Month: April 2009

Several people have reminded me that the government and Bank are going round in circles. They have sold £3.5 billion of 2015 stock, and bought back £3.5 billion of stock with maturities in the range 2014-18. They did the first to fully fund their spending. They did the second as part of their quantitative easing policy.

What’s the point? It makes work for the Debt management Office and the Bank. There is the chance that the people selling the gilts back will then go and spend the money and help create more activity, whilst there is also the chance that the people buying the new stock would not have spent the money anyway and might not have kept it here in the UK as a bank deposit. That might have been a pig flying past your window.

I think it shows there is still muddle around what they are trying to do. One simple way of easing money supply is to sell less debt than you need to borrow and print the rest. It is more difficult doing it by fully funding the deficit first, then negating some of that by buying back similar gilts to the ones you have just sold.

It would help the markets if we knew what they are trying to do. Is there a target interest rate for longer dated government borrowing they wish to hit? Is there a specified quantity of money they are trying to create? Do they have a target in mind for the increase in bank deposits? They are in danger of paralysing the gilt market because no-one really knows what the authorities are up to, but they do understand that for the time being the authorities can make the prices what they want them to be. If they do not maintain confidence in their actions they will lose this ability, and then things will get a lot tougher for them.

Yesterday I was asked to step in to speak to a lunch of Parliamentarians and business people in the House of Lords because the Governor of the Bank of England had cancelled. He was detained in the Bank, unable to get in and out easily owing to the protesters.

I decided to develop two of the Governor’s sensible remarks last week. I hope he privately approves of what I said. He himself is rather more constrained than I am by his need to work with the current administration.

I began by praising his comment that the UK cannot afford another “reflationary” package. I went on to agree with his comment that switching inflation targets in December 2003 made it much more difficult to conduct a sensible money policy during the build up of excess credit and lending.

We have three simultaneous crises that egg each other on.

There is the monetary crisis. We lurched from too much cash and credit in 2007, to too little in 2008. The authorities are now literally printing money to try to get cash and credit growing quickly again. If they succeed too well it will be inflationary.

There is a banking crisis. The banks lent and borrowed too much. The Regulators egged them on by approving their business plans, ticking their boxes and setting requirements that were too lax. Now we have a series of broken banks that need to get on with the job of managing their bad loans and worse investments.

There is a collapse in parts of the real economy, led by the property and housing crash and followed by the auto crunch. The real economy will not work well until money and banking are stabilised. The saving and exporting economies need to spend and borrow more. The importing and over borrowed countries need to save and export more. The G20 needs different solutions for different countries, not a new credit bubble based on government bonds.

The rest of what I said will be familiar to readers here. It can be summed up in four soundbites.

You cannot solve a crisis of over borrowing by borrowing more.
You do not make toxic debts friendly assets by nationalising them.
It does not help solve the crisis by undermining national credit worthiness. There must be prudent limits to how much a country can borrow.

The Governor might be pleased to be reminded I do want to see the Bank of England reunited with full Central Bank powers to handle government debt and regulate the banks. That way we might go back to avoiding monetary disasters and banking crises.

You have to be power mad or government greedy to think the answer to our current economic problems is to tax lower tax countries more.

Step forward Mr Sarkozy, threatening to wreck the summit if he doesn’t get his way. Step forward Mrs Merkel and the core EU to support him.

You have to be mad or bad, to think the solution to the problems of world capitalism is to smash the windows and break the computers in a nationalised bank in the City.

Step forward the violent protesters against the G20.

The problem with the Franco-German stance is it makes no sense. It cannot possibly solve the current problems. Threatening more regulation and higher taxes in the future is not suddenly going to persuade people to buy more cars and homes, is not suddenly going to resolve the current impasse in the banks, nor will it suddenly make monetary authorities wise and supportive worldwide so we can carry on as if nothing had happened. Trying to tax people in Jersey more, or trying to limit what hedge fund managers can buy next year will not create a single job, write a single new mortgage, or buy a single new green source of energy.

The problem with the yobs and protesters is they have no positive agenda. Destroying wealth others have created does not make the poor rich. Invading a nationalised bank is an attack upon poor as well as rich UK taxpayers, as we all have to contribute money to repair the damage and to pay for the huge police presence to stop them smashing up more banks. Breaking windows means more energy will be expended making more glass to replace the ones we have lost. That means hastening climate change on their own theory, the very climate change they claim to want to prevent.

