Retire later, save public money

Today we are asked if we should abolish the fixed age of retirement. The answer is “Yes” and “No”.

The answer is “Yes”, because people should not be made to retire at a fixed age against their wishes. If they and their employers want to carry on with the contract, or if they wish to carry on and they did not sign a limited life contract, they should be free to do so. When I advised on pensions policy in the 1980s I proposed a flexible “decade of retirement” (from 60 to 70 in those days- it would now be from say 63 to 73 given greater longevity) so both men and women could chose.

The answer is “No” when it comes to the terms of the State retirement pension scheme and public sector pension schemes. A pension scheme needs to have a stated age from which the pension will be paid. This can be the default or average age, with increases in pension if you work and contribute longer, or reductions in pension if you retire earlier.

Given the state of the public finances we need to raise the retirement age for pensions purposes. Those wanting to contribute for less time should receive smaller pensions.

Sack Mr Bernanke

I fail to see how anyone can claim that the Fed or the Bank of England have been well run in recent years. We have just lived through the biggest boom and bust in money policy we have ever seen. The two main Central Banks that caused the blow up and then supervised the collapse should take the blame.

I appreciate Mr Bernanke was not primarily responsible for the build up of excess credit, but he was responsible for the bust phase. He should be replaced with someone who forecast the recession and demanded earlier action to deal with it.

How could Obama hot air become a banking policy?

The President’s wish to split off hedge funds, proprietary trading and venture capital from utility banking on the High Street could be done. If he just tries to do it in one country, even a large and powerful country like the USA, the mega banks will simply shift their ownership of these areas elsewhere in the world. If the US claims extraterritorial jurisdiction, then the mega banks based in the US could switch their HQs to another overseas territory. If he still pursues them, they could split their capital structures.

If all the main banking jurisdictions of the world agree some new Basel accord on the subject it is likely the big banks would get the message. They could sell off their private equity, trading and hedge fund arms as separate companies, or they could split themselves into investment banks containing the “naughty” business as defined by the President, and utility banks.

All this implies two things that I do not agree with. The first is, it implies the three specified areas were the ones that caused the problems, whereas in many cases this is not true. Secondly it implies that future bail outs of utility banks is acceptable. Surely we ought to be seeking a world where bail outs are not needed? Why does the taxpayer have to face more pain for banking incompetence and Central bank idiocy?

What we ought to be discussing is how to regulate cash and capital by banks in a way which makes failure less likely. We need to discuss why the main Central Banks got it so wrong, why they kept interest rates too low for too long to create the bubble, then held them too high for too long to create the slump. We need to understand they ran a boom and bust policy, and both phases were wrong. We need to find people to run the Central Banks who don’t drive by looking in the rear view mirror, but who can think ahead.

If we stick with the regulation of commercial banks, the Regulator could make it clear their guarantees only extended to the utility bank subsidiary in their jurisdiction, and that such businesses could be separately accounted so in the event of a crisis that could remain solvent and independent if the rest of the Group went down. Alternatively, we could just strengthen deposit insurance so all who we wish to protect in a crash have the reassurance that their money is safe and there is no need for a run on the bank to add to its other troubles.

In the UK we need to split up RBS and Lloyds whilst they still have large public stakes. If the minority shareholders do not like it then they must arrange for buyers to take all the government’s shares at a profit for the taxpayer to allow them to call the shots. We need to strengthen our competition policy, by explaining to our Competition authority that the aim of policy is to get much more competition into High Street banking in the UK, supporting the policy of splitting RBS and Lloyds.

Which leaves us with the need to regulate cash and capital. I still favour this, though there is no evidence from the recent past that the Regulators knew how to do it. We should try again. All banks and financial businesses taking positions on their balance sheets and offering to pay people their money back at some point in the future should be expected to keep minimum levels of cash and capital. These levels should normally be higher than they were in 2007. In the short term they should be lower, as we need to generate more loans and financial activity to help the recovery.

