What should they do now?

There is an insatiable demand everywhere I go for comment on what we should do now.
I have tried at each step to offer advice on how to start getting out of the very large hole we are in, but the authorities seem very keen on digging it ever deeper. Let me summarise briefly some of the steps that should be taken – and remind readers of some of the steps that have been taken that need to be retraced.

This began as a crisis of overborrowing – in both the UK and the US. Too much borrowing has led to too big a balance of payments deficit, as the country lived beyond its means and sucked in imports. It has led to governments with colossal debts, which will prove expensive to service and repay and may mean higher taxes in the future unless we get some growth and better management soon. It has left many companies overborrowed, stretching them badly as the downturn develops. It has left many individuals overborrowed, facing a big cut in their living standards to repay the debt or facing bankruptcy. Much of the excess borrowing went on sky high property and asset prices which are now plunging. Meanwhile the major banks also started running large casinos playing the tables with derivatives, options, futures, CDOs and many other exotic financial instruments. This all added to total risk, overcommitting the banks.

The way out of it is to work harder, earn more of our own living, gradually repay the debt and extricate the economy from the overinflated asset prices and financial instruments. We can do that in big and painful bang, and then pick up the pieces, or try to manage it over a longer period. The authorities opted for the former through their monetary policies in 2007, and now are desperately trying to opt for the latter with their latest monetary and spending intentions.

In the UK the government’s policy of making us all poorer to adjust the balance of payments and the private sector deficit is working all too well. The huge fall in sterling will soon produce sharp price rises in a whole range of imported goods from clothing through furniture to electrical items. The Japanese will not be able to hold their prices of TVs and music players with such a big rise in the yen against the pound. The Textile producers will have to increase their prices. The continental Europeans will certainly not cut their wages in order to hold down the sterling prices of their exports to us. So we will face some big import price increases soon, and that will choke off some of the import demand. Demand will also be cut by the big increase in unemployment, and the earnings reductions that will flow in the private sector as companies struggle to reduce their costs, remove bonus payments, reduce overtime or put people on short time working.

Asset prices have plunged substantially, although property prices and rents still seem high relative to individual and company incomes. The adjustment will doubtless continue until sensible values are reached. The sooner this adjustment happens the better.

The real changes we need are in the conduct of the banks. All the time a bank can finance itself in the market we can let it get on and do that, subject to more sensible regualtion than we have enjoyed so far. For the banks that are now fully or semi nationalised we need new policies.

RBS is too big for the British government to own and manage. They should immediately set about breaking it up and returning what they can to the private sector. The taxpayer should not stand behind a £500 billion derivatives business. If it is as low risk and sensible as the company says it will find a buyer in the private sector. If it isn’t, the sooner it is wound down the better. The taxpayer cannot afford to put at risk one year’s tax revenue in such activities. They should offer the foreign profitable businesses for sale even in these conditions. Getting them away for anything north of £1 would at least reduce taxpayer risk, and allow the government to concentrate on the UK banking business which is presumably why they got involved in the first place. They should demand cost reductions from the parts of the bank that have to remain in public hands, and reduce top remuneration to levels appropriate for a failed bank making huge losses and relying on taxpayer cash. The sorry truth is they have lost most of the £37 billion they put in already. They did not take friendly advice warning them against such a rash course of action. Now we all have to pay the bill for the worst £37 billion of public spending ever undertaken. There were so many cheaper and easier ways of “saving” the banks.

Taking such action would signal to markets that the government has realised it cannot carry on borrowing at the present rate, and it does need to cut its financial risk. If the government started to show any remorse for its fiscal laxity, and signs that it now wishes to set some limits for public borrowing and waste, it would start to take the pressure off the pound.

There should be no more interest rate cuts. To cure too much borrowing you need more saving. Savers need some reward.

The government does need also to ease the squeeze on the corporate sector, creating some more money growth as the current squeeze is far too tight. Lower interest rates are not the way to do that in current conditions. The Bank of England needs to learn again that too little money is damaging just as too much is. They have lurched from one mistake to the other. They now seem to understand that there are ways they can ease the squeeze, so they had better get on and do it, unless they want the first option of major meltdown to wipe out more of the debt through bankruptcy on a big scale.

