Month: March 2009

The government is in a muddle with its policy of “quantitative easing” – printing or creating money.

It wanted us to believe this was a policy of the “independent” Monetary Policy Committee. Hence they enacted the charade of the MPC writing to the Chancellor and the government responding. In a moment of inconsistency the Chancellor yesterday announced the policy on the media and sought to defend and explain it. Clearly he is in full knowledge of it and has given it his blessing. It therefore becomes his policy, whatever the truth about who first thought it should be adopted from within the MPC and the government. He dropped the old pretence that these are matters under independent control which we leave to the Bank and do not comment on.

I am glad he did seek to explain it and defend it. It is a big step to take and one which the senior elected official needs to be happy with and needs to defend. Why then did my colleagues get a brush off in the Commons when they rightly asked for a government debate? Have we now got to such an undemocratic pass in this country that a government creating or printing the large sum of £75 billion does not have to announce it first to the Commons in a statement and then allow a debate? Shouldn’t a democratic government want to explain it to those paid by the taxpayer to approve or criticise these decisions? Once again I am driven to the world of the web to make my points.

Every Thursday the government holds a so called “topical debate” without a vote to require most MPs to be present . If they chose genuinely topical matters that could be a good thing. Instead they usually choose the government’s spin topic of the week. They do not let the Opposition ever choose their preferred topic. Yesterday should have been a debate on the economy and money. Of course it wasn’t. The Opposition asked me to speak in a full day Economy debate to be scheduled in Opposition time next Tuesday . I willingly said I would. Subsequently I was told the Chancellor was not available to take part, so the debate has had to be postponed.

So, like the rest of you, my opportunity to understand the government’s approach to all this was confined to watching Miss Cooper ( alias Mrs Balls) on Newsnight. She may have gone home thinking she had triumphed. She had put across the government’s highly political spin line. They say that the crisis is global, that they made no mistakes, that Gordon Brown is leading the world out of the crisis, that the Conservatives want to do nothing, and the Conservatives have opposed the very measures they are taking which will alleviate and then solve the problem. One of their dwindling number of supporters has put this all eloquently in a recent posting on this site.

If she did think this I fear she is much mistaken. Their points about the Conservatives are simply untrue. The Conservatives have proposed various actions, and have not voted against government measures which they think might help.

What I think we wanted to hear from Miss Cooper was something different. We wanted a serious tone, an admission that mistakes have been made by this government in the conduct of monetary policy, fiscal policy and banking regulation, and a better explanation of what quantitative easing means and how it might make things better. I do not think most viewers will have warmed to Labour as a result of her partisan performance.

Some think quantitative easing will have little impact. On the first day of its formal announcement bond markets did not respond greatly, and sterling remained mercifully unmoved. The Japanese who tried this found in their circumstances it did not work. Nor did it trigger inflation.

Some think quantitative easing marks our adoption of a Weimar or Zimbabwean approach to monetary management, fearing that addiction to it could eventually trigger a major inflationary problem. Government should remember that on its chosen measure inflation is still at 3%, and there are still price increases a plenty to come though from last year’s big fall in the pound.

Some think this will prove to be the right sized stimulus that could help turn the corner.

Miss Cooper seems to belong to the try everything school. She did not claim last night this policy is the magic missing ingredient. She may be adopting a monetarist policy, designed by people she used to condemn regularly as part of her ideological mantra, but she has not been completely bowled over by their claims. She said it was just another measure in a long laundry list of initiatives. As the Opposition pointed out this week, several of last year’s initiatives still have not got beyond the press release and planning stage.

So what do I think of all this? I think the government should realise that doing everything is not necessarily the right answer. I think inflating the deficit massively, spending huge sums on subsidising very large banks, and undertaking monetary easing increases the risks substantially. The government is overflexing the national credit card and national financial credibility.

The main problem that is different this time round is the state of the banks. The government should concentrate on making the banks heal themselves, instead of shovelling obscene sums into them. They should await the results of lower interest rates. They should stop savaging savers at a time when savers are needed in a country which has collectively borrowed too much. If you are going to print some money, you need to have a prudent course for future public finances. The government has not merely divorced Prudence but is holding a drink and drugs party on her grave.