Soemtime we need to come off quantitative easing and very low official interest rates. This is just a money go round to let the government spend too much, and to allow the banks to earn easy money. It does not help the rest of the economy, still struggling with too little credit at too high a price as a result.

Obama bashes the banks to shift the blame

I have been asked what I think of Mr Obama’s comments on bank regulation. I think they are good modern politics. For Mr Obama, it was bash or be bashed.

The US public – like the UK public – were not happy that so much of their money was tossed into propping up banks, or put at risk underwriting them. They became livid when those same banks, a year later, were busy paying their top executives mega bucks in bonuses as if nothing had gone wrong, as if they had earned the money by their own great talents.

Mr Obama has just had a very bruising encounter with the US electors. Both the winning and losing candidates in Massachusetts stated that the big issue was Obama’s very own unpopular health care plan. Mr Obama says he is quietly parking or delaying the offending big idea. Now he needs to change the topic and find people and institutions more unpopular than himself. Enter the bankers.

Like many modern politicians Mr Obama is good at moods and soundbites. He ought to be, as no doubt they spend a fortune tapping the mood and polling the words. So far he has proved useless when it comes to executive action, unable to develop honed policy and put it through. Closing Guantanamo was a great soundbite, but a year on it hasn’t happened. Changing the approach to the Middle East with a new kind of foreign policy sounded good, but the intensified Afghan war looks like Bush mark two. Offering healthcare to those who could not afford it sounded heroic. Instead many middle Americans feel threatened with higher cost health care and higher taxes.

So what is Mr Obama offering for his new banking policy? We do not know. There were two short paragraphs, designed to send a single message – he welcomes a fight with Wall Street. It worked with the tabloids, but it is scarcely a considered policy towards banking regulation.

He also implied that some banks were too big, without defining how big a bank should be and without naming the ones he had in mind. He wants big banks to get out of hedge fund activity, proprietary trading and private equity.

If he had bothered to thinik about the crisis we have lived through, he would have noticed that the two biggest catastrophes in the US were Freddie and Fannie. These are both specialist mortgage banks, brought down by advancing too much mortgage to too many people. His remedies do not tackle that issue. He might have spotted that Lehmans went bust. That was a specialist investment bank, that would also be unaffected by his two paragraphs. If he had looked across to the UK he would have seen that Northern Rock, Alliance and Leicester and Bradford and Bingley were also all specialist mortgage banks.

Out of his soundbites could come a sensible policy. As readers will know, I do want the two UK state owned mega banks broken up. They were too big to fail and too big to bail. The break up of banks that needed taxpayer support and might need it in the future is a good idea. Ensuring that in future they have more capital at the dangerous stages of the cycle would also be a good idea.

So was George Osborne right to back Obama? Yes, he played it shrewdly. He welcomed Obama’s interest in better banking regulation, and said it must be done globally. He also implied that Mr Obama’s message was the beginning of a long process of negotiation, not a settled answer for the world. That would be a kind way of putting it. Mr Obama came up with a bare knuckles soundbite. Maybe sometime the governments of the world will get round to getting some justice for hard pressed taxpayers, who were made to put too much into propping up some banks that did not not deserve it. They should have helped depositors, but they should not help bankers pay themselves too much.

The rise and rise of China

A few years ago the world’s four largest economies were the USA, Japan, Germany and the UK. We have long warned readers of the UK’s spectacular fall from grace, which is still continuing. The UK is now in seventh place and still declining. The sharp sell off in sterling last year, allied to the contraction in GDP, has propelled the UK below France and Italy.

The rise of China will also be familiar to visitors to this site. China has stormed up the league tables, to reach the second slot in a table of the world’s largest economies. This has mainly been achieved by growth rates of close to 10% per annum, based on her huge success as an exporter.

When I wrote Superpower Struggles in 2005 I forecast:

“A much more effective competitor to the US, potentially a major global player, is rising in the Far East. … It (the Chinese economy) has already overtaken Italy to become the world’s sixth largest economy, and will soon pass the size of France and the UK at market exchange rates. By the next decade it will be larger than Germany, in third place, poised to overtake Japan.”