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39 Comments

  1. Ian Jones
    Posted January 21, 2009 at 8:28 am | Permalink

    I have been thinking on the subject of the Government taking on RBS and other banks foreign debts. The question seems to be how do we pay for the foreign debt (4tn) if its called in but the underlying assets are illiquid.

    It is once again a case of if you borrow 10,000 pounds its your problem, borrow 1m its the banks problem and borrow 1bn its the Govts! A default on 4tn of foreign debt would bring down the global financial system, no foreign govt would want that. Therefore they should be able to get the foreign countries involved to print some fresh money for the UK to use to cover the demands until things settle down!

    Maybe its a good thing we have so much foreign debt! If we only owed a little like Iceland and Ireland then others wouldnt care if we go bust!!!!

    • StevenL
      Posted January 21, 2009 at 1:43 pm | Permalink

      I’m starting to think along these lines too. Be careful though, World War 3 is in no-ones interests.

  2. bill
    Posted January 21, 2009 at 9:16 am | Permalink

    Well said. It is thirty years since I was revising A level economics and the country had the good sense to elect Maggie to get us out of Labour’s last mess. Again we are in the midst of a Labour induced disaster which many of us saw coming for years. I am so disappointed that whilst in opposition the Tory Party has failed to properly attack Labour. If they had some of the worst excesses might have been avoided. I am sorry to say with the exception of the likes of yourself, the Tory Party collectively appears to lack the gravitas to take over from Labour and get us out of this mess.

  3. Jonathan Cook
    Posted January 21, 2009 at 9:44 am | Permalink

    John,

    This is clear thinking and makes sense.

    How do we get this message out there and ensure that every newspaper, television reporter and politician is hounding the government to follow a sane cogent strategy?

    With Brown, you just feel that we edge ever closer to bankruptcy as he announces ‘economic policies’ which seem better designed to solve the difficulties of his political positioning rather than the dire circumstances facing the country.

  4. Simon D
    Posted January 21, 2009 at 9:46 am | Permalink

    Excellent summary. We need a proper debate on what constitutes the true core business of Government-backed banks. Core business should include:

    1.Taking deposits from UK customers.
    2.Lending money to UK customers – both individuals and companies.
    3.Basic cash management and banking services for UK customers.

    The core business should exclude:

    1.Casino type operations.
    2.Businesses best run by other experts such as insurance or home loans.
    3.Lending ludicrous sums to overseas-based individuals and companies.

    Once the dividing line has been established, Government-owned banks should be compelled to develop a strategy to dispose of their non-core businesses. Timing is everything and, of course, the current climate is hardly the right time to sell surplus assets. However, advance planning is needed for a sale of the century.

    My experience has been that too many top executives are bored by running their core businesses and love the excitement and potential easy money generated by successful acquisitions or casino-type operations. It is great fun to be involved in mergers and take-overs. You are treated like royalty by City lawyers and accountants and fee hungry merchant bankers. Some of our banking “leaders” were affected by this syndrome and are now paying the price. So are we.

    Another problem is that the Government is in a complete panic. In addition to the banking crisis it has an election to win in the next eighteen months and a bad economic downturn to weather. So far it has had an easy ride both from the media and from members of the public. As ever, parliament is completely ineffective in holding the Government to account. However, the background landscape could change quite quickly and dramatically as the Government might find to its cost.

    • figurewizard
      Posted January 21, 2009 at 3:53 pm | Permalink

      As you may know there were many similar restrictions as you suggest in your post in the US courtesy of the Glass-Steagall act. This was introduced in the wake of the great depression of the thirties once the many hard lessons had been learnt. The main thrust of the act was to limit to a maximum of 10% of a commercial bank’s income from securities trading other than those involved in underwriting government bonds. Also while commercial bank’s could sell insurance products they were not allowed to underwrite them. They were then given a year to make up their minds as to whether or not they wanted to remain as commercial banks or become investment houses. This drew a clear distinction between the boring but safe on the one hand and the sexy but risky on the other, allowing would be depositors and investors to make informed choices. In 1999 under Clinton however this act, which had done so much for long term stability in banking was repealed. As the US banks, by now pretty much ignorant of the perils of securites trading, jumped back into these markets with both feet most of the rest of the world’s banks followed, including our own. Now boring, sexy and safe have vanished and we the taxparers are left with the risky.

