The Finance summit drowning in debt

Mr Darling has three aims for the Finance Summit this weekend – to borrow more money, to borrow more money and to borrow more money. It’s a strange way of sorting out a crisis brought on by borrowing too much.

His three way plan consists of
1. Countries to agree to borrow more to spend more
2. Countries to agree to find ways to get bad banks to lend more
3. Countries to agree to borrow more to put more into the IMF so it can lend more to overborrowed countries.

No wonder we are in such a mess, with thinking like this at the top.

He forgets the nature of the crisis. The UK, the US, Spain, Ireland, the Eastern Europeans and a few others borrowed too much. Banks got over extended, and then the authorities called abrupt time on the party leading to a huge hangover. Meanwhile China, Germany, Japan, and some others worked hard and saved hard, building up large surplsues which they lent back to the overborrowed.

The different countries need different solutions to help resolve the crisis. The saving and exporting countries could afford to spend more and create more demand at home. That would be very helpful. The countries that have borrowed too much need to control their borrowings and learn to live closer to their means. They need to save and export more, not reflate by borrowing too much.

The bad banks should not be bolstered and subsidised on the collosal scale this government favours. They should be made to own up to their losses, cut their costs, and get their businesses into shape. Far from lending more, they should be getting their risks into line with their capital. If the government must see more lending to UK businesses and individuals it should be done through good banks and new banks, not through the costly and distorting mechanisms of the bad banks. The government should learn that business does not need more loans, but more orders, not more bank debt but more revenue.

Putting more money into the IMF may be timely – who knows which country may next be in need of an emergency loan. They should also discuss what the IMF is going to make the over borrowed do to sort themselves out. Why not start doing it before having to seek an IMF loan? And why doesn’t the UK government see that we need to put our financial house in order as well.

This debtaholic Chancellor seems wedded to more debt. It is not the answer. We need to sober up and sort things out.He should start by calling time on more cash for bad banks. They just pay themselves too much and make bad investments. Haven’t we had enough of that? There has to be a day of reckoning for them. It is wrong of the government to delay it, putting the taxpayer at massive risk. Don’t let them go bust, but keep them short of cash so they have to sell assets, cut high salaries and get wise with their investments.

This entry was posted in Blog. Bookmark the permalink. Both comments and trackbacks are currently closed.

23 Comments

  1. Stewart Knight
    Posted March 14, 2009 at 9:49 am | Permalink

    The aim of darling and LABOUR, not the Government as this is a Labour party and political aim that takes no account of economics but of voteromics. They NEED the other G20 countries to announce massive borrowing in order to mitigate their own massive borrowing and to show Brown as the saviour that everyone agree with.

    I hope they all say we must tighten our belts and start saving again.

  2. Posted March 14, 2009 at 9:59 am | Permalink

    There seems to be a clear distinction between most companies whose business has shrunk by responding with deep and appropriate cost cutting and those banks which are in receipt of billions of pounds of taxpayers’s support. Why for example has HBOS not decided to rationalise their operations by closing either the Halifax or Edinburgh headquarters as part of the process of getting back to profitability? Has the government played any part in this oversight?

  3. Matthew Reynolds
    Posted March 14, 2009 at 10:07 am | Permalink

    My prescription would be to restore to the Bank of England the powers it lost in 1997 and to revert to an RPI-x inflation target of 2.5%. That seemed to work pretty well in terms of sound financial regulation & price stability. George Osborne is right that if asset prices are inflating too fast then our central bank should have the power to curtail credit levels to steady the situation while Lord Turner is right to say that banks in a boom should be building up bigger credit balances ( I assume to fund lending during a recession to thus minimize the effects of a downturn).

    Yes we should have a Golden Rule to balance the books over the economic stability but to underpin that a Growth Rule that limits real terms public spending increases to below 1% less than average annual GDP expansion would make sense. This would stop future chancellors over-spending and then having to hit taxpayers in the wallet to stop public debt levels surging. This would ensure economic stability by protecting taxpayers , making government smaller and keeping debt levels prudent. Gordon Brown’s Golden Rule would work if underpinned by the David Davis Growth Rule that the Irish followed in the 1980’s & 1990’s. This paved the way for the tax cuts that got Eire out of the mire and could do the same for the UK economy as long as tax cuts where funded after spending cuts had reduced the national debt.