Yesterday the Institute for Economic Affairs gave me a platform at one of their lunches to set out my analysis of the Credit Crunch and my proposals for resolving it. The lunch was unsually well attended. There was little dissent from what I had to say. I set out why I thought the government should be the intelligent bank manager to the banks, not their owner.

Most seemed to agree that the crisis had been brought on by a broken Bank of England, by loose regulation of cash and capital, by an MPC that made the wrong calls, by Competition authorities who allowed over large bank mergers and by banks that did not understand how much excessive risk they were running. Many agreed that nationalisation was an expensive and dangerous option. The audience liked my intelligent bank manager approach, based on rebuilding the Bank of England as a competent Central Bank with the full range of central banking powers and duties. All seemed to agree we need to break up RBS, cutting taxpayer risk and disposing of assets.

The main disagreements centred around why this view did not regularly get represented on the BBC and wider media, and over Glass Steagall.

I am always surprised that people expect to hear intelligent and rational analysis on the BBC from an anti government position. BBC journalists take their lead from government spin doctors. The last thing they want at the moment is any idea that the idiotic “rescue” of the banks last autumn was anything other than inevitable or inspired. Conservative critics either have to be kept off the airwaves, or made to sound out of touch or extreme. Mr Cable is put up as the voice of “opposition” and given soft appearances as well to be made to look good, for he also suppports nationalisation. I have set out this alternative thesis many times, on this blog, in public and private meetings and in the Commons. All these methods are good ways of keeping it secret from the BBC audience.

If I asked the BBC why, they would probably say because the main Establishments do not agree with you so it is not going to happen your way. I think in the end they will even be wrong about that. I suspect any Conservative government would follow a risk reduction strategy on the nationalised banks they inherit, and would say No to any more nationalisation. I suspect even this government will be forced into asset sales and risk reduction, as the magnitude of the sums involved becomes more apparent.

As to Glass Steagall, I do not think in modern banking it is easy to make the distinction between clearing banking and investment banking, and keep them seperate. To cut banking risk you just need a regulator who demands more capital for both activities. Banks would soon work out that low margins on risky large trading books is not such a good way of deploying capital.

England is the country that is not allowed to speak its name. It is the country that has to be wiped from maps of the EU.

The UK government was at it again this week in the Commons. I need to tell you as it was little reported, because the Labour spin doctors did not recommend it for news exposure for obvious reasons.

The House was invited to approve members of Regional Committees for England, as part of Labour’s lopsided devolution to Wales, Scotland, Northern Ireland and “the regions”. Once again England was to be balkanised and obliterated.

This is not an official Conservative site, and I do not seek to use it to retail official Conservative soundbites. Perhaps I may this morning say, however, that I was proud of the Conservative party on this occasion. They have refused to put any member onto these new regional committees, and have confirmed they will cease to exist after the next election if Conservatives have the majority.

They are all part of Labour’s attempt to cover over the chasms in their devolution policy. The decisive rejection of elected regional government in the North East meant the rest of England was never given the chance to tell the governent how much we hate the attempts to split England into artificial regions and then to charge us for ever bigger bureaucracies to govern us in this sad condition. Labour thought that maybe setting up regional committees in the Commons would overcome the “democratic deficit”, the lop sided devolution. No chance.

One newspaper did invite me to give a quote they had already made up, to define English nationalism by being anti Scottish. I declined, for that is to misunderstand the nature of the English. Most of us have no wish to define our belief in our country by being unpleasant about the neighbours. For almost two hundred years the English were happy to wave the Union flag rather their own and to sing the UK national anthem when supporting their teams. Labour and the EU have awakened English consciousness to the point where we wave our flag and recognise St George’s day. We still wish to understate, and reject the notion that we must fashion our pride in country out of denigrating others. Lop sided devolution is unfair and is creating ill will within the Union. Regional committees make it worse.

I congratulate the Democrats on their sweeping victories here in Congress. I congratulate your new President on his superb campaign. We all recognise the significance and symbolism of his victory. His arrival in the White House marks the final success of the civil rights campaigns that started decades ago.