  5. oldtimer
    Posted January 21, 2009 at 9:48 am | Permalink

    I agree with your remedies – but they omit any mention of what to do about the elephant in the room. This is understandable. Doubtless you have thoughts that you deem it prudent to keep to yourself.

  6. TonyW
    Posted January 21, 2009 at 9:56 am | Permalink

    John,

    Agree with what you say but would have liked you to highlight what the “market” could do to help if it is allowed to work properly. By market, I mean the tens of thousands of entrepreneurs in this country who can create real jobs in the private sector and grow our productive potential and their millions of customers: the only solution is to produce our way out of this mess rather then try to borrow our way out of it, which leads to the poorest taxpayers subsidising the greed and stupidity of banker fat cats.

    Would you rather unleash this ready and able army of entrepreneurs or rely on intervention by the Government front bench whose combined commercial acumen could not run the proverbial whelkstore?

    By allowing the market to work properly, I mean tackling all the manifold disincentives to creating successful businesses: high corporation taxes, high national insurance costs (a tax on employing people, the staggering array of benefits paid for by employers, the red tape thicket, planning delays – just some of the factors that stand in the way of businesses that can create the wealth we need to get out of debt and stay out of debt.

    Regrettably, those in government have damaged the productive potential of the market by stifling entrepreneurship. And they have distorted the workings of the market by allowing excess credit and abusive business practices by banker and financial monopolies. Someone like you needs to speak out for the principles of markets, and the freedom they bring, or we will quickly go down the road of socialism towards serfdom.

    Reply: I agree

  7. Michael Taylor
    Posted January 21, 2009 at 10:02 am | Permalink

    Excellent analysis, and useful advice. And, since you outline pretty well what will happen – because it must happen – it’s also a good forecast of our medium term future.

    The one variable for which you have not accounted is the sheer unbridled lunacy of current policy settings and assumptions. Unless restrained, GB can make this bad situation absolutely impossible. How can we get him out of the way before he ruins us all?

  8. Lola
    Posted January 21, 2009 at 10:12 am | Permalink

    What about cuts in income, corporation and capital taxes and if not a cut in state jobs at least a complete freeze on all state and local authority employment?

  9. Tony Makara
    Posted January 21, 2009 at 10:41 am | Permalink

    “The huge fall in sterling will soon produce sharp price rises in a whole range of imported goods from clothing through furniture to electrical items.”

    It will serve as an education to some people when they finally realise that cheap imports are only possible with a strong currency and the higher interest rates needed to support it. Now that rates have been cut we see what has happened to the purchasing power of Sterling and we will see imports becoming much more expensive. This is particularly worrying when it comes to the daily purchases of food and fuel. Our problem now is that because import-dependency has led to the collapse of home based industries, the British consumer cannot switch over to buying British goods. Our economy is exposed to imported inflation.

    The problem of debt in the system is not open to bypass, and the government should stop trying to look for a quick-fix by pumping money into the system. All efforts must be focused on maintaining price stability and supporting our currency. We have to accept job losses and recognize why they have occurred. As Mr Redwood says we, and the government, have been living beyond our means and its time to let the economy cool. Let the debt die, and then we can start to rebuild a more balanced economy, less dependent on imports, credit and lavish government spending.

    • Sava Zxivanovich
      Posted January 21, 2009 at 7:25 pm | Permalink

      Sterling doesn’t have gold base, so it is economy FIAT currency. As such, it is as strong as economy.

      It will be possible to have 100% interest rate and to have worthless currency.

      And it will be if the economy is killed.

      The time is too rebalance the whole economy:
      1) House prices should be of the same value or less than in Germany (Germany produces more).
      2) Salaries of state and para-state employees should be the same or less in Germany.
      3) Percentage of state and para-state employees should be the same or less than in Germany.
      4) Military budget expense per head should be the same or less then in Germany.