    MPC members should as George Osborne suggests be appointed for seven year non -renewable terms to limit political meddling in monetary policy and to lessen uncertainty. I would go further and have such appointees vetted by the Treasury Select Committee and then approved via majority vote in a reformed House of Lords. This would limit patronage and ensure that the best people where taking important economic decisions.

    Replacing Job Seekers Allowance & Incapacity Benefit with one sort of payment designed to slash economic inactivity while paying private firms to get the jobless back to work and ending the New Deal ( and other failed training schemes) could be supply-side measures to ensure shorter dole queues sooner once a recovery gets going. Allowing small & medium sized businesses to cease complying with huge numbers of state regulations as the Lib Dem’s have at times suggested would cause more such enterprises to open and/or expand thus boosting productivity , job growth and dynamism that is needed to end the recession.

    The profitable bits of the banks & shares in them need selling off ASAP so that the government can get on with lowering the PSBR to avoid an Italian style debt explosion that could wreck a recovery. We need lower state spending to stop tax rises prolonging the recession.

    So we can get out of this economic disaster with the right mix of policies – why does Mr Darling lack the common-sense to see this ? By ditching the debt addiction and following these policies much damage done in the Blair-Brown era can be rectified.

  4. Denis Cooper
    Posted March 14, 2009 at 10:27 am | Permalink

    Think back to last autumn, when the talk was all about the pressing need to remove “toxic assets” from the financial system.

    Not about the pressing need to remove top quality assets like gilts, so that it becomes easier for the government to issue more, so that it can cover and increase its budget deficit, borrowing more and spending more at a time of falling tax revenues …

    For example, in this Telegraph article on September 26th:

    http://www.telegraph.co.uk/finance/financetopics/financialcrisis/3086654/Financial-Cr isis-US-bail-out-plan-will-not-rescue-the-British-economy.html

    “As the US Treasury and the Federal Reserve Board, and indeed the White House, have now clearly recognised, without a major initiative to remove impaired assets from the US, and probably European, banking system, then it is likely that the whole US credit mechanism could grind to a complete halt.”

    “Hopefully, Congress will support US policymakers in their bold initiative to remove toxic assets from the system, allowing and indeed encouraging banks to rebuild their capital ratios.”

    That article was written by the chief economist at Goldman Sachs, and in the US the “bold intiative to remove toxic assets from the system” was the “Paulson Plan”, and part of the author’s argument was that:

    “As an aside, it could mean that US taxpayers actually make money, as the US authorities will be able to hold these assets and potentially dispose of them at a later date.”

    In a comment I pointed out that the last time this was done, to resolve the Savings & Loan crisis, US taxpayers actually lost an estimated $124 billion; nonetheless it must be possible to set up a “toxic bank” or “Resolution Bank” on contractual terms which would ensure that any shortfall was later clawed back from the banks, over a period of say ten years, making absolutely sure that the taxpayers did not lose out in the end.

    So why, over about six months, has the strategy swung round from:

    Removing “toxic assets” from the banking system, leaving only good assets on clean balance sheets; to

    Leaving the “toxic assets” on the banks’ balance sheets, but insuring them, at potentially huge cost to the taxpayer; while

    Removing top quality assets, gilts, from the system; and moreover

    Printing money to pay for the purchases of those existing gilts; while

    The Treasury continues to issue new gilts?

  5. Ian Jones
    Posted March 14, 2009 at 11:04 am | Permalink

    Its what happens when those in charge are of the Keynesian persuasion (Both King and Brown).

    Everything is driven by aggregate demand according to them so thats what needs to be raised.

    This is why the Germans and hence the rest of the Europeans are not playing ball. They are monetarists through and through and they know what happens when you try to print/borrow your way out……. inflation and bust.

    The UK and US know if the Europeans dont play ball in the spending game then the investment flows will be into Europe leaving the anglo-saxons stuffed.

  6. Posted March 14, 2009 at 12:17 pm | Permalink

    We seem to be thinking along the same lines, albeit that you are more polite in your description. So you must be right. What is happening now is like a circus where the juggling act has broken down irretrievably, and the Ringmaster has to Send In The Clowns. Only this one is not and never will be fun or nice. We are all going back the The Mercantile System whether we like it or not.

