Governments today can bask in the pleasure of the latest figures which show a sharp decline in the number of billionaires. Turn that round, and it means equality is rising at last.
You may not be able to make the poor rich by making the rich poor, but you can create a greater equality of misery with a really good Credit Crunch and recession.
Today we are told the Bank of England will create ÂŁ2,000,000,000 to buy government bonds back from the people and institutions who had bought them. The reason given by the Monetary Policy Committee is that they need to create more money.
We need to ask why? If you take the last three months figures for money supply and express them as a an annual rate, the recent rate of money creation has been lively. The latest figures show notes and coin growing at 12.2% – that is literally printing money – and wider money including all our deposits in banks growing at 22.6%. Yes, 22.6%.
It is true that in August 2008 notes and coin was only growing at 2.7%, and a year ago wider money was growing in single figures. It is a pity the Chancellor was unwilling to come to the Commons to explain why he has given the MPC permission to go ahead with this experiment, and why he has been silent on how much money he wants to create. If 22.6% is not a fast enough growth rate, can he tell us what growth rate he does want? I guess, given the sums involved, he wants to boost the money growth rate above 30%, which would certainly be racy.
The hope of the scheme is that this extra money will be spent on home produced goods and services, bringing factories back into use and leading to more people having jobs. Unfortunately it can also go elsewhere. It can go into pushing up prices, it can be spent on more imported goods and services, it can linger in bank tills and book entries and go nowhere as the broken banks throw an extended fit of caution after their past excesses.
The government is doing it in the spirit of “we will do whatever it takes”, and this is just one of many initiatives. I think it is dangerous to be putting so much at risk in the banks and running such a huge borrowing requirement at the same time. The pound is taking another pounding on the back of the government’s risky gambles. It means we are getting poorer by the day, as our money buys us less and less from the world market. Expect more price increases in the shops as the lower pound works it way through.
A few readers have said, can we hear some good news occasionally?
Yes, of course. I told you about an excellent play recently. Last night I watched the English bowlers and fielders show some real commitment, skill and hunger to win a game of cricket. The played brilliantly, bottling up the West Indies batsmen and letting us live in hope that they might have won the match. In between overs and during the ads I could turn to watch Liverpool playing as if they were on fire. They swept aside Real Madrid as if they were a second division team.
Recessions do end. During them around 90% of economic activity usually survives. Most people keep a job. If you work for the public sector or depend on a public sector pension, you can be assured the government will “do what it takes” to carry on paying.
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 ÂŁ260 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 ÂŁ260 billion). The government triumphantly told us this huge financial commitment would mean Lloyds would lend an extra ÂŁ14 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 ÂŁ14 billion of lending LLoyds would otherwise have not made. It would be a very expensive way of gaining an extra ÂŁ14 billion of lending, if that’s what you really want to do. I doubt even that will work.
Yesterday’s Commons debate on the estimates – or more spending – was pathetic. The government fielded a clutch of junior Ministers to discuss the Business Department’s estimate, and the Transport Departments estimate. The Autumn and Spring Supplementary estimates are the way governments get Parliamentary approval to spend more than the budget figure for the year. Most of it is usually paying extra for errors and overruns, with the occasional increase for something that is worthwhile. This year the Supplementaries ran to 700 pages of detail in two volumes, totalling ÂŁ36.446 billion (total net resource requirement, as HMT says). That’s a whopping supplementary. There was of course no Index to help you find the place you wanted, and often tiny items received much more explanation than the big numbers. The documents were a masterpiece of expensive obfuscation.
I discovered that there were just two large items within the wealth of detail. £20 billion was described in just 23 words “Raising the rate of sustainable growth and achieving rising prosperity and a better quality of life., with economic and employment opportunities for all”. I asked the Treasury Minister what that meant. It was clearly written in newspin, as there is no sign of growth out there, sustainable or unsustainable. The Minister either hadn’t a clue or had no intention of telling us. Further on in the bumper book of mad spending it did hint that this could have something to do with financial assistance to banks and other financial institutions, but there was no breakdown of the sums involved in a heading which also included extra spending on “honours and dignities” and the soon to be overworked Debt Management Office. I did not even find it reassuring that there was an offset, with a decline of spending of £3.7million, as this was on actions to “protect the integrity of the coinage”.
The Transport supplementary was the other large one, weighing in at £8.2 billion. I asked the Labour Chairman of the Transport Select Committee who led the debate what the large £7.55 billion item within this was for. It was called “Financial Instruments”. The detail supplied told us this was to “set up a non cash resource provision under a new Section for:Financial Instruments to reflect the opening value as at 1 April 2008 of FRS26 government guarantees….”