      And so on…

      Savings are in the range from £50-100 billions annually!

      Interestingly enough, taxation in the UK is higher than in Germany, but standard of living used to be worse (probably it will become much worse).

      WHY? Who spent all our money???

  10. Acorn
    Posted January 21, 2009 at 10:45 am | Permalink

    My last couple of posts got lost in the ether. I mentioned if we were having a Thelma and Louise moment (film). The bit where the girls are about to floor the throttle and head for the cliff edge. It would be a very British way to go down with the ship. Anyway, “mustn’t grumble” as Wogan would say.

    An article, bit technical, but worth Redwoodian’s time. This is the only one to mention, from those I have read recently, that GDP = money stock * velocity of circulation. Someone mentioned velocity in a previous post.

    http://www.marketoracle.co.uk/Article8344.html

  11. michael, islington
    Posted January 21, 2009 at 10:58 am | Permalink

    I seem to remember you posting in the past on the dangers of reacting to the banking crisis by introducing further regulation.

    Given what we now know, of which one suspects the £500bn derivatives liability you mention is just the most visible part of the iceberg, have you changed your mind?

    And now I come to think of it, you were against bank nationalisation, which many commentators now see as inevitable.

    Presumably you would be against that combination of utility attached to a casino which the government seems to be accepting at present as a potential model by default – because it can’t quite bring itself to go the whole hog and nationalise?

    Reply: I have always recommened acting as tough bank manager to the loss making banks, lending them short term money against security and forcing them to divest the casino or wind it down.
    I opposed the imposition of tighter capital regulation after the crash – having proposed it in the good times – and the government have now relaxed it again. Timing is everything in this crisis.
    I do favour separation of investment bank activities (“the casino”) from the utility bank activities (“the High Street clearing bank”) I have never been in favour of total deregulation of the banks, and have always made the case for tough and sensible capital and liquidity rules, as we ran in the 1980s successfully.

  12. Adrian Peirson
    Posted January 21, 2009 at 10:59 am | Permalink

    The more I think about it the more I realise that we are in this problem because we have too much Government.
    Globalism has all but destroyed this country, I believe we need to veer sharply or we are going to become a third world nation.
    If the Politicians cannot or will not do this then I pray and hope that military commanders have the sense to see and do what must be done, they are after all part of thre checks and balances.
    We need to get Govt out of our lives, what exactly was wrong with communities having their own local doctors, buying food from local farmers, local fishing, local shops.
    what was wrong with looking after Local and National interests first, Globalism is nothing more than the takeover of world by a few corporate interests.
    Everything that GB and the Globalist lobby groups are doing is taking away our independance and enslaving us, from control of the money supply to food, we are now virtually forbidden from hunting, we even have to buy a licence to own a fishing rod, when did Govt become owners of Wildlife that requires us to pay for the right to feed our families.
    By destroying our ability to feed and produce for ourselves, our ability to trade and barter with other nations Westminster has done the equivalent of setting us loose on a the high seas with no watertight bulkheads, to protect us from the unexpected which should ALWAYS have been expected.

    • THE ESSEX BOYS
      Posted January 21, 2009 at 10:32 pm | Permalink

      We asked this question in our blog yesterday…why is ‘Globalisation/ism’ automatically regarded as being good for us?
      Can anyone tells us – given the great universal meltdown – why we shouldn’t regard it as being precisely the opposite?

      Reply: It has good and bad features at the moment – just as regulation and government have good and bad features. It was globalisation that raised all our living standards here in the UK by giving us access to so many excellent and low priced goods for years from Asia.

  13. Adrian Peirson
    Posted January 21, 2009 at 11:03 am | Permalink

    I refuse to beleive that Gordon Brown or Tony Blair are Idiots, everything happening is by deliberate design.

