The Economic crisis – are you happy but not satisfied?

Yesterday I heard an account of where we are and what we need to do next.

In the popular mode of self assessment I had hoped we would be told the financial establishment were “gutted and dissastisfied” with their performance so far. Instead, our spoeaker blamed the bankers, told us the Regulators had to do more regulating, and advertised the attractions of investment in UK government securities.

He did not give us all the usual regulatory warnings. We were not told gilts could do down as well as up. We were not told to seek independent advice, as gilts may not be suitable for all investors. We were told they are “safe”.

I guess we are going to hear a lot more of this from the authorities. I understand the Treasury has a few to sell, understand the Bank is rather long of them, and understand the FSA is recommending them to banks on an heoric scale. If you look at most of the gilts available in the market, the one thing you can say for sure is you will make a capital loss on many of them if you hold to repayment by the government, as many are priced at more than £100 per £100 of repayment. It is true you could make a profit in the shorter term, if government and Bank buying power is used to push their prices up some more, and to force interest rates down further. It is also true you could lose money if markets worry about the volume of issuance and the extent of the borrowing requirement.

I would expect to hear from a measured public official comment on how the authorities plan to get us from a position where gilt prices are heavily influenced by a large government buying programme, to a position where the authorities can offload them again and sell the large volumes they need to sell. I want to know how the authorities think they can curb the mighty and rising deficit. I wish to hear how they can in future set interest rates which stabilise the economy, instead of continuing on the ruinous roller coaster ride we have suffered in the last decade. I wish to be told how they will start to make the right calls on banking cash and cpaital, not that they are going to intrude into an ever wider range of detail in banking in lieu of making the big judgements they are paid to make.

So, in the spirit of self examination, I am “disappointed but not surprised”.This site has offered advice to set interest rates, government borrowing and spending and banking rules in a way which would stabilise instead of destabilising the economy. That does not make me “pleased but not satisifed” with its performance. I remain “angry and unhappy” because the financial establishment has been so determined in the UK to make the cycle more violent, whatever we say.

Expect representatives of the public financial establishment to act as gilt salesmen from here. Pity the poor banks and pension funds which will be made to buy these stocks, locking into low yields after a long bull market in bonds. If all goes well they will earn 2-4% per annum interest on them. That’s not enough to fill the black holes in their accounts. If all goes badly they will be showing some unpleasant capital lossses at market price.

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7 Comments

  1. alan jutson
    Posted April 30, 2009 at 6:17 am | Permalink

    John
    A very interesting (and sensible) as usual, assessment of the financial market (in this sector), and your view on its long term performance.

    Given your speaker was probably representing some sort of a financial institution, I guess we can now all look forward to the big push on Guilt sales, as the next form of guaranteed investment for us all.

    The only people who should really be on the guilt trip is those that got us in this mess in the first place. BROWN & Co. Who should do the decent thing and resign.

  2. Ian Jones
    Posted April 30, 2009 at 9:46 am | Permalink

    Its patently obvious that the policy to get the banks and the country out of its debt mess is to get inflation going. At the moment the bank still has some credibility and can get away with buying guilts with printed cash but once real green shoots are seen then all bets are off.

    As happened last time rates were pushed very low, the pendulum swings to the other extreme. We have an unstable economy for 20 more years.

  3. Adam Collyer
    Posted April 30, 2009 at 10:01 am | Permalink

    Wonder what they’re goping to say to the banks? “Hey, you should buy our gilts instead of lending to those dodgy private companies”? “Buy our gilts instead of lending to those pesky inidividuals who want to own their own homes”? “Buy our gilts instead of investing the money in boring old productive industry”?

    What a shower they are.

  4. Janet Child
    Posted April 30, 2009 at 11:55 am | Permalink

    You’ve put your finger on it here!

    It’s in the best interests of the financial sector to foster “violent” cycles as that’s how they make their money both when things go up and when they go down (by short selling).

    They rely on the fact that most people don’t understand this so if you “blind people with science” and invent more and more complex “investments” you can make money out of peoples’ ignorance…

    or you can create a bandwagon mentality whereby you persuade people that they’ll miss the boat if they don’t “invest “now and so create a bubble.

    This must be what the government is hoping will happen with their gilts.

    Personally I don’t rely on anyone else (usually with a vested interest) when it comes to financial decisions and only put my money in things I understand myself.

    ie “keep it simple stupid”

  5. Pete Chown
    Posted April 30, 2009 at 3:11 pm | Permalink

    It sounds as though Brown is planning to finance the deficit by forcing people to buy government stocks. Pension funds and banks will be required to lend money to the government, supposedly for reasons of prudence, but it will of course help with the deficit too.

    I was thinking, in the bad old days, we depended on unfunded state pensions. We paid national insurance, but the government just spent it, rather than investing it so that it could pay the pensions when they were due.

    Now we are asked to save privately for our retirements. We put money in a pension scheme, which lends it to the government. The government then spends the money it has borrowed. So that the pension funds can pay our pensions, the government will in due course have to pay back the money that it borrowed from them.

    Essentially nothing has changed! The government still spends the nation’s retirement savings. A future government will still have to find money to pay the pensions of people who are saving now. Why does the British government have to be so imprudent, always?

  6. Waramess
    Posted May 1, 2009 at 7:55 am | Permalink

    I guess this then is the final goodbye to our pension funds.

    When inflation takes off, as undoubtedly it will, the market loss on some of the longer dated gilts will make losses on the stock market look like a walk in the park, and for those who hang on for fear of booking a loss: they will see inflation have the same impact on their funds.

    So, if you have a pension fund, for once, forewarned is not forearmed, unless that is you have a government pension scheme .

  7. sm
    Posted May 1, 2009 at 10:11 am | Permalink

    But we have 2 cycles , the political and the economic both manipulated.

    Suggestions:
    Elections and terms should be fixed.
    Electoral reform should enable, MP’s to be recalled by their local electorate for certain trigger events/offences and removed or returned as required.

    Limits on state borrowing and manipulation of the money supply should be made subject to super majority.This to then be followed by an election within 3 months.

    The comparatively insulated political class should have some skin in the game. Salary should be fixed to ratio of av wage,basic pension. MP’s Pensions should be fixed to ratio of the basic state pension. Not then too much need or reliance for so called independent committees- who are only human fallible individuals.

    This might align interests better.

    For example:
    The BOE pension fund has i understand switched investments to inflation protected investments.The BOE is pursuing a money supply policy which the pension fund seems to be protecting itself.

    Hoist them on their own petards, they then may take more care.

  • About John Redwood


    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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