Thirty years ago my country first elected a woman Prime Minister. I accorded her the respect of opposing her every inch of the way, as we disagreed about many political issues. Now she has been safely retired for 19 years I can say that her three victories showed that there is no glass ceiling in UK politics for an extraordinary woman. Margaret Thatcher was well known and much loved here in the USA. In her day there was a special relationship with your President Reagan. More recently my colleague and predecessor, Tony Blair, had a great understanding with President Bush.

We meet today against a grim background for our two great countries. Once again we find ourselves together in adversity.

I do not come here to claim a headline that there is automatically a “special relationship” between us. Like all long term relationships, our relationship will mean more or less as needs arise and as people and circumstances change. If we want it to be special both sides have to work at it being special.

If we wish to tackle the current crises of the world together, I and my country are willing to help. We do have an important shared history and set of beliefs to draw on.

Your new President has referred to the relatively brief time in our common history when we disagreed violently. The success of the US in winning its right to independence and democratic self government should no longer give us cause for coolness. You, after all, won. You can be magnanimous and happy in your victory. For our part, we have long taken the view that the Americans were right. We too are proud of the way the American revolution became the ultimate act of free born Englishmen who needed to travel to a new and freer land to create their great society. The tradition of the English settlers here who helped pioneer the revolution also became the winning force in UK politics, as the UK itself widened the franchise and championed democracy.

There are two mighty problems which today confront us both. Yesterday’s dreadful attack on the Sri Lanka cricket team in Pakistan reminds us just how much more there is to be done to help stabilise the wider Middle East. I support your President when he says that more must now be done by diplomacy and less by military means. The UK has not been unwilling to assist the US in her military actions since the horrors of 9/11. Today I ask that we reappraise the position in Afghanistan, consult more widely in the region, and do not ask our troops to do the impossible. Afghanistan needs political reinforcement more than it needs military reinforcement.

Foremost in many minds in both our countries is the economic decline. The US and the UK made similar mistakes. Our regulators did not rein in the banks when they should. Our monetary authorities did not set interest rates to encourage stability. In recent months we have been trying similar policies. We have slashed interest rates, expanded budget deficits, and offered huge sums of financial support to financial institutions in trouble. So far none of this has arrested the sharp decline in output and jobs.

I know as we meet today there is a big political divide over how to respond. The Republicans, along with some Conservatives in my country, are warning that we should not borrow too much, and should not leave future generations with large tax bills to pay off the debts. I have reflected long and hard in private on this. Let me surprise you. I agree with them that there are limits to how much a state can and should borrow, even in times like this. That limit has to be set below the limit of borrowing that markets will readily accept. We need to be careful. We will not save the world if we undermine the state’s credit standing.

This is not the time or place to be precise about the limits. It may well be that conservatives and I will never agree about the prudent limit anyway. What should unite us are these principles:

You cannot get out of a crisis of overborrowing by borrowing too much
You should not cut the payments to those who have been hurt by the economic cycle. Deficits do rise naturally in a recession.
You cannot solve the bad debt problem by transferring them from the private to the public sector. We now need to say to the banks and other financial institutions that have received state aid, sort yourselves out and don’t ask for more money

It is a pleasure to visit our US partner company at a time of unparalleled expansion and success. Our joint formula of “putting the losses back into business” is working well. On both sides of the Atlantic governments are able to report big leaps forward in trading losses from a growing range of talented loss making businesses in which governments have shares. Our joint formula of “never knowingly undersubsidised” is proving especially popular in our financial subsidiaries.

I would like to bring both our US and UK audience up to date with our recent good results. I belong to the school of thought that you never knowingly understate a good loss, and should use every opportunity to remind the audience of success. Following the announcement of £24 billion of losses at RBS we were able to make an additional £26 billion of capital available to them. This means they have needed £46 billion ($65bn)of new capital from us in just three months.

We have now officially reported the £1.4 billion loss for our Northern Rock subsidiary last year. This may seem quite small, but they did achieve it on a reducing book of assets that is now under £40 billion of directly controlled mortgages, so the loss rate is good. The second half loss was, I am pleased to say, well up on the first half. We were able to put another £3 billion into this satisfactorily loss making venture.

