credit Crunch started when the Us authorities and the UK authorities decided to call time on the respective bubbles they had helped create in their economies. We know the UK thought it was necessary to teach those who had borrowed too much and those who had lent too much a lesson, for both the Chancellor and the Governor of the Bank told us so in speeches in the autumn of 2007.

Now they are discovering they cannot just teach the imprudent some financial arithmetic. The low interest rates they have set are clobbering the savers. Many running good businesses are struggling for custom and cash as the credit and the orders dry up. Worse than that, the most imprudent banks are the ones that are walking off with the cash, as the government frantically pumps new share capital into them instead of making them address their underlying business problems .We all know that if we work hard and save for the future, it will be us who pay the higher taxes and pick up all the huge bills they are now running up. Policy seems to be based around the proposition that there is no limit to how much taxpayers should borrow collectively, to remedy a problem brought on by some taxpayers and some taxpaying banks and companies borrowing too much individually! Nor is there any apparent limit to how much taxpayers are made to put into weak banks, who carry on paying large salaries and bonuses.

To some extent it is the same pattern globally with the different countries. Japan, Germany and China worked hard, saved a lot and exported good well priced products to many parts of the world. Where we imported they exported. Where we borrowed, they saved. Where we failed to provide for the future, they put lots by for a rainy day.

Now we see a much faster rate of job loss in China as her exporting industries hit the brick wall of low demand. We heard this week of a 10% cut in industrial production in Japan – and similar bad news for workers in good Japanese car plants in the UK. German industry is being hit hard, owing to its reliance on the particularly troubled auto sector.

Some will say it is only fair that all are suffering. Some may even enjoy in that peculiarly British way to see success brought down. It is certainly true that it takes two sides to create such a massive imbalance – there was a huge and ultimately unfinanceable gap between how much the successful exporters saved and how much the unsuccessful importers borrowed.It is a gap which has to be adjusted on both sides. Part of the adjustment will follow from the large currency price changes we have seen for the yen and to a lesser extent the Euro. The USA seems to want a further appreciation of the Chinese currency. This at one and the same time devalues all China’s holdings in dollar bonds, and makes it more difficult for them to carry on exporting to the USA. It means fewer jobs in China.

On current policies we will not avoid having to take some of the hit ourselves as part of a borrower nation. There is a price to pay for past excess and past regulatory errors. It is about to come through in the form of much higher import prices, cutting how much we can afford. It will be a tragedy if British industry and service businesses are unable to find the cash and talent they need to fill the gap. We need a quick response from business at a time when it is much weakened, so we can make for ourselves which we have in he past borrowed to buy from abroad.

I have a current surgery case which worries me a lot. A pensioner told me how she needed a gas boiler repair. British Gas came in September and told her the boiler needed replacing, and stopped her from using the old one any more.
She applied to Warm Front for a grant to help with the replacement cost, as she is on a low income. There was no favourable response for many weeks. Desperate to keep warm, she decided to invite British Gas back. They replaced her boiler and helped her arrange a loan at 26% APR to pay for it.
Subsequently she says Warm Front offered her another contractor to replace the boiler with additional work for a higher sum than Britsh Gas had charged for replacing the boiler, along with a grant for some of the cost. The grant I believe would have covered the BG price for boiler replacement.
I mention this before I have responses from the others involved to hear their side of the story because I learn that there have been a number of problems with Warm Front. I am not releasing name and address as I prefer to sort these problems out without publicity, and do not usually recommend putting my constituents through the media mill. Nor can I give a full view on this case until I know what the others say.
However, I do feel this lady has been very badly served.The elderly on low incomes are in especial need of help to keep themselves warm during the winter. This is I thought one of the main aims of the scheme. Boilers do not last for ever, and modern boilers should be a lot more fuel efficient than older ones. Why can’t they process applications more quickly? Do they go to the right contractors in each location to get the best prices for the work? How do they decide how much work needs doing? Do they not see that people entitled to grants need them in time to keep warm?
I can understand that there is room for professional disagreement about how much work is required, but what kind of check is there on the specification? And in an age of semi nationalised banks, are high rates of interest the best we can do for people who need to borrow modest sums for the basics?
I am interested in other people’s experiences of safety work requirements, and borrowing costs in cases like this, as well as in Warm Front’s efficiency.