The forecast was almost too cautious, as China only waited for three weeks of the new decade before announcing her second place.

Before the latest phase of China’s rise and the UK’s decline, the top four economies of the world had a certain balance. The US and UK were heavy borrowers. Their consumers sucked in imports from the successful exporters. Their banks and borrowers drew on capital from the savings of the successful exporting economies. In contrast, Germany and Japan were economies driven by savings and manufacture for export. It is true that the US was a lot bigger than the other three, but for a number of years it was a relatively stable system which let the Anglo Saxons borrow and spend, and the others save and sell overseas.

China’s rise now has an important impact on the world economy. China’s huge stimulus last year helped end the recession in many parts of the world. Now China’s early wish to rein in bank lending before the bubbles grow too big is sending shivers around world markets as changes in the Fed’s attitude always do. The arrival of another export led high savings economy at the top of the tables makes it even more competitive for Germany and Japan, struggling to handle the sharp downturn in demand triggered by the bursting of the borrowing bubble on both sides of the Atlantic.

Nor should we think China’s arrival in second slot marks an end to this period of rapid change. Whilst it is going to take a good few years for even China to catch up with the size of the US economy, we could well see India from just outside the top ten and Brazil from tenth slot advance up the rankings. Going in the opposite direction could well be Spain and Italy as well as the UK, as all suffer from economic weakness in an ever more competitive world.

What lessons should we draw from all this? The first is that this remains the age of the Pacific. Two of the largest economic gainers are and will be China and India. There is a decisive shift in economic power occurring from old world and western world, to new world and eastern world. It could have a lot further to go, as these emerging economies have many more people to shift from agriculture to more productive activities. They remain with low incomes per head, able to apply existing technology to catching up the west.

The second is that the big gulf between the exporters and the borrowers has become too large and is now a cause of instability. Adjustment hurts both sides. Indeed, Germany and Japan, the exporters, took a bigger hit than the leading borrower, the USA, during the last downturn. From here we think the borrowers are going into leaner times, as they have to rein in some of their excess consumption and borrowing.

The third is that there remains too much capacity around the world. The older and dearer exporting countries, like Germany and Japan, will probably struggle more to adjust than the newer and cheaper exporters like China.

Rising interest rates – Ouch! Mind the mortgage.

Yesterday in the Commons during the debate on the deficit reduction I warned the government again about rising interest rates. I tried to explain to them that if they persist with huge borrowings and so much overspending, it will drive interest rates higher, damaging the recovery in the private sector. I explained that the markets could do this on their own, whether the Bank of England left interest rates on hold or not.

This morning I awoke to read that Skipton Building Society, one of Labour’s own preferred mutuals and a specialist institution taking deposits and lending for house purchase, has hiked its interest rates. It feels it cannot compete for deposits from savers unless it does so.

The Minister of course was unable to refute, comment on or accept my remarks. It is such a pity they neither listen nor understand what is happening to the economy, preferring their ludicrous soundbites to the realities of the markets that are now beginning to bite them.

Skipton have hiked their standard rate from 3.5% to 4.95% – a big rise of 1.45% or over 40%. It’s 5.2% if you do not pay by direct debit. That’s a mighty long way from the 0.5% the government boasts about in the Commons.

I must say I enjoyed reading the Skipton’s account of what it is doing. Their site begins with an all too true remark “At Skipton BS we know every penny matters”. No doubt that’s why they need more of them.

Wokingham Times

There are many unsung heroes in a working democracy. Each of the main parties relies on volunteers to deliver leaflets, to tell the public about their local and national party policies and actions, and to support their Council candidates. They also rely on volunteers to come forward to contest seats where the prospects of winning are not good as well as where they are good. No greater love hath man or woman than this, to give up their evenings and week-ends to campaigning in places where in the past their parties have done badly.