    • chris southern
      Posted March 14, 2009 at 2:38 pm | Permalink

      That explains why we are seen as a colony by the EU and drained of as much “gold and silver” as possible!
      it also explains why the west is finding reasons to invade regions that are rich in natural resources.

  7. Posted March 14, 2009 at 1:02 pm | Permalink

    Whenever the blogosphere seems weak and tired, here is one place for a breath of fresh air. Globalisation and huge inter-lending ponzi schemes have replaced good old honest trade. We need to put individual “basket case” economies back into a mindset of common sense. Only then will see a recovery, painful though that has to be.

    • alan jutson
      Posted March 14, 2009 at 3:25 pm | Permalink

      Agreed, the financial institutions lost the plot years ago.

      At one time you had to produce things which you sold for money, or you provided a service required by others for which they would pay cash.
      Business was simple.
      Cash was the key to fund everything, borrowing was for industry and business only, save perhaps for a few people who were TRUSTED to repay a mortgage.
      Then we had expansion of credit, bit by bit it increased and slowly those who would never have qualified previously were granted facilities at higher amounts, and at higher interest rates.

      Credit cards replaced real money, and it did not seem to matter that you did not pay the monthly bill in fact your limit was often raised without any request at all.

      Then we had unsecured loans for those who had no assets but still wanted things that they could not afford.

      Banks accepted growing risks in order to gain market share.

      Not happy that this was enough, they then set up schemes where you invested money into the stock market and gambled on the performance of Companies, this was not a problem in itself.

      But then it was allowed that you could purchase or sell shares at a future date, but not pay for them until that date.
      It was then found that you could manipulate the market a little bit in your favour by giving out press releases on projected performance of any given Company, you could therefore increase your chances of making a bit more money when you had not really invested anything at all.

      We then had an entire industry gambling on the future share price of Companies and Commodities which bore no relation as to their real performance, value or worth it was all hype.

      Shares and Commodities were simply being talked up or down for the sake of share value manipiulation, those buying talked it down, those selling talked it up, result chaos and the casino culture.

      Even worse, Banks appeared to set no limits as to the amount of funds that were gambled, ever more suspect schemes were introduced, with even higher risks, which again bore no reference to true value, again they were talked up or down to suit the parties involved.

      Sorry for rambling on, but the sooner we get back to basics, the real value of investments, the real value of money, the better for all of us.
      We have to learn that you cannot live beyond your means, and that means individuals, Companies, Local Authorities and Government.

      It is only private business which creates wealth that every one shares in, and the sooner the Government realise this the better.

  8. Posted March 14, 2009 at 1:04 pm | Permalink

    Recessions are supposed to produce the failure of unproductive industries & the use of their assets more productively. What we are seeing is an wxpansion in the least productive indeed probably negatively productive overall sector – government. The borrowing has allowed the state to now wxceed 50% of the economy.

    This is a formula for ever deeper recession not for getting out. This was started by the oil price skyrocketing & fears of peak oil whuich, because government could do little, solved itself in free enterprise style by expanding supply. However it had knocked the confidence in the housing house of cards which duly fell. Since then government spending to prop it up has made the recession far worse than it need hace been. My guess is if some of the banks had been allowed to fail we would have had a shrp crash last year from which we would now be recovering. I am quite certain that if Sarah Palin had been able to carry out her promise to start building nuclear power stations in January their recession would at least have bottomed by March.

  9. mike stallard
    Posted March 14, 2009 at 1:38 pm | Permalink

    One hundred years ago, this part of the world was run by Britain. Malaya produced rubber. Burma produced stuff with planters. Singapore was an entrepot and base. India was firmly under the raj and the Durbar was more or less in progress.
    Meanwhile, the pound stirling was the currency of the world, based as it was on gold.
    British shipping united the Empire on which the sun never set.

    Hello!

    It is now one hundred years later.
    Britain is a little bankrupt island off the shore of Europe which is run by an unelected committee. Its army has been humiliated in Iraq and is (as ever) bogged down in Afghanistan. America is at the height of its power, but full of internal problems. Briatin is just a tiny little adjunct to Europe and America.