President Obama is a thoroughly modern politician in the best and worst senses. Consider his recent outburst against the large bonuses Wall Street bankers paid themselves in 2008, at a time when their businesses were in a state of stress and in many cases reporting huge losses.

The President has correctly judged the public mood. Governments around the world find it convenient to blame the bankers. The bankers have been poor at stating their case, if they have one. The bankers clearly made large errors in the way they ran their businesses. Paying themselves large bonuses in any of the loss making businesses is absurd, just delaying the inevitable. Sometime these organisations have to cut costs to get them into line with what the customers will pay for. The President has decided to reflect the public mood, to show people he is touch with how they feel, by roundly condemning them.

To me reading the public mood, and saying the right things at the right time, is an important part of political leadership, but not the most important part. In a way it is the easy part. As an MP I see so many emails, letters and commentaries, and meet so many people who tell me how they feel, that it would be surprising if I did not have some feel for the public mood. Some colleagues need to spend lots of money on polls and focus groups to do this more scientifically, but usually come up with similar answers to those of us who trust our own judgement of what people think.

The more difficult part of political leadership for those in power is to decide how to solve the problems of the day, or to take action to prevent future problems emerging. To do this politicians have access to unbelievable amounts of public money and to the best advice money can buy. They are meant to be the generalists, the voices of commonsense, trusted to arbitrate and adjudicate between the competing strands of advice on offer to get things right. In recent years on both sides of the Atlantic politicians in power have concentrated on painting the mood rather than on solving the problems, with disastrous results.

President Obama, you might recall, was invited to the big meeting in the White House to discuss whether and how to bail out the banks at the end of last year. Why didn’t he then insist on a no bonus clause in the public financial support for banks which he then welcomed? Why didn’t he offer some leadership to his friends who control the Senate and House, to ensure that when they debated and voted on the package of financial support, they inserted a requirement that no bonuses be paid in state aided businesses? It is no defence to say he was not then President. Mr Bush was behaving in a non partisan way and was open to changes from the democratic candidate. More importantly Mr Bush understood that the Democrats held the purse strings through their votes on the Hill, so he would have to have listened if that was what they wanted.

We have learnt in the UK that clever media manipulators in office can get away with successful interpretation of the public mood for quite a long time before the public rumbles them. We are also learning that once the public loses faith, the disillusion becomes deep.

Mr Blair’s success in speaking for the public mood caused the Conservatives no end of trouble for the first five years or so of this government. I remember being a lonely voice behind the scenes arguing to the Opposition that it was no use our trying to do what Mr Blair did. If we spent money on polls and focus groups they would tell us that we were living in a Britain where the public liked their PM and believed in the lines that were being trotted out by Number 10. Of course they did, because those lines from Number 10 were informed by their polling to find out what people thought!

It was a nonsensical circular loop, which could only in the end work if the government walked the walk as well as talked the talk. If they did what they said and it worked the Conservatives would continue to lose. If, as I thought, the government failed to deliver the better world it said it was creating, the Opposition would win in due course. Opposition needed to highlight the mistakes, warn about problems ahead, and show it was different from the public mood. One example of an early disagreement was over Bank of England “independence”. The leadership told me correctly that people believed the government when they said they were making the Bank independent, and it was popular. I said that may be so but it was not true and would end in tears.

Sometimes in Opposition politics leadership comes from telling the public something they do not yet believe or even want to hear. Always in government successful leadership requires not just winning the immediate battle of the soundbites, but making the recommended action and making sure it works.

George Osborne’s decision to oppose the VAT reduction was an important moment in modern British politics. It was decisive rejection of what could have been a popular government move. Because it was right, public opinion followed the Opposition’s move. It has been followed up by the Opposition rightly pointing out that the government is spending and borrowing too much. The government’s soundbites about the global crisis, and doing something, may suit the focus groups, but they will not save them. What matters is what the government does and whether it works.