    • Jason
      Posted January 21, 2009 at 1:04 pm | Permalink

      I am plagued by the same thought…its almost a conspiracy to lead us down the path of ruin, firstly by not taking a prudent approach during the upswing (in fact actively encouraging recklessness), secondly by pursuing what can only amount to lunatic imprudent policy in a reckless gamble. Im not in the govt, I dont have access to detailed data on the economy, but I was very worried and sold my flat in June 2007. As far as I am concerned – the writing was on the wall – certainly in terms of risk. It is simply too much to believe that all the economists, civil servants and policy makers failed to see this coming. If they claim that to be the case….its simple they should resign as those who could not see that coming and take appropriate precautions have no chance of providing solutions. It reminds me of Iraq, any politician with dignity should have stepped down over the affair – Blair did not. Brown will not either.

      If one looks at the situation it is difficult to believe this has happened by accident….but the consequences of that statement are immense and there is evidence of shadowy power structure. It makes one think…I would also be interested to hear JR’s take on this most important of issues.

    • Adam Collyer
      Posted January 21, 2009 at 1:11 pm | Permalink

      I agree. The similarities between what they did to Railtrack, and what they are currently doing to the banks, is striking.

      • Michael Taylor
        Posted January 21, 2009 at 4:25 pm | Permalink

        A contribution which thinks there needs to be an enquiry into how details of major banking transactions got into the public media before proper announcement to the Stock Exchange,and whether this created a false market in shares – ed

        Oh, to be honest, John, I don’t expect you to allow this, but let’s face it, that was disgraceful behaviour even by current standards.

  14. Paul
    Posted January 21, 2009 at 11:32 am | Permalink

    John, is there any chance of you being taken on by the Front Bench ? Not only do you seem to be one of the few MPs who has a clue what’s going on, you can express it well in terms that people can understand.

    • mikestallard
      Posted January 21, 2009 at 5:19 pm | Permalink

      I want to say this and it is unpleasant to have to do so.
      And here is the text of the sermon:
      ” Ecclesiastes 9.15: But there was found in the city a poor wise man, and he in his wisdom delivered the city. Yet no one remembered the poor wise man.”
      Politics is no longer about skill or issues. It is about appearing luscious on TV. David Davis appeared on TV and he looked dapper, clean cut, intelligent and, above all, he had a lousy upbringing so he was not ‘middle class”. Mr Cameron and Mr Osborne both have the expensive charm of the best education in the world, and it shows. This, however counts against them because they do seem to pull their punches. Old fashioned politeness cuts no sound bites on TV. What the producers need is attack and tension, preferably with something unusual like lifting the mace, or involving the Police.
      Tony Blair and Mr Obama both have as much TV glamour as most film stars. Therefore they get elected.
      The whole problem is that the very best politicians do not necessarily have that TV personality.
      I cite Frank Field. He is just – well, dumb on TV. Hazel Blears, on the other hand, comes over all bubbly and bright. Mr Brown looks statesmanlike and forbidding. Mr Darling shuts up and looks what he is – a lawyer.
      Dominic Grieve looks like an undertaker, but he is outstanding in what he says. But who cares what he says? He isn’t glamorous. Frankly, the game has moved on since parliament (which hardly seems to discuss anything important nowadays) contained people like Nye Bevin, Betty Boothroyd, Harold Wilson and his mistress and Mr Major. Notice how the excellent Mr Hague was sidelined by the electorate, or Michael Howard.
      I suspect that this is why our host has, quite unjustly, not been included in the inner circles of the opposition, even though he is in the tiny minority of those who can not only see what is going on, but knows exactly what needs doing as we face economic melt-down. (See Simon Heffer in the Telegraph today). It must be terribly frustrating for him.
      All the BBC can see is the Welsh National Anthem and the Dr Spock joke.
      Well, if that is the nature of the beast, we are all DOOMED!
      Allow me to finish by saying that Zimbabwe is now very much on the cards for us Brits – and it is not just gloomy old me saying so either, is it.

  15. Neil Craig
    Posted January 21, 2009 at 11:41 am | Permalink

    While all this is true the financial crisis is simply a symptom of the underlying problem – that government is not only tasking half the national cake but is so regulating the rest & vetoing, or at best holding up for years, new technology & investment. That is why so much of the economy has gone overseas. It was the lack of productive things to invest in which drove a speculative bubble in houses.

