Month: June 2009

Labour is not good at coups. A couple of Cabinet Ministers resigning after reading brieifing against themselves in the press was not enough to bring the government down. They could wound but not kill. If the Chancellor had said he was going, and if some other Ministers had lined up to threaten the same, things might have been different.

An alerted Prime Minister can now counter attack. He needs to reshuffle quickly and decisively, understanding that he has to consider his party’s opinions on who to have in crucial roles. A new Cabinet of cronies is not the answer. He needs to use a reshuffle to know more about his Ministers, and to assess who will stand by him and who might be able to do something sensible for the country.

What he needs above all is is to understand that his plan for the economy based on debt, debt and debt, is not going to be the answer. He needs to start the necessary task of reining in excess in public spending before the public finance crisis intensifies. I doubt he has it in him to do that. I fear he believes his own rhetoric.

What is strange is that amidst all this the Chancellor did not say to the PM “back me or sack me”. If he had demanded the PM speak for him yesterday in the Commons or else, I suspect the PM would have felt he had to back him. At least Gordon was lucky with his Chancellor!

Alan Johnson is being touted as a dream unity candidate. I wonder if Mr Balls would let him run without a contest? The problem with Mr Johnson is he has never hinted of having any alternative economic strategy that might work, and has never shown any understanding of what is wrong with the government”s current economic approach. He too is probably a bank nationaliser, an overspender, and someone who believes that more borrowing is the answer.

The Monetary Policy Committee will probably keep interest rates at 0.5% and chug on with their programme of quantitative easing. This policy will keep house prices higher than they need to be, will keep many savers starved of a proper return, will extend the government bond bubble,encourage too much debt and do nothing to sort out the huge imbalances in our distorted economy.

Sometime the authorities have to

1. End quantitative easing
2. Curb the public deficit
3. Bring the recommended interest rate into line with the reality of what banks are offering and charging
4.Offer help in the form of lower taxes and less regulation to the exporting private sector, to slash the trade deficit further

They may not want to start to do this even now, but they could at least tell us they want to do it, and sketch a timetable for returning their management of money markets to something more normal. Otherwise it will look as if they are just going in for a political fix for this year, delaying the essential adjustments the economy needs to make.

There is an air of death hanging over this Parliament. Yesterday I was able to ask a question in topical questions without winning the ballot to be be able to do so, because there was no one else wanting to ask anything. The Immigration debate was very thinly attended, despite the importance of the subject to our constituents. The business collapsed well before 10pm owing to a lack of speakers.

I date the general depression and lassitude to the attack on the Speaker. As I explained endlessly on this site, the Speaker was safe all the time Labour MPs supported him. Suddenly that comfortable majority and that solidarity and supportive briefing vanished. Labour decided the game was up, and withdrew their support. Labour does not seem to have a popular candidate of its own to be the replacement. Many Labour MPs think it would be wrong to have a third Labour Speaker in a row.

Now the rot is spreading to the government itself. Some Ministers feel their own interests would be best served by resigning. It is difficult to see what the purpose of the government is, and obvious that most of them are no longer comfortable within the government they have to support. Their backbenchers either do not turn up, or if they do are likely to ask awkward questions and express their displeasure at what Ministers are doing. There is an atmosphere of authority draining away, of people going through the motions, of a government drifiting.

Can a reshuffle make the difference? Probably not. If the PM chooses the wrong people for the top jobs again, it will intensify the resentments and the unhappiness. If he appoints only loyalists he will encourage a them and us mentality and may give his critics more life and courage. If he goes for a more balanced Ministry he may stabilise things a bit more, but he also needs to turn the opinion polls and give the new Ministers a sense of purpose.

Will they change Leaders? If the rebels are to do so they need to show more cohesion and purpose than they are showing at the moment. They need to identify a single candidate who is brave enough to do it. They cannot afford a long drawn out Leadership election with several candidates. They need to show resolve, and organise a better coup than the aborted one of last year. At the moment that all looks unlikely, but this is a very fast moving story.

Gordon Brown today gets his come uppance for the crude and unpleasant way Prime Ministers treat colleagues. He inherited from his two past predecessors the bad habit of allowing stories in the press in advance of a reshuffle setting out who is no longer in favour and who has to go. No wonder some Ministers have decided to call his bluff and resign before he can sack them.

This is not a day for sympathy for Miniuters, but let me be unfashionable. If we want Ministers who can do the job well, and who can concentrate on the task in hand, we need the Prime Minister to behave very differently. Newly appointed Ministers should be told what is expected of them, and told how they will be mentored and monitored. This rarely or never happens in government.

The Minister should undergo a private review of performance from time time to time – a Cabinet member from the PM, and junior Ministers from the Cabinet Minister in charge of their department. If a Minister is not measuring up to the job they should be given the chance to improve following private coaching and criticism. if they fail to make the grade they should be given warning that they may have to stand down at the following reshuffle. If they play the game they should not be monstered or briefed against in the press.

Instead we have a crude and nasty system. Ministers who have not been told to improve or change read in the papers that the PM no longer rates them, or read of someone else being groomed for their job. On the day of the reshuffle they are left on the end of their phones, paralysed and unable to command authority in their departments, if they have been given the black spot in the press. There are surprises both ways on the day of the reshuffle. Ministers often get shuffled into jobs they did not want and know nothing about. Then the same wearisome cycle begins all over again.