Mr Obama is an intelligent man. He has shown he is a superb modern politician, who can build a coalition of support and judge the public mood. Now he has to do something much more difficult – run his country well, trigger an economic recovery and lead the Western world politically. Attacking bankers for paying large bonuses is not the way to do that. He has the power now. So why doesn’t he sort out this affront to commonsense and decency? The financial sector cannot afford to pay bonuses if the underlying businesses are loss making and struggling to survive. No bank in receipt of state aid on either side of the Atlantic should be paying bonuses for 2008 to senior people.

Andy Burnham came to the Commons yesterday to tell us of his plans for digital Britain. Someone had already upstaged him by briefing the press overnight, and Number 10 held a morning briefing well before the Statement in the Commons. Parliament has come to expect that kind of treatment from this government, and does nothing to stop it.

Mr Burnham is thought at Westminster to be one of the brighter Ministers. He was certainly more sensitive to the mood of the House, and did not treat all Opposition MPs to idiot political soundbites. It was not, however, to be his great day.

There were not many people on his side of the House to urge him. It was a Thursday. Labour business managers rarely put anything on any more on a Thursday which requires a vote or sparks genuine debate so many MPs have taken to doing other things on such days. He announced a raft of new reports and quangos, whilst comparing the importance of what he was saying to the launch of the Penny Post in an oblique rhetorical flourish that was unlikely to work.

I asked two things. The House was so empty I felt I could ask a double question, something which most do as a matter of routine but which is bad form when time is pressing and other colleagues wish to be heard. I asked whether he shared my concern about the quality of broadcast sound in this country following the advent of digital radio. I have met several people now who share my experience. We have to place our radios up very high with their aerials fully extended to be able to hear an FM programme. These programmes are now more likely to be interrupted or to lose sound volume and quality. I also have reports of people experiencing similar difficulties in picking up programmes on digital. Former BBC technicians have said to me they think too much is being compressed onto narrow spectrum by the BBC, making it unlikely we will solve the quality problem by switching to digital. Mr Burnham expressed surprise and asked me to write to him about it so he could look into it.

I also asked when cricket lovers might be able to hear BBC cricket commentary on FM and digital rather than just on 198. Mr Burnham thought you could already.

Jeremy Hunt asked when there would be digital car radios. There was no answer to that either.

The Opposition pointed out that the government’s aim for faster broadband was taking a speed which was below the current average! At least that’s one target they might hit.
The digital revolution apparently will be powered by quangos, reviews and partnerships. Funny that. I thought it might be powered by finding reasons why people should buy a digital radio, and making sure they could then hear what they wanted to hear in good quality.

Yesterday I heard different senior economists give their views of the Credit Crunch and recession and what we could do to get out of it. They gave them under Chatham House rules, so I will call them Views 1, 2 ,3 and 4, grouping opinions into the four main different positions at the meeting.

View 1 expressed worry about extremes in policy making. Whilst they could live with a modest reflationary package, they are concerned about undue borrowing or money printing, and felt there could be an inflation problem in due course. They also believed that we had to accept a substantial one off drop in national output, reflecting the activity of banks and shadow banks that had gone over the top and could not be continued. They felt that the recession had to take its course, and that policy action of any extreme kind could cause inflation, or fail to stabilise the asset markets.

View 2 argued that individuals and companies are very short of money. Money supply has ground to an abrupt halt in recent months. They therefore favoured the UK government borrowing substantial sums from the Bank of England or the commercial banks, to spend or give away as tax reductions so the private sector has more money to spend and repay debt. They did not agree with the recapitalisation and felt the banks had sufficient capital.

View 3 argued that the government had been right to put more money into the banks and might have to do some more. They also felt some money printing may be necessary in current circumstances and agreed there could be a period of underfunding of the borrowing requirement for a bit to generate some more money in private hands. They felt house prices should fall another 25%, preferably quickly, so the market could then be stabilised. They favoured a Medium Term fiscal strategy to start to reduce the large deficits and reassure markets that in due course Prudence would return.

View 4 argued that banks had to go back to simple banking models, relying on deposits from customers as sources of funds and lending to customers as assets. They were pessimistic about how to pull the economy out of recession, and ageed house prices had to fall further.