  16. Pete Chown
    Posted January 21, 2009 at 12:36 pm | Permalink

    The details of the government’s latest rescue still seem unclear, but I hope they are not planning to provide guarantees for a large chunk of the banks’ assets. The size of the banks’ balance sheets is such that we will be on risk for more than a year’s GDP.

    The shares the government owns in the banks have lost a lot of money, but that is peanuts. Suppose the government guaranteed the RBS assets, and they declined in value by 1%. This would be £18bn, which is equivalent to an 11% rise in income tax. If the assets decline in value by much more than that, which doesn’t seem unlikely in the current circumstances, the Treasury will be unable to pay its bills.

    Back at the start of the crisis, I asked why we needed a rescue package at all, given that the Insolvency Act sets out very clearly what happens when a company runs out of money. Since then, the government has spent billions, and the banks are still in deep trouble.

    So far, the amounts spent have been large, but they are not so large that we couldn’t write them off and walk away. Now, the government proposes spending so much money that it could bankrupt the Treasury. That would turn a banking crisis into a national crisis, making the situation much worse. The banks are not too big to fail, they are too big to rescue.

    RBS’ UK retail deposits total about £220bn. The government could, if it wanted, guarantee these deposits even when they exceed the limit set by the Financial Services Compensation Scheme. This would still be a large exposure, but nothing like as large as a guarantee covering the whole bank.

    • mikestallard
      Posted January 21, 2009 at 5:38 pm | Permalink

      OK – so what happens when Barclays, HBOS, HSBC, NatWest and Lloyds are taken on board as well then? We are now talking tens of trillions.
      And if we do not honour the guarantees, our word will not be our bond and bang will go our credibility, along with the pound and our credit rating.
      Oh, and the City of London will be the City of the Dead.
      But – hey! – it will not affect the North of England and Labour’s heartland!!!!!

  17. Chrysippus
    Posted January 21, 2009 at 1:28 pm | Permalink

    John,

    Whilst you state correctly ‘The huge fall in sterling will soon produce sharp price rises in a whole range of imported goods from clothing through furniture to electrical items. The Japanese will not be able to hold their prices of TVs and music players with such a big rise in the yen against the pound.’ this is a minor inconvenience.

    I don’t NEED new clothes, furniture or electonic toys.

    What I DO need is both fuel and food, both of which are extensively imported and the price rise of which will lead to a reduced standard of living for most later in the year as the exchange rate kicks in for future contracts.

    Reply: yesd, I agree. But some food and energy is home produced and we need to make sure more is.

  18. Tony
    Posted January 21, 2009 at 2:12 pm | Permalink

    If we are really in trouble, how about putting ALL state employees on a four-day week?

    If the state represents half of the economy, and most of that is wages, then a 1/5 drop in the state’s payroll represents around 10% of GDP.

    Use this saving to drop ALL taxes by 10%. Then we should see a resumption of growth at around 5% per annum , and in a couple of years the state employees can go back to a five-day week when we can afford it.

    There! Recession avoided; No-one loses their jobs; Economy growing again. And for state employees, extra long weekends to do interesting stuff. An all-round win, I’d say.

    Tell me, John. As an MP, would your colleagues go for a shorter working week? And in your experience of state employees in general, would we notice the difference if they went on to short-time working?

    Reply: Of course many state employees could go onto a shorter week, but contractually they would probably insist on full pay.I prefer reducing numbers through natural wastage. The Opposition also supports fewer MPs.

    • Tony
      Posted January 21, 2009 at 4:19 pm | Permalink

      Thanks for that reply, but if a state of national emergency exists then I would think that the Government could claim “force majeure” ……

    • Acorn
      Posted January 21, 2009 at 8:02 pm | Permalink

      Those of you that have been involved with government know well the massive waste and lack of productivity in the public sector. At least one in five public sector employees adds no value to the economy. They are simply employed welfare recipients, operating some valueless government initiative. They are disguised welfare recipients that are not on the books of the DWP; but, essential components of the NuLabour client state.