I remember it well when I fought Peckham for the GLC and for Parliament before I came to Wokingham. I am therefore usually sympathetic to Labour candidates in Wokingham, who see the need to tell us about their party and its national ambitions and deeds, but who in the past have not found enough support to win. We need Labour to take Wokingham seriously, just as Conservatives should take Peckham seriously. A national party needs to feel comfortable in both places and to understand the needs and views in both. They are different in many respects. To be a national party you need to explain your views and actions in every constituency, and keep alive political activity in your name. National parties should not take victory for granted in some places, and write off their chances elsewhere. Upsets can happen.

I am pleased that Labour has an active prospective candidate sending out press releases and seeking attention in local newspapers. That is good news for democracy. No-one should resent a fair debate. Democracy is about choice, and electors should have all the main offerings before them when they vote. What I find disappointing is that our local prospective Labour candidate is silent on the big issues of the day. He does not tell us about how Labour will control the large deficit they have built up. He does not explain why the UK is still in recession according to the Chancellor when most other countries got out of it months ago. He does not explain why they spent so much money on propping up banks, yet small businesses are still unable to borrow enough at realistic rates of interest.

He has instead one main interest – my expenses. If he wishes to make that the big issue I think he has some explaining to do about Labour MPs’ expenses. In order to help him I have some questions for him that he might like to answer when he next writes about it.

In 2007-8 I was the 19th cheapest MP, with total expenses of £105,917. I set myself the task – before the expenses issue blew up in the papers – of cutting my costs by 10% in each of the following two years. I am pleased to report that my expenses will come in well below the £95,000 target I set for 2008-9 when we see the total audited figures, and should come in well below the £83,000 I set for 2009-10 this year. This compares with an average of £144,000 for all MPs in 2008-9 (this audited figure is now available at last).

My questions are these. Why do Labour MPs cost the taxpayer so much more than I am doing? It’s not all additional travel for the ones that come from further away. Why do London Labour MPs on average charge more than I do? Why did the average Labour MP cost around £50,000 more or one third more in 2008-9 than I charged? Why did the Prime Minister have to pay back more than £11,000? Was he wrong to claim that money in the first place?

What would his budget be for the first year were he elected? If he thinks he could do it for less than me, can he explain why current Labour MPs cannot? I would give serious consideration to any sensible budget he cared to propose, as we can all learn how to do better with less spending.

I want Parliament to offer a lead in cutting the deficit. We have to show we can deliver more for less, because we are going to ask the rest of the public sector to do just that.

Living standards plunge

This week the government announced prices are going up by 3.8% a year before the VAT increase, excluding mortgages, or by 2.9% on its preferred measure of the CPI. Most commentators think that will rise again in January. Meanwhile the Council leaders announced there would be no pay increases this year. That means local government workers join the many industrial workers who had no pay rise last year, though it still will leave them better off than the many workers in the private sector who have been on short time, experiencing pay cuts.

In other words, this year, even before the Election, millions are contemplating a year in which their spending power falls by at least 2-3%. It takes special economic incompetence to deliver a fall in living standards on this scale.

Some months ago I forecast a big squeeze on living standards on this site. Labour immediately seized on my remarks and tried to make out I recommended it or wanted it. Let me make it clear again today. Like most MPs I want to see living standards rise. Unlike a majority of MPs, I recommend economic policies which could deliver that happy goal. Then, as now, I am predicting what will happen under Labour’s economic policies. They encouraged the private sector to live well beyond its means in the boom days. They presided over banks that lived well beyond their means. Now they are bloating the public borrowing, making the public sector live well beyond all our means. Even they at last recognise this cannot go on. After their booms come their busts.You cannot solve a crisis of over borrowing in the private sector by borrowing too much in the public sector.