The G20 will cobble together a communique with hopeful words and confirmation of reflationary action already taken by the major countries. It will be a small step on the road to more world power for China. President Obama will fly east with his reputation for articulate charm intact and with the prospect of a nuclear arms agreement with Russia closer. No great harm will have been done. The G20 will not save the world, but it shouldn’t make the situation any worse.It will have put some money in the tills of some London businesses, whilst disrupting the lives of many other Londoners.

Even Mr Sarkozy will probably stay and eat all the meals provided for him. I don’t care whether he does or doesn’t. He just reminds me why I think the EU can be such a deeply unhelpful organisation dedicated to too much useless regulation and to high taxes, at a time when we need lower taxes and good regulation of the things that matter most.

The EU’s vast and expanded army of regulators over the last decade was looking the wrong way and regulating the wrong things in financial services. Instead of rewarding these regulators with higher salaries, bigger bonuses and more assistants, to make a bigger mess in the future, we should be changing regulation for the better. We need fewer regulators, but ones who can see where the true problem lies. We need people who understand the need for prudent regulation of overall cash and capital. We need people who can reduce all this box ticking process driven detailed work which did not stop a single dodgy mortgage or stave off a single banking failure. We need regulators who understand that making everyone show a passport and a gas bill before conducting a transaction does not prevent money laundering and is a waste of time and money.

Yesterday I tried to make it easy for the Chancellor. I asked him a question I have asked before, thinking this time he might have thought about it and have an answer to hand. I should have known better.

I asked what limits he thought there needed to be to public borrowing in current conditions, to avoid any danger of gilt market strikes, trips to the IMF or national bankruptcy. He treated me to a lecture about how we have to borrow during difficult times, as if I disagreed with that or thought we could somehow avoid some borrowing. He failed to answer a civil question with a helpful answer. Doesn’t he realise the question I asked is the one many people need to know the answer to? Markets need to know there is a way out of excessive borrowing. They need to know there are some limits and some startegy to keep the public finances in order.

We used to have a control framework. It wasn’t a very good one, and it was subject to political change, but for several years it seemed to work and the government got away with it. There was a control on how much the running deficit could be each year, and a control on the total stock of debt as a proportion of naitonal income. In theory the government only borrowed for investment, not for day to day expenses, over a cycle as a whole.

Neither of these two controls now operate. The government is flying blind, feels free to borrow and print as much as they like, refuses to come clean about how much or when they might slow down. Meanwhile they add more and more debt onto the groaning taxpayer, as they collect bad banks and bad loan portfolios for the taxpayer to bail out or guarantee.

I urge the Chancellor to think again and to drop me a line to answer the big unanswered question. Commentators are filling in their own sums, and some of them are going to be scary, in the absence of credible official figures.

The media should start reading what the government does put out. Instead of using the £78 billion Chancellor’s figure for 2008-9 borrowing, they should use the published Treasury figure of borrowing in excess of £150 billion, well above 10% of national Income.

In the first few years of this government Prudence was at hand to offer some restraint. Mr Brown divorced her, and Mr Darling claims never to have met her. One day he will wish he had. She is a great lady who may take her revenge.

Today’s gesture to cut back top civil service awards to just 1.5% will make practically no difference to the problem of controlling costs in the public sector, whilst annoying senior civil servants.

I would think it fair if MPs had no pay rise this month, as long as pay rises were cancelled for anyone in the public sector earning more than £50,000. That would make a bit more of an impact, and give all public sector leaders and managers some moral authority to start reducing costs and improving efficiencies throughout their empires.

Sometime the government has to show it understands the magnitude of the public borrowing crisis it is bringing on us. Saying no pay rise to all the better paid in the public sector would be a relatively painless way of starting to wake up to the reality. It should be followed up by reviewng all public sector jobs paying more than £100,000 a year to ask are they needed and do they need to offer such high rewards? Why not link any bonus payments to clear targets for cost reduction and quality improvement in each command, so we get something for all the extra money we are paying these people? If they want to be called Chief Executive they should at least be prepared to take some tough decisions to get costs down, as the private sector is having to do on a massive scale at the moment.