From the discussion which ensued, the following points emerged which I think are correct:

We will lose a portion of our National Output, represented by banking and related financial activities on bloated balance sheets, which will no longer be possible in current conditions. The UK will take a large hit as we have large banks and hedge funds relative to our GNP, and our growth was flattered by the huge financial service expansion in London over the last decade.
Somehow the balance sheets of companies and individuals have to be strengthened, which means they do need more cash and income, at the same time as we need more demand from their spending.
Some of the extra demand will come from public spending, with tax cuts and benefit payments giving individuals more money to spend
Creating more deposit money in the banks by underfunding or by the government borrowing from the Bank of England is worth a try. The US authorities have expanded the Fed’s balance sheet and are discussing buying up Treasury bonds.
Increasing future public spending on large infrastructure projects takes too long for the decision to be translated into jobs and spending. Income Tax cuts provide the fastest way of injecting the borrowed public money into the cash starved private sector.
The government does need to construct a budget plan on spending that will start to control borrowing and outlays.
It should remove its VAT cut, and substitute cheaper Income tax reductions.
The government needs to cut its risk of losses in the nationalised banks by cost reductions, netting off futures and options positions and reducing its risk to Investment bank type activities.
The government, now it is a bank owner, is the best placed to carry out the traditional banking utility function, making its direct contribution to a reduction in Investment banking capacity to reflect the new circumstances.

The conclusions from last year’s Davos summit make interesting reading today. They put out a press release saying “we will have a resolution this year (2008)” to the Israel-Palestine conflict. They promised to make climate change the number one priority at the G8 summit and stressed its importance in all that business does. They identified four pressing problems for the world :“conflict, terrorism, climate change and water conservation”.

So how did they get on? Unfortunately their prediction on Palestine was wide of the mark. By the year end the conflict had flared up again in a violent and distressing way. Worse still, India suffered a dreadful terrorist attack. This year’s Davos needs to return to the drawing board on terrorism and conflict.

They have done much better on climate change and water conservation, but I trust not in the way they intended.The assembled body of Finance Ministers, Presidents, Prime Ministers, Central Bank Governors, Chief Financial Regulators and the main commercial bankers have between them brought the western economy into a deep recession. As a result people are buying far fewer cars, several leading car makers are on the edge of collapse, and many fewer people can afford air tickets to fly. Their stated wish to see less driving and flying has come true. They will doubtless be comforted to live once again in a world where the elite gets the limos, the chauffeurs and the first class air flights at public expense, whilst everyone else makes the sacrifice to keep down the CO2 emissions. Water demand in the west is down, as industry contracts and uses less.

I learn this morning on the BBC that the big topic for their amusement this year is “Should the world have a Global financial Regulator?” There’s plenty of life in that one. Ignore the hubris that they will be discussing the post Credit Crunch world, when the rest of us are still mired in the Crunch and hoping they might lead us out of it. Ignore the ignorance – they seem to have forgotten we have a world regulator of banking capital and liquidity in the form of the Basel agreements. It was those rules that let us down so badly in recent years, allowing banks to over borrow and overlend on a colossal scale. There is a simple answer. We do not need more regulation or more regulators. We need a good regulator, who sets sensible targets for capital and cash in both the upswing and the downswing. We need a regulator who knows how to dampen the cycle, instead of one who knows how to make it wilder as they have been doing in recent years. Each Central bank is best placed to do this, as they have to bank the banks.

If we are to have son of Basel it needs to be tougher and smarter. If we have a global agreement, we should then remove the EU level of regulation. We do not need so many regulators tripping over each other. They are all additional cost which ultimately the consumer has to pay. It should not take two or three layers of regulator to tell a global bank how much money to keep in its tills and how big a reserve it must have to carry on its business.

So what do I want from Davos? I want some recognition that Central Banks and Regulators made a huge mess as well as the bankers who could not say “No” to new business. I want some understanding that heaping more regulations and regulators on a tip of bad regulation will not solve the problem. Above all it would be good to know that they know we are not out of the Credit Crunch yet. Before we start building the “new architecture” we need to clear the site and see what we have left.

It was good of the President to spend time explaining his economic package to Republicans,and to listen to their fears and alternative proposal. We can all learn sometimes from our political opponents.

The Reublicans have two main points of criticism of the package. The first is that tax cuts work more quickly at creating demand than federal programmes. They relieve pressure on family budgets and balance sheets and allow a more rapid adjustment from the heavily indebted consumer world of recent years. If you are going for a reflationary package it should have more income tax cut in it.

