Month: January 2009

It was good that the President admitted the Chief Justice had helped him get the Oath of Office wrong. Admitting mistakes and correcting them is a sensible virtue. The Oath has been retaken.
He announced an intention to close Guantanamo within a year. That will be a welcome line under an unfortunate blemish on the Democratic West, a violation of the principle that men should know the charge against them and be given a trial when detained by the state.
Even Wall Street gave him a break and a boost for the day, whilst his team works out their approach to the gathering banking storms.

Today the government is sitting on a loss of more than £25 billion on the bank shares, the pound has fallen further, and they announced record breaking levels of public borrowing for the last month’s figures. When will they start to limit the taxpayer risk?

I hear this afternoon that the government has decided to withdraw its proposal to partially exempt MPs from FOI requests concerning expenses.

I am very pleased they have seen sense over this. As I have been telling constituents, I do not support such a move.

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.

I can forgive the President for his stumbles with the Oath of Office. He was nervous, they were not his words, and his staff had failed to place the words on his prompt screen. It is a detail they will doubtless get right the next time he has to reproduce a traditional statement.

I do not agree with the carping critics that the speech was a let down. The House of Commons decided to have a vote on the financial crisis at the opening of the President’s remarks. I decided to watch it in the Commons tea room so I missed very little, as that provided the nearest TV to the Chamber. Some MPs and the Tea Room staff assembled to see it. The staff from a wide range of backgrounds were visibly moved by the powerful rhetoric, and by the sight of the US coming together after the dreadful past of segregation and racial hatred. Only a few hard bitten MPs were more cynical.

I thought he spoke well. He did not need to dwell on the success of the movement for racial equality – he is its embodiment. He did weave in a wider US history to his approach. As a Conservative he said nothing I wanted to condemn, and some things I admired. I fully support his passionate defence of opportunity, and of freedom, set within the message that people have to do things for themselves to protect that freedom and to grasp those opportunities. As a Brit I had to take the memories of the US struggle against the clumsy British government to gain the Republic’s independence on the chin. It was entirely fair, even if I would like to have seen it balanced by some friendly remark towards us for our more recent support of the US and our shared heritage of freedom and democracy.

I felt let down not by the words nor by the event, but by the actions.

If he is serious about closing Guantanamo, why doesn’t he just announce a date or process for closure? Guantanamo became a symbol of a great democracy failing to live up to its own standards. We democrats condemn torture and believe in no detention without charge and trial. Why is he delaying even military justice for its inmates by seeking another 120 day delay in the trials about to edge forward? If he wishes to transfer them to civilian trials then just do so.

He promised that he would start the withdrawal from Iraq on Day One. This morning there is hesitation in the briefing about that. In a way George Bush pre-empted him, but it would still be good to see the President instructing the Generals to take the necessary steps as promised.

Whilst they were partying on Pennsylvania Avenue, Wall Street was having a terrible day. The transition team should have had something ready to tell the markets about how the Obama Presidency would handle the banking crisis and the recession that might be reassuring. Instead Wall Street sees more of the same – more massive state borrowing to prop up ailing banks, and more state borrowing to create some jobs through Federal programmes whilst many more jobs are lost in the private sector.

He told us it would be tough, and he rightly united his country to take the actions needed to change America. He has little time to spell out exactly what changes he wants, as the markets are already spooked. He implied that the USA has to change its approach to the economy, by becoming more energy self sufficient and living more within its means. We know that, so why not get on with it?

Today the pound has lost significant ground against the dollar and the yen. The government should see this as a verdict on its approach to the crisis, and take action to instil some confidence in its management of public borrowing.

Yesterday was a disastrous day for the UK. The government had to tell us that its first banking package, amounting to £487 billion of share buying, loans and guarantees, had not done the job. They are now planning another package which includes new loans, new guarantees, the possibility of quantitative easing and an insurance scheme for bad debts.

The timing of this announcement seems to have been related to the publication of the news of the huge losses at RBS. The government had not completed the negotiations with the banks, and had not filled in much of the detail of its proposals, implying it had been rushed by events. We do not know which bad loans or obligations of the banks will be eligible for the insurance scheme, we do not know how they will be valued, we do not know what the insurance premium will be and we do not know the total taxpayer commitment. What we can guess is that the commitment will be large if the policy is to have any beneficial impact, and that pricing the insurance will be very difficult. There is no static and measurable pool of bad and doubtful debts. In this recession the lake of underwater debt is growing at flood rates.

In these circumstances a rumour spread that UK sovereign debt is about to be downgraded by a rating agency, whilst sterling fell again against the dollar and yen. The share prices of RBS and Lloyds plunged, leaving the taxpayer sitting on large unrealised losses on the shares the government has so recently purchased in these two major banks.

People often ask me now, how bad can it get? They have in their voices the apprehension of people who still have their jobs but are worried that all the bad news will one day cross their threshold.. They are relieved that petrol is a bit cheaper and maybe are benefiting from lower mortgages costs, but concerned that things might get tougher for them in some unforeseen way.

The answer is they could get a lot worse. The government has to avoid moving from a very serious problem of weak and overborrowed banks, to an even worse problem of a weak and overborrowed state. We need to be able to keep confidence in our currency and in the government’s capacity to borrow and spend sensibly. Were the government to lose the confidence of the bond markets and were the continuous decline of sterling to become a rout of the currency we would be in for much higher interest rates, much higher unemployment, and a further cut in living standards for many.

The starting point for the government’s analysis should be my simple point that the major banks in the UK are too big for the state to assume all their liabilities, or all their bad debts. The Chancellor yesterday confirmed they were looking at insurance for all the overseas loans as well as the UK ones, and seemed unclear on all the derivative and other financial instrument activities that these banks undertake. Put together, this all amounts to too much risk for taxpayers.

The second perception they need is that the private sector is short of cash. Companies are short of orders and revenue, Many individuals are overborrowed and are having to pay off credit card debts and other loans. They need more money. They are not necessarily going to go out and borrow more, even if the banks suddenly are in a position to lend it. The government does need to work on the money supply to ease the squeeze.

The government does need some combination of the schemes it announced in outline yesterday. It also needs to put some limit on the amount the state will spend and borrow, to start to instil some confidence in its own finances again. It should be seeking to dig its way out of its expensive and so far disastrous share buying amongst the banks, and finding cheaper ways of seeing the banks through a painful period of adjustment. Short term loans against security, the provision of banking cash and maybe guarantees on inter bank and new lending are the least bad ways of doing this. The banks themselves have to cut costs, change their business models and reduce their risks. Subsidising them too much delays this necessary process. Buying their shares just puts the taxpayer in line to pay the losses, which as we saw yesterday are eye wateringly large. When I first said the three banks the government was buying shares in could lose the equivalent of the defence budget, many people looked surprised. That is what RBS has announced on its own just a few weeks after the government bought shares!