      You could reduce government spending by £100 billion, no sweat, mainly by reductions in staff above the current median salary point and the three pounds they spend for every pound of their salary.

      The reality is that despite all the political bluster and governments intervention in the world’s economy, there is little they can affect. People think like people; markets think like markets; they existed long before so called governments. People and markets have seen their wealth and income decline by a large percentage. Both will go into defensive mode for years to come; and, look for strong men in their tribe to be their leaders.

      The days of complex economies being run by amateur politicians are coming to an end. Prepare for the world to revert to 194 sovereign states that look more like large corporations than, old style, countries. The “middle ages” will make a comeback.

      Discuss; marks will be given for original thought.

      • Michael Taylor
        Posted January 22, 2009 at 9:47 am | Permalink

        Two thoughts, then. First, the degree of interconnectedness in the global economy makes a return to the 194 sovereign states’ scenario impossible.

        Second, though, we should expect that the ‘Anglo-Saxon model’ will be revised significantly. One of the revisions will be the discovery that it is all too easy to elide the standard (and correct) critiques of ‘mercantalist trade policies’ with a ruinous neglect of/ignorance of, balance sheet issues for households and governments. In short, we’ll discover that our economic policy settings have been targetting solely the p&l of Britain Inc, whilst ignoring its balance sheet. Worse, we’ll find that crude applications of the ‘Anglo-Saxon model’ tacitly encouraged this tendency.

    • Hugh
      Posted January 23, 2009 at 12:08 pm | Permalink

      Theoretically it would be possible for a decisive government to bring in emergency legislation to reduce hours, or pay or a combination of both.

      Practically this would be very difficult.

      A cleverer combination, say 3% less pay (standstill) and 3% less hours (robust management action) and natural wastage (3% pa, robust management action and legislation reducing unnecessary bureaucratic task) might be workable, particularly as sterling would probably respond positively.

      The problem is this equals continuing recession for several years, but may be that is what we are in for.

      Seems unlikely to happen under the current administration though.

  19. Ruth
    Posted January 21, 2009 at 2:47 pm | Permalink

    Well said. The government’s idea of forcing banks to return to former lending levels is madness, since that is what caused the problem in the first place.

    I run a small online retail business and I am currently going through the painful process of updating prices. I have a number of products which originate in France – ones that cost £17.70 two weeks ago have now been repriced to £24.99. The supplier says they will keep an eye on sterling/euro and reduce them if the situation improves, but I’m not holding my breath. Now it’s a race for me to update all the products before anyone orders them and I lose money on the transaction. So yes, imports are becoming more expensive, massively so.

  20. rugfish
    Posted January 21, 2009 at 4:07 pm | Permalink

    JR- “and remind readers of some of the steps that have been taken that need to be retraced”. – Well said Mr Redwood. It seems government actions thus far amount to consecutive throws of the dice without bothering to check the limit on the table.

    Incidentally, to put £1.23 trillion into focus as to what that amount means, I happened to read Policy Change’s “100 Reasons why Britain needs change” today, and by sheer coincidence, it points out this is also the cost of providing total state benefits for 10 years from 1998 todate.

    I imagine ten years worth of unemployment and sickness benefits adds up to quite a lot for taxpayers to pay back if that’s the real measure of the debt we have as a nation. Sadly, the government talk as if we have a bottomless pit when in fact we reached the bottom months ago by all accounts.

  21. Stephen
    Posted January 21, 2009 at 4:44 pm | Permalink

    We constantly hear that doom would await us should a bank like RBS be allowed to fail. Could someone articulate exactly what that ‘doom’ would be, and why it is a worse fate than the current course set by the government?

    Reply: The rapid fire sale of all the assets and big write downs would cause substantial further dislocation, as the fall of Lehmans did.

    • StevenL
      Posted January 21, 2009 at 6:51 pm | Permalink

      I think there’s also the issue of admin. When Lehmans was closed I read that a lot of assets were frozen in customers accounts. As far as I know this mainly affected private investors and hedge funds. To my knowledge Lehmans was a traditional broker-dealer investment bank, unlike RBS which has a massive retail presence as well and an investment banking arm. I think RBS is a market maker too for warrants and cfds, but I could be mistaken.