The lady was unable to answer, and the Minister was keeping mum about this one as well.
And so the Mother of Parliaments gladly passed £36 billion of extra spending after several hours of debate about something other than these two large estimates. All’s well with the spend more borrow more world.
The Credit Crunch has brought a rash of socialists and so-called Christians onto the media to condemn the immorality of bankers and capitalism. My advice to all who feel a strong urge to do so is to remember the Christian injunction, let he who is guiltless throw the first stone.
The moralisers think the crisis is an easy story. A small group of very greedy bankers lent too much so they could pay themselves huge bonuses. The answer recommended by these self appointed national preachers is equally easy. Nationalise the banks, and in some magic way lending too much and paying bankers too much will no longer be possible, whilst at the same time the economy will miraculously grow again. As we have seen, the nationalised banks still seem to pay large pensions and salaries to people working for loss making concerns, whilst the government itself decides it and its nationalised banks need to lend and borrow more, not less. Meanwhile the economy goes from bad to worse, with all too many people losing their jobs or their businesses.
If lending too much was greedy and wrong, wasn’t it also wrong for so many people to borrow so much, especially if they cannot now repay it and are going to walk away from their obligations? Who was more guilty – the lender or the borrower?
If the bankers who did the lending were greedy and wrong, weren’t the shareholders in the banks similarly guilty as they were happy to receive the dividends from all that excessive lending? Didn’t that include most people in the country? The Church Commissioners who pay the clergy salaries doubtless owned lots of bank shares, as did practically every pension fund in the country. I don’t remember them speaking out at Bank shareholder meetings asking for the banks to grow less and pay smaller dividends.
If the bankers who did the lending were immoral, surely the governments and Regulators who allowed them to do so by signing off their balance sheets and business plans were also wrong? Weren’t they employed as upholders of public morality, and didn’t they set the tone for the age of irresponsibility?
And if it were morally wrong for us collectively to borrow too much from the private sector, isn’t it even more immoral for us now collectively to borrow staggeringly larger sums through the government, as we are being forced to do?
It it were immoral for the authorities to sanction so much easy credit in the good days, wasn’t it even more immoral for them to bring the whole system crashing down in the bad days, by hiking interest rates too far and by demanding the banks suddenly held more capital? Why is too much private sector credit immoral, whereas too little private sector credit is moral? And why above all is too much public sector credit moral? Is printing money the height of morality and responsibility, a new kind of public duty, as some now have it?
I think it unwise to make this a morality tale. I could take no pleasure in thundering against the immorality of one or two scapegoat groups. We all lived through the age of private sector irresponsibility, and are now all having to live through the age of government financial irresponsibility. It’s a very one sided morality which condemns lending too much but does not condemn borrowing too much. It’s even more bizarre that over lending only matters if it is done by a private sector bank but is encouraged if done by a nationalised one. If lending and borrowing to excess is immoral these socialist and Christian moralisers should be on the airwaves condemning the excess of public debt now being built up on a scale which dwarfs the credit boom of 2003-7.
It’s the politics, stupid.
We seem to be in a real mess.
So what does Mr Brown have in mind?
He tells us that he need to take the banks into “temporary” public ownership. They can rebuild themselves with some public capital and assistance, and a rash of guarantees against past mistakes. Then they will be floated off, with the shares being sold at a “profit”..
Can he really believe this? I do not know any Minister prepared to say the bank shares can be sold before the next General Election. Is Mr Brown really so altruistic that he thinks he can tidy the banks up , give them a lick of paint, so a future Conservative government can have the pleasure of selling the shares off after a year or so in office at a healthy profit? I doubt it. Looking at the state of the banks he has bought, that is a very unlikely scenario.
What Mr Brown has in mind is altogether very different. Prudence and adherence to Conservative spending plans was a useful device to persuade voters in 1997 that the economy would be safe in Labour hands. After the 1940s and 1960s devaluation crises and the 1970s IMF crisis Labour needed to change the polling which said consistently Labour governments end with too much borrowing and spending in a collapse of financial stability.
By 2000 the polls told him that spin job was done. He started to increase the spending and the borrowing, breaking his own sensible rules – for those rules were just political, they were not meant to constrain him once he wanted to flex the national credit card for real.
When the enormous spending and borrowing started to go wrong the government needed to spin itself out of trouble. The first line was that people should not “talk us into recession”. All would be well as long as no-one forecast a downturn. When that was overtaken by events, we were told “The UK is the best placed to weather the storm, and will have a lighter version of it”. When that fell to bits they concentrated on spinning that they will “do whatever it takes” to get us out of it, meaning there will be a rash of initiatives and mega buck spending.
