An extra trillion will do nicely

It was another very expensive day for taxpayers in the Commons yesterday. First came a statement from a junior Treasury Minister committing taxpayers to back £260 billion of Lloyds toxic assets. This was the Ministerial spin on the real statement that we were taking a controlling interest in a £1 trillion bank. Then came the Supplementary estimates, weighing in at a modest extra £36 billion. There was still no mention of printing money, and all attempts to ask about that were blocked with the surprising answer that this was a matter for the “independent” Bank of England. Funny that. I distinctly remember them asking permission of the Chancellor.

Neither the Chancellor nor the Chief Secretary to the Treasury was willing or able to explain these huge sums to us. The Chancellor, we learn, was busy dreaming up new financial lame ducks we go and help, with his scheme to lend lots more money to Eastern Europe, as if we had not yet borrowed enough!

The Lloyds bank package was bizarre. Apparently taxpayers are to stand behind the potential extra losses on £260 billion of Lloyds assets, but in the process of doing so will gain control of the whole bank.

I asked what was the point of taxpayers “insuring themselves” in RBS and Lloyds. Are there any circumstances in which the government would let RBS or Lloyds go under, now we are the majority owners? I assume not – or otherwise what was all this spending on bank shares about? Given that we do stand behind these banks, lock stock and barrel, stand behind every CDO, commodity future, loan to a foreign oligarch and every failed mortgage, why then do we need a separate insurance scheme for some of the toxic debts? We the taxpayer have to stand behind all the possible losses on all the assets of these mega banks.

Was it just a device for consultants and advisers to charge more fees to the taxpayer? Why didn’t these mega banks have a handle on their toxic assets already, and why can’t they just get on and manage all the assets for us in the normal way? The Minister could not be bothered to answer this question, so he tried to answer a different one. As always one was left wondering whether he simply hadn’t a clue, or whether he knew the answer was embarrassing and it would be better not to go there.

The Conservative front bench concentrated on what we were meant to be getting for committing our trillion (or £260 billion). The government triumphantly told us this huge financial commitment would mean Lloyds would lend an extra £14 billion this year. Asked by Mr Hammond if they would continue to use their normal lending criteria before making an advance, the government confirmed they would. It is difficult to see that on this basis we will get £14 billion of lending LLoyds would otherwise have not made. It would be a very expensive way of gaining an extra £14 billion of lending, if that’s what you really want to do. I doubt even that will work.

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23 Comments

  1. Jim Pearson
    Posted March 10, 2009 at 7:45 am | Permalink

    Having read your posts today, I am shocked and dismayed that any one can work this way. I know I shouldn’t be, but the figures are really astronomical now. God help you when you get in to power, because you’ve got the Gordion Knot all over again. Shame there is no Alexander to cut it…

    Till then I will be counting the cost.

  2. Ian Jones
    Posted March 10, 2009 at 8:23 am | Permalink

    I was wondering the same thing today. RBS is legally obliged to lend £20bn and Lloyds £14bn. Will they require a 10% deposit and only allow a multiple of 4x income on mortgages?

    House prices have some more to fall unless their version of “normal” lending criteria is pre-bust or they will lend it to the Govt by buying any gilts the Bank Of England cannot get their hands on…..

    I’m sure no junior minister has a clue what goes on, Macavity is running the show.

    • Demetrius
      Posted March 10, 2009 at 1:48 pm | Permalink

      Only four times income? Only? We found it tight on just two and a half times income a long while back. Admittedly, at that time food prices, tax levels, local council rates and motoring costs were relatively higher. But what what is going to happen to all four of these in the coming months and years?

      • Ian Jones
        Posted March 11, 2009 at 4:06 am | Permalink

        I think 6 or 7 times were normal in the credit boom. An average house costs 250K but the average salary is only 25K (mean salary 25K , the modal salary being significantly lower).

        Therefore house prices must fall a lot more unless we return to the old requirements for borrowing.