The second is that a large reflationary package will place immediate strains on government debt markets as the government seeks to raise all the borrowed money, and longer term strains on taxpayers who will have to pay it all back with interest. It is at best a paradox that a country needs a massive increase in its collective borrowing in order to tackle a crisis caused by borrowing too much in the first place. It may turn out to be a contradiction.

I doubt if the President can accommodate these two views sufficiently to satisfy sensible Republicans. He should not worry, nor should they. One of the main points about living in a democracy is the government should be tested and criticised by a democratic opposition. The Opposition should set out an alternative and be ready to take over if the government falls or gets it wrong.

In the UK the biggest mistakes have occurred when the main parties all agree. Lib Dems and Labour urged the Conservative government to adopt the Exchange Rate Mechanism, an economic policy which turned out to be a predictable disaster. The absence of strong Parliamentary opposition to the policy made it very difficult for us critics of the policy.

More recently Democrats and Republicans came together to support the first bank bail out package in the US, pushed through by a Rep[ublican President. It did not work and there have been several subsequent revisions. It is a pity more did not dig in and oppose it outright.

Yesterday I was unable to cross examine the Secretary of State who announced the policy towards the motor industry, as he was in the Lords. More importantly, I was unable to cross examine the architects of the policy, as they were in Brussels.

The package of support for the motor industry had been well discussed, heralded and downsized in the press in the days leading up to the Statement. The Secretary of State correctly said it was “no bail out”. He should have gone on to explain that a bail out would be illegal under EU rules. He is permitted to offer some support for green technology, to help the industry adjust to tougher emissions targets imposed by the EU, which is what he did.

We need a system where the Commission has to send a senior representative to Parliament to defend and explain what they are doing. I would like to have asked such a person why they allow state aids to banks who pay their senior staff too much and who run huge risks in financial instruments for no good reason, but not to companies making things. I would also like to know why the EU competition authorities allowed the Lloyds takeover of HBOS, which has greatly increased the problems of Lloyds management. Stopping subsidies is a good policy, but it should be applied to all commercial organisations.

People from the Irish Republic are rushing over the border into Northern Ireland to take advantage of the cheap prices in the shops as they flash their Euros. The shops in Kent and London are welcoming many continental trippers who find sterling prices cheap to them. On Sunday visiting a shopping centre in middle England in Oxfordshire, I was struck by how many of the voices were speaking foreign languages.

The market is beginning to work, to adjust the big imbalance in the UK balance of payments. Foreign shoppers will swell receipts, whilst UK shoppers will buy fewer foreign made goods as their prices surge. Families nervous of job prospects and finding it difficult to balance domestic budgets will cut back on foreign holidays. Gradually imports and exports will come into better balance.

The danger in the present situation is that many countries and currency blocs might like the sound of devaluation. The UK’s neighbours in Euroland are becoming unhappy about the very strength of their currency which makes UK goods and services such a bargain for them. The Euro area is demonstrating just how dangerous it is to impose currency union on economies and markets that had not properly converged in the first place.

There has been considerable worry about Portugal, Italy, Greece and Spain, sometimes ungallantly named by their initials. None of these economies had been brought fully into line with France, Germany and Benelux, the core countries of the currency union.

In the early days of currency amalgamation Spain had a boom based on interest rates which were too low for her conditions. Now she is experiencing the reverse, with a high currency and relatively high interest rates driving her asset prices down and giving her a severe economic hangover after the heady days of the boom. Spain’s property bubble was blown to greater size by premature membership of the Euro and a monetary policy which was too accommodating for too long. Ireland experienced exactly the same conditions.

Italy has struggled throughout her membership. Used to inflating and borrowing much more than Germany, Italy had for years survived as an exporting country by periodic devaluations. Now she is unable to devalue her way back to competitiveness, so she is suffering loss of export orders and needs to cut wages and restrict costs severely to become more competitive.

Greece too has suffered, entering the Euro area with more borrowing and inflation than was comfortable and now experiencing the rigours of a strong currency.

The cost of borrowing money has risen for the governments of the weaker economies of the Union, despite the fact that they are all part of the same currency area with some implied obligations from the stronger to the weaker members. The bond markets are becoming more suspicious of the sovereign debt of the heavy borrowers amongst the Euroland governments, placing a risk premium on their money raising.