Throughout they have told us this is a “global problem”, without pointing out that the downturns in Japan, Germany and China are very different from the downturn here. They don’t have the same excess of too much borrowing and very broken banks. Their downturns result from the UK and US crises, because they were too dependent on exporting and lending to us. They told us the crisis was made first in the US, glossing over how a British bank, Northern Rock, regulated by a British Regulator and lending to British people experienced such a catastrophe.
They now think the crisis gives them cover to do what they have always wanted to do: spend limitless amounts of money on everything they want to do in the public sector. They will borrow as much as they can. Frightened that maybe the markets will rumble them and deny them too much lending, they have now decided to buttress their position. They will instruct the banks, especially the ones the taxpayer owns, to lend more to the government itself. And they now have instructed the bank of England to buy up government debt to keep the price up. In other words they will now print as much money as they like to spend as much as they like in the run up the election.
Taxpayers – and the incoming government – will be left to clear up the mess.
The economic stragey has ended just as one feared – in too much debt, a vioent boom/bust cycle and a weak pound.
The politicians think they can ignore that cruel reality by the spin cycle. We will be told the government is on our side, has done all it can and should. This government believes it can buy votes with taxpayers own money, and now believes it can buy votes with money it simply prints.
The government may even be happy now. It thinks they can spend and spend their way to the election like there’s no tomorrow, paint the Tories into the cuts corner, and await the applause of a delighted and subsidised electorate.
The polling and the electoral responses suggest many voters see it otherwise. They know the reality is a broken economy, a massive debt , and years of lower living standards as we wrestle with how to pay it all off.
In the distorted world of Westminster and its client media Mr Brown and Mr Cable are held up as economic and financial experts. After all, we are told, Mr Brown was Chancellor for many years, and Mr Cable was once an energy economist at Shell.
Neither man has ever run a large private sector company – or for that matter a small one. Neither knows what it is like to be responsible for paying the suppliers and the wages, keeping the bank manager happy and trying to make a profit all at the same time. They have no comparable experience to that of trying to run a big bank.
Nor has either any especial expertise at money markets, government bonds markets and how banks work. Neither has held a job which depends on reading and understanding fast moving markets and acting to make a profit in such markets.
Both are intelligent and hard working people. But both are to their very finger tips modern politicians. They live by the soundbite of the day. Their lack of experience in what matters in this crisis has led them both to the misguided view that we need to nationalise the big banks. It leads the government to mumble that having nationalised them they should be left to get on with their own business without undue political interference, as if the owner can ignore its main investment and offer no leadership or even set out consistent and sensible aims for that investment.
Taking on banks with assets – and liabilities – well in excess of £3 trillion when the annual revenues of the state are less than one fifth of that sum is to take far too big a risk. To do so without setting out how you are going to cut the risks and manage the assets sensibly is dangerous.
We need to control the risks, sell the foreign assets, wind up the casino banks within these banks, take the losses and create a more stable and smaller footing from which they can trade sensibly. Doing it Mr Brown’s way means the taxpayer has to foot the bill. What have we done to deserve such brutal treatment?
We need the government to get a grip on these wayward banks. They do indeed need to be “cleaned up” and cleared out”. So why is there no statement of how this will be done, how much it will cost, how long it will take and when it will start? Why can’t public and Parliament see the business plan, as we are paying dearly for it.
RBS and LLoyds now dominate the public finances.
Bigger losses.
We now know that if you force a merger of a loss making bank with an OK bank you end up with a bigger bad bank.
We are about to find out that if you own two big loss making banks, they own you. Hold onto your purses and wallets.
If buying one very large bank was careless, buying two is lunatic.
When the government bought RBS instead of assisting it short term and at least cost it bet the farm. Now buying control of LLoyds/HBOS it is betting the farm, the shop, the factory and everything else of value in our overborrowed country.
When I pointed out that buying RBS meant you could lose the annual defence budget with a 2% fall in the value of the bank’s assets, some Labour MPs looked worried. With both LLoyds and RBS as state pensioners we can now lose the health budget with an adverse movement of a little over 3% in their “assets”.
I used to ask where did they think all the money was going to come from to buy all this financial ironmongery. Surely there was some limit to the possible borrowing? Didn’t they realise it was the same money they borrowed to pay the nurses that they were now borrowing to pay the bankers’ bonuses? Which should be the priority? Can you really afford both?
Now we know their answer. They will print the money to buy “whatever it takes”. Your farm, your shop, your factory is now on the line for the biggest national overdraft in history. And if the global bankers and savers start to call time on the national overdraft, worry not. They have already borrowed the money to buy the electronic printing presses.