  3. Mike Wilson
    Posted March 10, 2009 at 9:14 am | Permalink

    I’m wondering when someone (the opposition?) are going to start challenging the government’s handling of this crisis.

    Let’s recap. Over the last 10 years growth in the economy has been the result of growth in personal debt. We went from a collective (personal) debt of 650 billion in 1997 to 1.45 trillion now. The purchase of new cars, expensive holidays, extensions to houses, conservatories and, of course, the purchase of bigger (or additional) properties was all funded by debt – secured against property.

    We had, apparently, a miracle. Constant growth in the economy and low inflation. Of course, house price growth was left out of the inflation measure – because, technically, it should not be there. But it is the single biggest expense for every family (that aims to own their own home) and to ignore the fact that property prices trebled – even quadrupled – in some areas was complete folly. Did the opposition ever raise this as an issue? No, the silence was deafening. After all, how could you criticise a housing bubble when you had a spectacular one of your own in the late 1980s which led to a recession throught the early 90s.

    Now, of course, the debt/asset bubble has burst.

    What is the government’s primary objective now? To reflate the housing market! We seem to have developed an economy that completely depends on house price growth – and the constant and repetitive extraction of that debt by way of mortgage equity withdrawal. So, your house goes up in price by 25k a year and you take 10k of it out to fund your lifestyle – to pay off your credit cards every 6 months and to have a good holiday – or a fairy-tale wedding – or that cruise you always promised yourself.

    It is time for the Conservatives to say ‘Enough of this nonsense’. You cannot run an economy like that. There will be pain – pain is unaffordable after the debt-fuelled pleasure of the last 10 years. Someone who has bought a house in Wokingham for 600k in the last few years needs to get used to the idea that, in a globalized economy where wages are now paid against the backdrop of global competition, that house is only actually worth about 300k AND that their house will probably not be worth 600k again in their lifetimes.

    If we persist with the course we are on now, we are building up massive, truly massive, debts for future generations to pay off. This is not fair and it is not sustainable. What on earth are our children to do in the future? They are expected to pay our pensions and healthcare costs – and pay massive mortgages to buy the houses we sell them – so that we can live on the unearned income derived from what the baby boomer generation seems to think is their birthright … buy a house for 25k in the 1970s and sell it for 600k now.

    Where do people think the money comes from to fund this growth in the property market? Do they think it is a natural progression – wages go up – inflation goes up – so house prices go up too? Or do they think there is some magic and vast pot of money that mystically keeps multiplying so that everyone can keep borrowing more and more and, somehow, against all logic, keep the party going.

    It is time for some straight talking. The events of the last 10 years have been a scandal. A massive transfer of wealth from young to old. What chance in life do our children have now?
    Look around at average salaries for average jobs. Recruitment agency windows in Wokingham show salaries of 14k – 16k – 18k. How is it supposed to work when people still think a 3 bed semi-detached sardine tin on Woosehill is ‘worth’ 275k?

    I’d like to see the Conservatives start talking some sense about the economy instead of tacitly agreeing with everything that Gordon Brown is doing. Brown got us into this mess – but you (the opposition) seem reluctant to hammer this home. You need to start saying:

    “Trying to get everyone to take on more and more debt to ‘buy’ our way out of the position this government has created is not the answer. The government have made a monumental mess of the economy. The growth they boasted about for 12 years was simply based on debt – debt provided by banks that were secretly taking insane risks – parcelling up the same debt over and over again and ignoring capital adequacy rules. The regulatory regime Brown put in place was flawed and, now the banks have had to come clean, we can see it has failed. But what is Brown’s answer? Instead of punishing the banks – he keeps bailing them out – with taxpayer’s money. With money our children will be repaying for a generation. We need to call a halt to this insanity. We need to accept that we cannot build an economy on ever increasing house prices fuelled by ever increasing debt. We need to make sure that businesses can access debt – so they can grow and create real growth in the economy. We need to return to traditional banking values when it comes to lending money to buy houses – so that houses maintain a normal relationship with affordability – with people’s salaries. Brown and this New Labour government have failed the British people and, just like every Labour government – they have broken the economy and saddled everyone with massive debts. They are congenitally incapable of running an economy.’