Some Euro critics see in these pressures the beginnings of a break up of the Euro. They think that maybe one or more of the troubled countries will conclude they need to leave the Euro, devalue, and get more people back to work through such a realignment. Why not take the softer option to price yourself into work, rather than the tough option of staying within the Euro and having to cut wages and other costs?

I think this is a misreading of the Euro project. The single currency was always more of a political project than an economic one. The Germans saw it as their contribution to European union to offer a shared currency, drawing on the legendary anti inflation strengths of the DM. They do not expect other countries to cavil at the necessary anti inflation discipline which they built into the Euro, as they think it is good for all.

There is no easy way out of the currency. Whatever the people of the peripheral countries may think of their currency, their governments regard it as a matter of faith to stay in and manage the consequences. EU support for the concept has switched from arguing it is good economically, to arguing that the larger currency bloc gives members some protection from market hurricanes like those that engulfed Iceland recently.

At the same time as some members have to accept the pain that the common currency brings them, some are discussing British membership of the Euro again. German sources have confirmed to me that Germany herself does not think this would be a good time for the UK to join, as they are worried that at this rate of exchange the UK is too competitive for comfort. They see the recent large moves of the pound against the Euro, showing that the two economies have not converged. I think the UK government appreciates that 80% of the UK public are still against membership, and understand that the promise to hold a referendum before joining is a pledge they dare not break. Ministers regularly repeat the mantra that now is not the right time to join, even though they stick to the view that in principle they would like to.

My conclusion is the Euro club’s membership is going to be more stable than some commentators suggest. Weak countries will be reluctant to leave, and big new entrants will either be reluctant to join or kept waiting before they do. Looking at the economies of Western Europe it is difficult to conclude that the Euro area is a perfect size and shape. It appears that too many peripheral economies with different economic policies and circumstances have already been allowed in. Whilst in due course the expansionists might want to welcome more in, there is a growing realisation that large economies to west and east are different and could prove destabilising for the young single currency.

After all, sterling wrecked the Exchange Rate Mechanism, the dry run for the single currency. The pound would prove an overmighty subject for the currency area, which has enough problems sorting out the pressures within its large and divergent territory. Successful single currency areas usually have more advanced means of transferring wealth from good performing areas to distressed areas, and have a common price for raising public capital. Euroland does not so far have these, so the poorer performing areas suffer more, and governments pay different prices to borrow. Lenders are still not fully convinced that a single currency is for ever. In the meantime German and French industry will suffer bigger falls from the strength of their currency, whilst the devalued pound should start to help UK manufacturers if they can have the capital and the stamina to exploit the market opportunity.

Can we manufacture? Yes we can.
Should we manufacture? Yes we should.
As someone who has worked in private sector manufacturing, in private sector services, and in government, I feel I have an unbiased view of the worth, achievement and desirability of each sector.
We need all three. My period in government confirmed my view that we could do more for less in the public sector, as even then government was way behind the best practises of the private sector. The efficiency gap has got much larger since.
In those days Gordon Brown and Labour bemoaned any contraction in manufacturing. Some Labour figures even challenged the idea that services generated wealth or were worthwhile. How that has changed, now we have seen a sharp decline in the relative importance of manuacturing under this government, and now we are entering a savage recession which is hurting manufacturing more than services.
We also see many UK manufacturers who have done all that could be asked of them to raise their game. Managers have developed new products and pushed through better ways of working and managing working capital. Employees have co-operated, improving working practises, gaining new skills and recognising the need for profitable activity.
The closures and contractions of steel plants announced this week are a sad commentary on where we are. Of course we should be producing steel here at home. We need it to make cars and white goods, steel frames for buildings and components for many products. At the current level of the pound the UK should be especially competitive. Corus ought to be looking at plans to divert more steel production from the continent to the UK, as it must now be better value here.
It should be a good time for manufacturers to dust down daring plans to expand and capture more of the world market from our more comeptitive base. That is why manufacturers are so angry about the banks with government money in them. They want more support for their longer term plans and for their short term working capital needs, so we have some capacity left to take advantage of the big swings of the currency.