I expect the plan was to try to keep things going until after the election – borrow all they could to see them through. Unfortunately for them the markets are running out of patience, putting interest rates up. The pound has fallen, so their money goes less far, as we learn today with the Foreign Office budget. And now, the Councils have been squeezed a bit so they are telling us the truth. If they are to avoid major redundancies, they have to offer no pay increase. Against a background of surging prices that means lower living standards.

The private sector, which was living well beyond its means, has been reining back hard on the debt. Individuals have been repaying credit card borrowings and cutting the mortgage where they can. New borrowing has been very restricted. It is now the public sector which has gone to extremes with the new borrowing. Yesterday we debated the Deficit and the government’s absurd Fiscal Responsibility Bill. I pointed out that the government has taken out a whopping mortgage for us all, which it has told us about,(gilts) but it has also taken out a second mortgage,(bank nationalisations) lots of hire purchase(leases) and maxed out on various credit cards ((PFI/PPP)without putting all those figures into the official borrowing stats they like to quote. Now we are into the final phase, the visit to the Pawn brokers. This week UK shareholders sold the rest of Cadburys which they still owned to a foreign buyer. There will be more of that to pay the bills we have run up not covered by our earnings. If we carry on importing our lifestyle from China, we have to find a way of paying off the debts we incur as we do so.

Cadbury – a foreign owned company is taken over by new overseas shareholders

Many of Cadbury’s shareholders who will shortly vote to sell their company are overseas individuals and institutions. In this gobal world one group of overseas shareholders will sell to a new group of overseas shareholders. It is not quite as some present it. The Cadbury family ceased to own and control it years ago. As a major quoted company on an international stock market anyone can come along and buy shares.

Cadbury is currently led by an international management team. It is true the UK is well represented in that team. It is the senior managers who are keen to sell to the new overseas shareholders. The new shareholders will put in a different international management team, which will also include some British people in some of the important jobs.

Of course there is in me that same feeling as many share today. Why can’t we have great British brands, with products from good British factories, owned by British shareholders? Wouldn’t that be good? The answer to both, is Yes, we can and it would. No government, however, is going to stop British managers selling out if they wish, or stop international shareholders selling their shares for a good price, unless there is a competition policy reason to block the merger. Cadbury ceased to be a plucky British company years ago. Fewer than 10% of its employees work in the UK.

Will the UK factories survive? I hope so. The truth is that British managers and British shareholders have been known to close UK factories and switch produciton abroad when the figures show that is the right commercial thing to do. British ownership does not protect all UK jobs. Foreign ownership does not mean automatic closure. Nissan. Toyota and Honda have done much more for UK motor industry jobs than Britsh Leyland, Rover and the UK government did. Time will tell how much commitment to the UK Kraft will have. The workforce and the British government can make the future of the British factories more certain by their actions. It needs to be better made in Britain. The UK needs to have an attractive tax and regulatory system so people want to invest here.

Should we abolish the Monetary Policy Committee?

Mr Blanchflower resigned from the Monetary Policy Committee. He now thinks it should be abolished because it did not agree with him whilst he was on it, and may soon disagree with him again.

Readers of this blog will know that I too have been constantly critical of the various calls the MPC have made, in the run up to the Crunch, during the Crunch and in the aftermath of the Crunch. The MPC was told to keep inflation around 2%. They allowed it to soar well above target, they forced it to slump well below target,.and now they are letting it surge well above target. It is not a good record.

The MPC are given the task of regulating the economic clock so it always gives steady and reliable time. Instead they speed it up too much when it is already running fast, and slow it down too much when it is already in danger of stopping. Mr Blanchflower is someone who favours speeeding the clock up. He recommends lower interest rates and loser money. He is trying to fight unemployment and recession, and thinks you can do that by printing money – if only. Inflation well over the target rate does not seem to worry him.

The MPC remit is to control inflation. They have failed to do this. They need to think again about why they have got it so wrong, and try to do better in the future. Who are they kidding with their current 0.5% interest rate? Have they not noticed that everyone else has to use much higher rates than their recommended rate, and even the government now has to pay a lot more for most of its money.