    Reply: The Conservatives did warn the governemnt that it was inflating a debt bubble – We started this line of criticism under Michael Howard and Oliver Letwin before the 2005 election. We disagreed with budget after budget expanding borrowing on the way up. I consistently opposed the Bank of England changes, and published in my Economic Policy review for David Cameron an analysis of the problems and the likely inability of the Regulators to deal with the next crisis.

    • Bernard Dugdale
      Posted March 10, 2009 at 11:57 pm | Permalink

      Hello John, a question for you. Should we simply have allowed the banks to deal with their own problems, at the risk of going bust?

      I was struck by Peter Hain (not literally!) two weeks ago on Question Time asking, rhetorically, “Would you rather we’d let the banks go bust?” (I’ve paraphrased).

      Instinctively I think if you’ve mis-represented your bank, made mistakes, called the markets wrong, and you’ve done it enough, then you ARE bust, no matter what you, me or any one says about it. Shuld we have let them go under? Would it have mattered that much?

      At the time I imagine the justification was that without bail-outs there would be no lending at all, leading to an ever-more severe ‘credit crunch’ and severe recession. Which sounds sort of familiar. I’d be very interested in your view.

      Thanks,

      Bernard

      Reply: I think that would have been extreme. What I favoured was forcing them to admit the errors, take the losses and sort themselves out more quickly, with the authorities acting as a mean lender of last resort to prevent system failure but not buying shares are feather bedding their excessive costs. Lend little, lend short, lend against security: don’t lend lots, gurantee lots and buy shares. Now we are the owner, be a very tough owner, and make them sort it out quickly.

    • Mike Wilson
      Posted March 11, 2009 at 9:07 am | Permalink

      You must have kept very quiet about it – I do not recall hearing anything from the conservatives in the run up to the 2005 election about the risks being taken in the economy. Not one word about our growth being built on debt, not one warning about the regulatory structure.

      I could not count the number of times I heard Labour politicians on ‘Question Time’ boast about ’10 years of consecutive growth’ and ’48 quarters of consecutive growth’ … over and over again … like a scratched record. I kept waiting and hoping for the conservative representative on the panel to point out that the growth was based on a growth in debt, that it was unsustainable – that we had a debt and asset bubble … but no, not a word – never a word – they always just sat there looking uncomfortable. Why did they never quote Gordon Brown’s words … ‘I will not put at risk the sustainability of the recovery by allowing house prices to get out of control’. But he did, and you said nothing. But, of course, how could you? After what you allowed to happen in the late 80s.

      Reply: On the contrary, we were vocal about it. We set it out in the Commons very clearly, but the BBC was never very interested in reporting it or inviting us on to discusss it because it was not part of the Labour spin.

      • mike stallard
        Posted March 11, 2009 at 11:14 am | Permalink

        I must support our host on this. For some years, the Telegraph newspaper has been forecasting that when Mr Brown took over the economy would be going from boom to bust.
        It is not a new thing at all the Conservative protest and forecast of disaster.
        The idiotic and partisan BBC was still at the stage of shouting down anyone who was openly conservative at the time. Remember?

        • Mike Wilson
          Posted March 11, 2009 at 5:31 pm | Permalink

          I must have been living on another planet for the last 12 years. Apart from since the credit crunch started – I have heard almost nothing from the conservatives pointing out that Brown’s miraculous economic growth was based on debt – and must come to an end.

          Whatever spin the BBC has put on government policy (and I agree they have been simply a mouthpiece for New Labour) … find me one edition of Question Time prior to the 2005 election where Labour ministers boasted about their years of economic growth – and a conservative member of the panel warned that the growth was based on debt and that it would all end in tears.