I appreciate the UK PLC portfolio does not include such stars as Freddie and Fannie. They truly have become global favourites, a licence to lose money. Nor have we yet found such a gem in our insurance sector as AIG, which has pioneered a wonderful loss making niche in the world financial system. I hope nonetheless our American friends will recognise the huge improvements in our capacity to lose money and waste capital, shaking off the puritan days of Margaret Thatcher when profits stalked the nationalised sector and privatisation was all the rage to limit risks and costs to taxpayers.

Our model depends on ever greater borrowing. Both US Inc and UK PLC are aiming for new and exacting records this year and next. We have both expanded our normal borrowing requirements to new peaks, and can add many billions to those figures through our commitment to loss making businesses. I think adding the capability to print the money needed should markets become reluctant to lend is the icing on a very exciting cake.

Today I was brought up to date by the health foods and supplements industry. They are awaiting their doom from Brussels.

The Food Supplements Directive proposes maximum dosages for vitamins and similar products. These are likely to be well below the levels used and recommended in the UK. The Nutrition and Health claims regulation will require businesses to submit full and detailed scientific papers as if these were drugs before advertising slogans are permitted. The industry thinks it could result in many closed shops and closed busiensses here in the UK

Meanwhile Uk buyers are likely to take to the internet to find product from outside the EU which does not come under these strictures. It looks like another own goal from Brussels to put the UK at a disadvantage. I will take it up again with Dawn Primarolo, the responsible UK Minister, but don ‘t hold your breath for a happy outcome. I doubt she has the much advertised influence in Brussels to get a good result.

Yesterday I was asked by one blogger if there is a beginner’s article, and by another to set out a Conservative alternative to the current “rescue” policy. So let’s ask today Why aren’t the UK and US initiatives working? In doing so I will answer these points.

There are four main reasons why it’s not working.

The first is the authorities did so much damage, both by stoking up credit and then by tightening too much too quickly, creating a very nasty crash. It was bound to take time to deal with the injuries from the crash. Some readers will remember how I shouted at the authorities to relax their grip earlier to avoid a bad downturn, but they were adamant they would not do so. The results were entirely predictable. It was a crash they created, so why are they so surprised?

The second is that some of the actions now taken to relax, especially lower interest rates, take at least a year in normal conditions to work through. These authorities have been driving by looking in the rear view mirror instead of looking ahead, so no wonder they keep crashing. They now need to be patient and to start looking ahead.

The third is the state of the banks, who have made such huge errors along with their Regulators for the last seven or eight years. The banks need to be mended before economies will work at more normal levels of activity and growth.

The fourth is that confidence is low, and is being driven lower by the foolish responses of the authorities pursuing weekly initiatives that are all going to cost mega bucks for taxpayers. The authorities wrongly think that transferring the bad and doubtful debts and the bad investments from the banks to taxpayers solves the problem. It doesn’t. It creates a new problem – weaker credit status of the governments themselves, and in some cases like Iceland national bankruptcy.

So what should they do?

They were right to cut interest rates, though they did it a year too late. This will have some beneficial impact in due course.They have now cut them more than is sensible.

They should concentrate on getting the banks to change their approach. Banks need to cut their costs substantially. They have staff numbers and pay levels geared to the heady days of the credit bubble. They need fewer people paid at realistic levels to handle personal and business banking. They need to cut back their investment banks massively, closing out positions, selling investments and trying to minimise the losses whilst owning up the them and reducing the risks of their books. The larger weaker banks need to raise money by selling off parts of their businesses to those with cash and more wisdom to run them better.

Governments need to stop shoving cash down bankers throats as a reward for bad conduct. Under the current model the banks that did the worst job get the most cash from taxpayers. No wonder nothing works. The bad banks have to slim down and sober up quickly. Taxpayer cash delays them doing that.

If the authorities continue to follow the present absurd model more countries will have their credit worthiness brought into question. The main country players are already trying the competitive devaluation game to steal a march on others, and trying to find ways round the international rules to limit trade and encourage business at home. It is not a good background to recovery. No wonder markets still find it difficult to be confident about the future.