      If RBS was closed one day, and all accounts frozen, it would surely cause mayhem. People unable to access their salaries, unable to pay mortgages and other debts, no-one to undertake collections, RBS warrants and cfd markets frozen? I imagine that if the government let it go rather than step in there’d be civil unrest, not just a fire sale.

      When Lehman went the US govt had to bung AIG several $billion to stop a chain reaction from their cds exposure bringing the whole financial system down (again just from what I read and understood).

      Potentially, a bank like RBS being allowed to go under could start a chain reaction that would be like pressing a ‘reset’ button on the global financial system.

      Lehmans balance sheet was roughly a third the size of RBS. I read that PWC reckon it will be 10 times harder to wind up than Enron – and that’s with the rest of the financial system still switched on.

      Party politics and jibes aside, I actually find this really worrying.

    • Adam Collyer
      Posted January 21, 2009 at 9:41 pm | Permalink

      That’s probably right – but at the moment the government are not talking about rescuing RBS. They are talking about rescuing “the banking system”. Isn’t the government itself damaging confidence in the sound British banks, by failing to be specific about the institutions that need help?

  22. mikestallard
    Posted January 21, 2009 at 5:50 pm | Permalink

    If only Mr Brown would trust his electorate enough to come on TV and tell us, man to man, what the trouble is and how he plans to deal with it.
    If only Mr Cameron would come on TV and tell us, man to man, what he would do about it if elected.
    We are in desperate need of a solemn moment.
    We have not got an overview, you see.
    1. How much money has been guaranteed in the banking system exactly? And to whom has it been guaranteed? Is it world wide or just in UK? What are the arguments for and against this? Why was it done if it was done?
    2. Which banks, exactly, are going to be nationalised? Can we afford this?
    3. How much are taxes going to have to go up to pay for all this malarky? When will this be?
    4. Who is in charge? Is it the FSA, the Bank of England, the Treasury? The Prime Minister? The EU? Are they all working together or against each other? What has this got to do with the current banking crisis?
    5. Why, if there is so much money being printed that the weekly record has been stopped, are we not facing melt down inflation? – the market and risk assessors (S&P) seem to be fairly doubtful about this.
    We Brits, you see, have been through quite a lot of worse times than this: we can take it. Trust us.

    Reply: My previous posts do set out the figures for you

  23. Mark Wadsworth
    Posted January 22, 2009 at 10:01 am | Permalink

    Re the taxpayer-funded ‘bad bank’ solution, as I have said before … there is a much better way – just create a few new ‘good banks’.

    All that happens is savers shift their cash to New Banks (thus old banks owe New Banks money for assuming this liability). When mortgages with old banks come up for renewal, New Banks skim off the best mortgage risks (say, < 70% LTV; loan < three times joint salary, no history of arrears etc) and lends to them, these borrowers then repay old banks, who in turn repay New Banks.

    Instead of transferring out the bad stuff, which is, as Peston points out, very difficult to value, you leave the bad stuff where it is and transfer out the good stuff, which is easy to value.

    Old banks thus becomes ‘closed funds’ that make no new loans, they merely collect mortgage repayments and redemptions, do the repossessions etc. The liabilities to New Banks get repaid first; once they’ve been paid off, bond holders get paid next in the order that they would have fallen due – if the money runs out before the ten and twenty year bonds are redeemed in full, well hey, the loss lies where it falls, if by a miracle there’s still some money left over after that, then the shareholders get it of course.

    This requires minimal government involvement, zero taxpayer exposure and is the closest thing to a truly free market solution.

    That’s that fixed. Next.

  24. Mick
    Posted January 22, 2009 at 10:43 pm | Permalink

    Agree 100% with the article – it actually coincides almost exactly with my views. We most certainly can’t afford to stand behind any bank liabilities except for retail deposits. It’s all delusions of empire again where we think we’re so important that the world revolves around us.

    But what really bothers me is that the level of debt will reach a tipping point where it makes the economy non-viable. And I think we’re already there.

    Abyss, cliff, here we come.

  • About John Redwood


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

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