          You’ll have no trouble finding an episode of Question Time where a Labour minister boasted about their successive quarters of economic growth – they did it, unchallenged, every week. But you’ll struggle to find an episode where anyone questioned the fact that it was all based on an unsustainable debt/asset bubble.

          But, that is all history. Where is the opposition NOW to current government policy? We have the BOE buying up government debt with the very real risk that interest rates will have to rise and they’ll (sorry, WE’ll) take a thumping loss as the gilts have to be dumped into the market.

          We have banks bailed out with billions of our money. Debts being taken on by this government on my as yet unborn grandchildren’s behalf.

          We should have let the first bank fail. Protected the deposits – and let them go to the wall. Then, if necessary, bypassed the remaining banks to make sure business can access the credit it needs.

          But, the conservatives are still paying lip-service to the house price boom of the last decade. They are still terrified to explain that it was built on unsustainable debt growth – and that the party is over. That anyone who bought at the top of the bubble is going to be in negative equity for 10 or 20 years.

          As such, apart from a bit of bleating about the government not lending to business, there seems to be general agreement that there is no alternative to what we are doing now.

          If we carry on as we are, we’ll have 10 million unemployed within a few years and gangs roaming the streets.

          There is a fundamental reluctance to face facts. What on earth are 60 million people on this small island supposed to do to make a living? Selling houses to each other and financing our lifestyles on the profits doesn’t seem to be working anymore.

          Reply: if you look at Hansard you will see Conservatives provided strong criticisms of everything economic from the pensions taxes through the sale of gold to the overreliance on debt, the wasteful spending and the stealth taxes

  4. Brian Tomkinson
    Posted March 10, 2009 at 9:21 am | Permalink

    Thanks for two informative blogs today. Both, I fear, added only to our sense of doom and despondency. Parliament is clearly not working and the Government has contempt for the people of the UK and those sent to represent them in the Commons. At the earliest opportunity you should use your time in the Commons to highlight this situation and include a motion to reduce the salary of the Prime Minister for his incompetence and the parlous state to which he has brought the economy.

  5. rugfish
    Posted March 10, 2009 at 9:22 am | Permalink

    Questions in the Commons you say?

    Any Prime Ministers Question Time you like, goes something like this:-

    (Dave), “On The Bank of England, they are independent are they not”?

    (PM), “We saved the banks”

    (Dave), “No you didn’t, the Bank of England did that surely”?

    (PM), “No, the Bank of England is independent you nit”

    (Dave), “Okay, so how did you save the banks”?

    (PM), “We bought all their shares”

    (Dave), “Where did you get the money”?

    (PM), “Err”

    (Judge), “You must answer the question”

    (PM), “Well the Bank of England put the rates down, not us”

    (Dave), “Objection your honor, the witness is failing to answer the question and is deviating”!

    (Judge), “I’ve already told you to answer the question, please answer the question or you will be in contempt of this court”!

    (PM), “The Bank of England in its independent decision making, which I gave it, (as he’s doing a ‘I got one up’ sign), and the Bank of England ‘printed it’. Yes that’s it, they printed it. Are you daft or something”?

    (Dave), “Judge would you please have a word with this witness. He’s now attempting to question me”!

    (Judge), “I’ve warned you about that, and if I……………….”

    (PM intervention), “I won’t do it again M’Lud, please carry on”!

    (Dave), “I asked you about the Bank of England”.

    (PM), “Yes, of course. It was me wot gave them authority to BE independent, as I have said”

    (Whisper from Alistair), “That’s a good one Gordon”.

    (PM), “Right, now can we move on to what’s happening in more important areas or are you going to talk the economy down for another half hour”? – he he he

    (Dave), “You made the Bank of England independent and it decided to print the money, is that correct”?

    (PM), “Ive already told you that” (pleads to judge), “He’s badgering me your honor”!!

    (Judge), “Yes, I noticed he was badgering you and if I have any more of it then Dave will be in contempt”!