    Can’t anyone else see this?
    Mr Brown is a tiny little figure in the planet. Alistair Darling is known only by a few nerds.
    The sooner we stopped posturing on the “world stage” and started living within our meagre means, the better. One in three people, remember are paid for by the government. We produce little and are living on our fat.

    • chris southern
      Posted March 14, 2009 at 9:00 pm | Permalink

      it’s more than one in three paid by the goverment now, remember all of those people who get benefits, be they british citizen or immigrant.
      the PUBLIC sector is tipping over 50% now, and that’s before the people who are on benefits get paid.

      i wouldn’t be surprised if the private sector was down to 1 in 3 now.

  10. Steve Cox
    Posted March 14, 2009 at 2:02 pm | Permalink

    Both the ‘bad banks’ saved by the government have ‘Scotland’ in their names. Does the resulting policy of chucking endless cash at them surprise, when we have an unelected Scottish PM in Number 10, and a particularly inept Scottish Chancellor in Number 11?

    What surprises me is that Northern Wreck seems to have almost dropped off the radar in all this shovelling of money into the furnaces of RBS and HBOS. The last I recall, that particular northern financial disaster was likely to cost us between £30 billion and £50 billion. What’s the latest tally, tally me bananman?

  11. Denis Cooper
    Posted March 14, 2009 at 3:32 pm | Permalink

    In fact a vehicle which could become a “Resolution Bank”, with the task of removing “toxic assets” from the financial system and arranging for their safe disposal, already exists – it’s called UK Financial Investments Ltd:

    http://www.ukfi.gov.uk/

    and a letter about it from Alistair Darling to the Chairman of the Treasury Committee, dated November 3rd 2008, can be read here:

    http://www.hm-treasury.gov.uk/d/ukfi_letter_031108.pdf

    I suggest that this is what Alistair Darling should do:

    1. Write to Mervyn King, telling him to desist from pointless purchases of high quality assets like gilts, and instead provide UKFI with newly created money (“Central Bank Money”) to buy up the “toxic assets” which are the real problem;

    2. Write to the CEO of UKFI, telling him to draw up closely worded contracts so that UKFI can buy up the “toxic assets” held by the banks, starting with those belonging to RBS and Lloyds which are presently insured through his “Asset Protection Scheme” at huge risk to the taxpayer, and gradually dispose of those “toxic assets” without the taxpayer making either a profit or a loss.

  12. APL
    Posted March 14, 2009 at 4:07 pm | Permalink

    JR: “1. Countries to agree to borrow more to spend more”

    Good luck there. There comes a point when the interest on the borrowing will exceed the tax take in a given economy. As that point draws closer, wise money will think twice about lending to any government.

    As the British economy dives into recession, the tax take will already be plummeting.

    “2. Countries to agree to find ways to get bad banks to lend more”

    Don’t you just love the way Socialists form a cartel at the first opportunity. Yet any time the private sector try it, all hell breaks loose.

    “3. Countries to agree to borrow more to put more into the IMF so it can lend more to overborrowed countries.”

    Over-borrowed countries. He means bankrupt countries.

    • Denis Cooper
      Posted March 15, 2009 at 10:10 am | Permalink

      “There comes a point when the interest on the borrowing will exceed the tax take in a given economy.”

      As the Treasury issues more gilts to borrow more money, the Bank of England uses newly created money to buy up existing gilts; so then as the Bank owns those gilts which it has removed from circulation, the interest on them (and eventually their redemption value) should be paid by the Treasury to the Bank; and if the Treasury starts to run out of money to do that, the Bank can create more money to buy up more existing gilts, allowing the Treasury to sell more new gilts to borrow more money, to pay the Bank what it owes …

      Maybe in the end, the government will order that all the gilts held by the Bank shall be transferred to the Treasury, at no charge, and then they can all be cancelled.

  13. jim
    Posted March 14, 2009 at 4:08 pm | Permalink

    I don’t know if you’re familiar with the baseline scenario website? The guy who runs it did an interview with Bill Moyers. His main point is that government in America (and Britain), has been captured by the bankers. Thus we see massive subsidies to reward failure going to the banks. The result of this can only be the impoverishment of the taxpayer and the country. The only way to stop this is to bankrupt the banks, and break their stranglehold on policy. There must be liquidation of debt, or there can be no recovery.