Trying to print the right amount of extra money to turn the economy without creating inflationary fears is not an easy trick to pull off. It would be more plausible as a strategy if at the same time governments reined in their wilder – bank oriented- spending – and showed they recognised there have to be limits to how much risk taxpayers can run and how much borrowing they can repay. Present actions show that governments have learnt nothing from the Credit Crunch. What was it all about, if it wasn’t designed by the authorities to send a warning to people and companies not to borrow so much? Why is it then a good idea for people and companies to be forced to borrow even more in the name of the state?

The announcement of large losses at AIG and a further US taxpayer injection into the US insurer came alongside HSBC announcing the wish to raise more money from shareholders to buttress its capital position.

There is no easy way out of this mess. The banks and insurers need to work their way through their problems, cuttting risks and costs as quickly as possible. Too many state bail outs delays the adjustment and wrecks the public credit. The markets are beginning to worry about state borrowing plans because they are so huge.

The Monetary Policy Committee when it meets this week should not cut interest rates again. It will doubtless announce “quantitative easing.” All eyes should be on how much and how it intends to do it.

It is high time the government announced how it plans to get public finances back onto a sensible path. Watching this government is like watching a man with a bonfire. He had a big blaze.(easy cash and capital rules, low interest rates) In panic he doused and doused it with water (high rates and tougher rules) until it appeared to have gone out. Now he is busily tipping ever more petrol onto it in the hope that there is still some heat which will ignite the petrol. One way or another it is not going to have happy ending.

Last week I attended a dinner organised by German hosts, who had gathered an impressive group of the economic and political establishments of the two countries to discuss the history and future of the Euro. I am grateful to them for their hospitality.

I am sure they were aiming to be friendly, but the exchanges I experienced reminded me why the UK can never become part of Euroland, viewed as a kind of Greater Germany by some of those present.

The conversations did not begin well. I was asked by a friendly German where I came from. I explained I came from Wokingham. Asked again, I said England. He wanted me to give him the name of a region, and went into a long explanation of his regional identity before asking me again.

I explained patiently that I fully understood regional identity and lander power in Germany, and was happy for him that he liked his land so much. I had no wish to change that for Germany to bring them into line with our system. If he wanted to understand my country he should know that we hate enforced regionalism in England, and have voted it down when given the opportunity. I am not and never will be a Rest of the South easterner. We dislike attempts to balkanise England and hate the EU’s refusal to recognise England as part of our history and identity.

The conversations got worse. I was asked pleasantly when we would want to join the Euro. They explained that they knew we did not want to join it now, and agreed with that judgement. The more I explained we never wish to join it, the more argumentative they became.

I was then told very firmly that if we carried on behaving like that – refusing to have regions and refusing to join the Euro, – we would “not have any influence”. They seemed amazed when I said I do not seek any influence. I have no wish to try to govern Germany, and wish her every success. I am certainly not going to volunteer further large sacrifices of power to govern ourselves in the vain hope that it will bring us influence over the government of the continent. To date it has not brought us any such influence. The EU project has continued on a pre-ordained course of more centralised power whether the UK has stood aside or has given away her rights to self determination.

The mood of the gathering generally was sombre. For the first time Euro enthusiasts realise there are threats to the Euro’s future. They are grappling with the problem of bailing out Eastern Europe, with the Euro fanatics keenest for Germany to pay the bills. There was a shock to discover that Germany’s successful export based economic model has been harder hit so far than the US’s debt based consumption model, as orders have dried up for German cars and capital goods.

My suggestion is that Germany should be less insistent on countries joining her union. She should concentrate on completing the union with the inner core who are willing and ready. She needs to understand us better so we might buy more of her goods. The single market was not a favour granted to the UK in a moment of weakness, but legal underwriting of Germany’s export superiority at a time of tariffs and other barriers worldwide. This has been largely supplanted by the world trade framework anyway since then.

So who should we be special friends with? I have always found the Commonwealth a better gathering, where the strong ties of language, history and culture create more of a family atmosphere. Let’s be friendly with as many as possible, but not strain to be more friendly than common interest allows.