    (PM), “Thank you your honor, I’ll make sure your pension ( and others), isn’t too adversely affected by these measures I’ve allowed the Bank of England to make independently from government decision making, which allowed me to claim credit if it goes right and to stuff the blame on them if it all turns to sh…., er, if it goes wrong”.

    (Dave), “But that’s a load of bollox and you know it”!

    (PM), “Judge not, lest ye be judged by others my dad used to say” !!!

    (Judge), “Please step down Mr Brown, I think you’ve answered enough questions for one day, and kindly refrain from using such language in my courtroom Davey Boy, otherwise I’ll have to tick you off”!

    (Dave), “We’ll see you next week then”!

    (PM), “Not unless I see you first and can arrange another Global discussion to be at”….. he he he. “Tarra everyone, see you next week”!

  6. StevenL
    Posted March 10, 2009 at 9:37 am | Permalink

    “Was it just a device for consultants and advisers to charge more fees to the taxpayer?”

    Yes, they are selling us pointless financial services – it’s what they do. I remember when I bought my car, they tried to sell me four different types of expensive and pointless insurance.

    Far from being clever, the bowler hats in the Trwasury are mugs if you ask me.

  7. Waramess
    Posted March 10, 2009 at 10:03 am | Permalink

    It is all now down to printing money. How much you print doesn’t really matter. A great suprise that Gordon hasn’t apologised for his past tax collection when he might more easily have printed it.

    All that happens now is they flood the economy with new money under the guise of inflating a deflated economy and when the velocity of circulation picks up again they will recall the money.

    Except of course they won’t be able to because in large part it will have been spent on the huge bank losses that will start to crystalise, and the other bailouts that will have been given to all and sundry that will have been spent on unwanted production.

    The government now have little credibility remaining and their fine words can be “seen through” by the public, even occasionally when they are talking sense.

    David Cameron will come to power either when depression has finally taken hold or around the time when inflation starts to become uncontrolable; in either case it will be to his great advantage if his economic credentials are low, because expectations will then be equally low.

    What is clear is that it is now too late to bother about what these hooligans are doing with our money and more important that the conservatives have a reasonable idea of how they intend to clean up the mess

  8. Demetrius
    Posted March 10, 2009 at 10:10 am | Permalink

    As an old military man who sat at his grandfather’s knee, another old military man, who would tell me things and about The Battle of Corunna, January 1809, where his forebear found himself, all of us bearing the same name, what he use to say was that the last place you wanted to be was wandering around in No Mans Land in a thick fog, with shelling and firing coming in from both sides. Even what was apparently the “safe” option, diving into the nearest big hole, was very likely the worst choice to make. So now the taxpayers have been ushered in to the biggest hole the Government can find, where might they finish up? What was it that grandfather used to sing when out of earshot of grandmother? “Hanging On The Old Barbed Wire”, I recall. All together now………………………

  9. James M
    Posted March 10, 2009 at 11:55 am | Permalink

    “Why didn’t these mega banks have a handle on their toxic assets already, and why can’t they just get on and manage all the assets for us in the normal way?”

    I still don’t understand why damaged HBOS wasn’t sorted out first, by whichever or however many of the tri-partites were required, before being put up for acquisition. Instead, they’ve simply produced another bad bank from one of the few remaining good ones.

    Utterly incompetent, and I suspect it was once again a matter of temporary political convenience.

    Reduce the salaries of PM and Chancellor indeed!

  10. TomTom
    Posted March 10, 2009 at 3:25 pm | Permalink

    Having voted against de-mutualisation whether Scottish Widows or Halifax or B&B – and having voted against this merger as an HBOS shareholder and when wearing my Lloyds hat, I cannot understand how City fund managers breathed Promethean Fire into this Frankenstein Zombie Bank. Don’t they read the prospectuses that plonk on the doormat ?