  14. not an economist
    Posted March 14, 2009 at 4:22 pm | Permalink

    “And why doesn’t the UK government see that we need to put our financial house in order as well.”

    To do so would imply too many hard decisions at the expense of the public services that they have recklessly extended in the last 12 years. They’d be seen to be going back on so many of their electoral pledges. I think they have overextended govt and much of what they have done is unaffordable if we are going to get out of the recession/depression but then I am not standing for office.

    At the slightest hint of Tory stringency in the public services since 1997, Labour has demanded the Tories declare what servcies they would cut, playing with the public’s affection for the NHS and State schooling by suggesting the Tories would slash those budgets. To suddenly declare that they (i.e., Labour) will now take a knife to the State sector would be such a radical about turn – a U-Turn if you like – that they wouldn’t be credible and, to be fair, it would go against their statist beliefs. I mean – their whole policy platform since ’97 has been based on expanding the state. If they suddenly start to cut it back what exactly was the point of that last 3 Labour administrations?

  15. DiscoveredJoys
    Posted March 14, 2009 at 4:25 pm | Permalink

    I agree wholeheartedly with your analysis John. I worked in a large privatised organisation where cost control was an annual priority (interspersed with years of savage cost cuts). It made sense and could be achieved through dogged planning and action.

    But what can I do as a private individual? I pay my credit card bill off in full every month, I have a miniscule mortgage (really just for the sake of maintaining my credit history) which I may pay off shortly. I have savings in various places. I’m now drawing my pension. What can I do, other than vote in any elections for a party which supports sound finance?

  16. Posted March 14, 2009 at 7:38 pm | Permalink

    I’ve been reading the views of a US commentator, Lawrence Kudlow, and put on my own blog my consequent observations that Gordon Brown’s QE experiment will reduce banks’ yield margins creating a greater disincentive for them to lend.

    A more relevant point to the Finance / G20 Summit is Kudlow’s call to set aside or dilute mark-to-market accounting rules. It isn’t an original idea. The US SEC has already looked at it but decided against in December. But it seems the idea is getting wings again in Congress.

    The notion is that banks’ toxic assets should be allowed to be viewed long term and priced at cash value plus credit risk rather than fire sale value. It might be a cost free alternative to using £100s of billions of taxpayers money, as in UK, to support banks’ balance sheets. No need either for a ‘bad bank’, nor for banks necessarily to collapse through the knock-on effects of indebted balance sheets. Is it something that should be discussed at the G20?

    • alan jutson
      Posted March 15, 2009 at 6:26 pm | Permalink

      To a degree I agree.
      I certainly think that we have entered panic mode far too easily.
      Clearly the whole of the toxic debt has various degrees of toxisity.
      Some will be worth nothing no matter how long you hold them for, but others will be worth something better than fire sale value either now or in a sensible period of time.

      The problem at the moment is that even the banks are not aware of the percentage of the mix let alone the Government.

  17. Robin
    Posted March 15, 2009 at 5:53 pm | Permalink

    Debt is free John – come’on get with agenda.

  18. Robin
    Posted March 15, 2009 at 5:58 pm | Permalink

    Seriously though politicians have a similar time frame to Executive Directors. Once they are in power they can leave the mess to those who follow them, and those who follow them can blame the mess on somebody else.

    Debtaholics anon – we don’t need Gordon to apologise we need him to confess … “Good evening. My name is Gordon and I’m addicted to Debt … That first injection of capital, well it’s just so easy. Once I started I couldn’t stop.”

    Debt-Junkies.

  • About John Redwood

    John Redwood has been the Member of Parliament for Wokingham since 1987. First attending Kent College, Canterbury, he graduated from Magdalen College, and has a DPhil from All Souls, Oxford. A businessman by background, he has been a director of NM Rothschild merchant bank and chairman of a quoted industrial PLC.
  • John’s Books

  • Email Alerts

    You can sign up to receive John's blog posts by e-mail by entering your e-mail address in the box below.

    Enter your email address:

    Delivered by FeedBurner

    The e-mail service is powered by Google's FeedBurner service. Your information is not shared.

  • Map of Visitors

    Locations of visitors to this page