Proper career planning and time spent on finding out what talents and interests Ministers and potential Ministers have would pay handsome dividends. It is no wonder so many Ministries are so badly led, when you see how the bosses are appointed,and then how they are treated once in place. When I advised Margaret Thatcher I introduced a system of regular bilateral reviews between the PM and each cabinet colleague, so they had an opportunity to set out what they were trying to do, what problems they were encountering, and a chance to hear for themselves what the PM thought of what they were achieiving. It was important to have regular meetings to agree priorities, hammer out diffferences, and to identify early disagreements and disappointments on either side. 20 reports is a lot, but a busy and active PM could handle it. It also gave the PM a total strategic picture of what the government was doing, and enabled her to concentrate on the bigger issues that defined the strategy.

Witch hunting was always an overrated and unpleasant pastime. It is popular today. We will receive another instalment in the battle of the regulators, as the Lords concludes that the FSA were most at fault in the run up to the Credit Crunch. There will be further pressure to shift powers to the Bank of England.

The whole Tripartite system of regulation failed . Not one single senior person in the Treasury, Bank or FSA thought the banks were lending too much. Not one tried to blow the whistle on the most extraordinary credit binge we have ever seen.

They did not lack powers to stop it if they wished. They did not lack information. You could see it just by reading the published balance sheets of the top banks. The rules allowed excess and no-one making or enforcing the rules did anything about it.

The important issue today is not who was most to blame. It is why are we still operating with the same system? How can we be sure the regulators are now getting it right. They need to answer some serious questions about the current situation:

1. What is their view of bank support? When will they force the state banks to cut costs, improve business, sell assets so the taxpayer can be repaid?

2. Do the regulators agree our banks are too big to bail and too big to fail? When will they start to split them up to create a more competitive and more manageable industry?

3. Do they now understand that hiring more regulators to make more people tick more boxes did not keep the system safe? Why do they want to do more of the same?

4. Why do they want more and better paid people? How will they find the one or two senior people they need with overall judgement – and courage – to do what it takes to keep the system stable?

5. Why is the MPC happy with the current level of government deficit? Why doesn’t it warn the government that the size of bond issues needed threatens market stability and sensible interest rate policy?

6. How does the MPC plan to get out of quantitative easing? Is it worried about the big devaluation last year, and surge in commodity prices this year?

7. Is any regulator concerned about the bond bubble that seems to have built up?

My view throughout the last fifteen years has been that the Bank of England is best placed to regulate the banks, set interest rates and manage the money markets, subject to the overall political responsibiltiy of the Chancellor. I am not proposing more powers to the Bank because they had a good credit crunch, or following a witch hunt of the FSA. It just makes sense to put together all the levers you need to control to run orderly money markets and to keep credit within sensible limits.

I have been puzzling over the May 2009 Bank of England “Inflation Report”. It contains three charts. Chart 2 shows the forecast inflation rate if interest rates reflect market expectations, and Chart 3 shows what happens if interest rates stay at today’s current low level. The text tells us, as we would expect, inflation will be higher on the second forecast.

Try studying the graphs. It is like one of those Spot the difference picture competitions. I have puzzled and puzzled, but think they must have put the same chart in for both headings, as it looks the same to me.

It seems to confirm that the MPC and Bank are not as focused on inflation as they should be – or that they have too many staff tripping over each other with the publication, so no-one ends up proof reading it. Chart 1 is of course the forecast of GDP, implying that they are more concerned to target output these days.

The Us Treasury Secretary has difficult meetings this week with China. Getting the US/China relationship right is crucial to world economic progress. Somehow both sides need to move. The US needs to export more and import less, to save more and borrow less. China needs to import more and export less, to save less and spend more. Neither side has its heart in the changes it needs to make. Both are wedded to their old ways of doing things.

One of the central issues is the exchange rate between the two currencies. The simplest and quickest way of sorting out the imbalance would be to devalue the dollar. At a stroke US goods would be better value in China and Chinese goods would be dearer in the USA. China’s claims on the US through all the TBs and bonds it owns would be worth less,making them more nervous about saving so much. The USA would be repaying devalued dollars to clear some of its debt.

The US seems by its actions to favour a weaker dollar at the moment. The dollar has been falling on the markets. Very low interest rates and printing more dollars are an effective way of cutting the value of the currency. The Chinese are likely to tell the USA they do not wish to see further falls in the US currency, given their large stake in US debt. The US will have to say something reassuring to the bank manager, but are unlikely to announce interest rate hikes or an end to quantitative easing, so it will not amount to very much. Maybe they will say privately they have a plan to cut the deficit in due course. They will probably explain that China has to go along with massive US reflation, as the Chinese economy still needs export markets. They will be able to point out that China is effectively locked in to her dollar investments, as her position is too big to sell without substantial damage to the value.

In the longer term the Chinese currency will have to rise against the dollar. In the not so longer term the US is going to have to cut its trade deficit more and its government deficit substantially. This week will see some shadow boxing as the two big powers adjust to the US being the supplicant and the Chinese being the stern bank manager. It’s in all our interests they find a fudge to keep the show on the road. It’s even more important that both sides grasp that they do need to change their ways. Chinese people should spend more, and the US government does have to rein in its massive spending.