    It was plain to see from the hefty tomes that RISK was flasing red neon on this deal. Any dealmaker would have demanded up-front money from the Treasury before touching HBOS and then have transferred viable entities out of the shell. Anyone who had seen BHS refinanced with a £1000,000,000 cash extraction could guess HBOS corporate lending was dodgy, so why did Lloyds let itself get suckered into a suicide pact by shackling itself to a drowning corpse ?

    Lloyds could have been the kernel of a healthy new banking system, now only the Spanish Santander and Hong Kong regulated HSBC and the putatively solvent Barclays are left as High Street banks outside Government control.

    I simply cannot understand why Lloyds behaved as recklessly as Peter Cummings when buying HBOS, nor why Andy Hornby wasso weak as CEO that Cummings ran his own empire….but if Lloyds had tried to buy HBOS in 2006 why didn’t the Government let them and have spared us this debacle. How can one trust City fund managers if they cannot read the prospectuses ?

  11. oldrightie
    Posted March 10, 2009 at 3:42 pm | Permalink

    What is most alarming is that all these useless measures are flailing in AT THE BEGINNING of the recession. The later stages will be unimaginable.

    • APL
      Posted March 10, 2009 at 5:23 pm | Permalink

      oldrightie: “.. AT THE BEGINNING of the recession.”

      Exactly, you would think the government would know that as employment falls the tax take will fall with it, that is an absolute certanty.

      Yet here they are ramping up their spending …

  12. Mike Wilson
    Posted March 10, 2009 at 4:23 pm | Permalink

    I assume my post was a bit too near the truth to get past the moderation.

    Reply: No – just too long to do quickly

    • mike stallard
      Posted March 11, 2009 at 12:01 am | Permalink

      But well worth the wait!

  13. JeremyS
    Posted March 10, 2009 at 5:46 pm | Permalink

    Brown’s magic bullet – printing money – is presented as a possible get-out strategy. But I postulate, in my ignorance, whether even this could run out of gunpowder. What if long-term interest rates are also brought down to 0.5%, but economic activity still fails to stir? After all, the long-term rates that the government is manipulating are no longer real rates based on real economic activity. They are false rates achieved by the creation of false money. The real economy may perhaps know better – that we are in for a long period of contraction and retrenchment while the taxpayer pays off the government’s / banks’ liabilities.
    http://pol-e-tics.blogspot.com/2009/03/could-browns-magic-bullets-turn-into.html

  14. mike stallard
    Posted March 11, 2009 at 12:09 am | Permalink

    Last night we went out for a meal at the Blue Elephant, Bangkok. It was full of non Thais. It was expensive and absolutely fantastic. The whole meal (we didn’t stint!) cost about 120 pounds for four adults.
    My son told me that he needed some professionally done (with retouching) photos for his own publicity. Cost? 15 pounds. In any other country? At least 300 pounds. And so it goes on.
    We are in open competition with these people and, trust me, the standard is simply exquisite.
    My daughter in law happens to be Singaporean. She told me that in Singapore Socialism actually works. I don’t know if she is right. But, from what she said, it seems to.
    She explained that the shipyards still work in Singapore, and they still repair ships because people do not mind working there.
    This is our competition.
    Why are we so much richer than these people?
    I wish someone would tell me……… _

    • alan jutson
      Posted March 11, 2009 at 9:52 am | Permalink

      You are correct and we will never be able to compete with them on a like for like basis when they have a lower cost base.

      They probably do not pay Council tax at £2,000 per year on their home, suffer huge Business Rates on their premises or pay exortionate rates for heat, light, and power.

      I will not even bother with Rules, Regulations, Tax, Employment Laws, pay rates and the cost of the Benefits Structure.

      You need less to live well in some other Countries, here you need more for that same standard of living.

      We have some benefits like National Health Service etc that others do not, but in most cases it is a question of choice as to where you want to live, and how you want to live your life.

      Our problem for the future is are we going to be more or less competitive in 10 years time.

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    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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