Good news from America

In the US we have seen better figures for employment, rising output and a stronger Stock market. This morning we hear that most of their banks pass a tricky stress test. Why are they doing better than Europe?

It all comes back to the banks and the currency. The US left their main clearing banks in the private sector. They taught the bankers a lesson by allowing Lehmans to fail. Their banks were soon weaned off temporary assistance from the authorities. Most of their banks are now in reasonable health, and capable of financing a recovery. The Fed has not needed another round of quantitative easing. The US single currency is a settled system, backed by a political sovereign, and making large transfers from richer areas to poorer areas.

Meanwhile, in the EU, the banks are still not properly fixed. In the UK the two large ones with state shareholdings remain weak. In Euroland the banking systems of Ireland, Spain and Greece in particular were weak. Ireland has had to tackle it by massive state aid to its banks which dragged the country into special measures asnd subsidised international loans. The Euro currency does not work for the peripheral states. Too many places end up with the wrong monetary policy and the wrong exchange rate. They do not receive the large compensating subsidies the poorer parts of the dollar union receive from the centre.

In the UK the banking regulators remain tough, demanding more cash and capital to support the volume of loans they have already made. The wish to clamp down on mortgages has led to the demand for much higher deposits from home buyers. This in turn has led the government to bring in a scheme to offset some of these tougher rules, as the government is frustrated at the sluggishness of the housing market which results from some weak banks and a newly toughened regulator. If you do not fix all the banks, one intervention leads to another, some of them pointing in opposite directions. The present tougher cash and capital restrictions will also lead to Credit Easing, a policy designed to offset some of the new regulatory muscle.

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33 Comments

  1. lifelogic
    Posted March 14, 2012 at 6:15 am | Permalink

    It seems to me that the lack of banking (Natwest/RBS group in particular) is indeed the main problem. Bank are just not lending on a sensible basis to sound businesses and this is delaying recovery (due to the new capital rules Basel 2+ and the generally dis-functional banks). It is also hitting confidence. There are examples where lending has been cut in half for no real reason related to the business or risk just lack of bank lending.

    Of course the usual over taxation and over regulation of everything, the expensive green energy nonsense, lack of pro business vision and the Ted Heath like Cameron’s pro EU
    socialist approach to everything, do not help either. Also the clear prospect of Labour likely in May 2015.

    Energy in the US is very cheap but in the UK it some of the most expensive and most over taxed. Growth need cheaper energy systems that actually work. Not the absurd Chris Huhne religion.

    • Disaffected
      Posted March 14, 2012 at 9:44 am | Permalink

      Lifelogic,
      At the last election a lot of people voted to get Labour out, not to get Tory in- the same was true to give the Lib Dems a bloody nose with the AV vote. The election campaign was so weak no one even knew what the Tory party stood for (Lord Ashcroft was absolutely right on this point). Had the Tories stated that it would continue with Labour’s socialist position of spend and borrow, more immigration, more integration with the EU then Labour would still be in power. Brown was the downfall of the Labour party together with Blaire’s Iraq war.

      Deluded Tory MPs think that by changing to Pro European socialists, denouncing the church and Christian values to appease Lib Dem atheists and to change the accession to he throne so women are on an equal footing in the monarchy will make them vote winners. Oh dear. All of this assumption based on current polls/surveys. Many people like me have already seen enough to know I will not vote Tory at the next election. Not a chance.

      Benedict Brogan’s article int he DT today only shows him to be deluded or a complete sycophant. If Tory MPs concur with his sentiment in his article today they are truly deluded and I think they will not be in office for much longer (2 1/2yrs). However, their socialist Lib Dem partners face annihilation and will not blink to jump in bed with Labour- what other choice will they have, when at best, there will be a handful of Lib Dem MPs left?

      Wake up Tory back benchers, Cameron has to go even for your party to stand a small chance in 2015.

      • lifelogic
        Posted March 14, 2012 at 3:54 pm | Permalink

        Cameron will not go and to be fair he is still a very good presenter, he says many of the right things he just never does them. He needs a navigator and a party to push him in the right direction. I can’t see him being replaced before the next election but one wonders how any promises he now makes, cast iron or otherwise, will ever be believed this time round.

        • Robert Christopher
          Posted March 14, 2012 at 7:51 pm | Permalink

          “He needs a navigator and a party to push him in the right direction.”

          But apart from that he is a good leader! 🙂

        • BobE
          Posted March 14, 2012 at 9:14 pm | Permalink

          Liebour will win by default. The Lib Dems will vanish. UKIP will get stronger.

          • Disaffected
            Posted March 15, 2012 at 8:37 am | Permalink

            Totally agree. I will vote UKIP even though I am in a Tory Lib Dem marginal seat.

        • Electro-Kevin
          Posted March 15, 2012 at 9:39 am | Permalink

          With Ed Miliband leading Labour, Cameron can’t lose.

          As Lifelogic says; I voted Conservative to get Labour out but such was the disaffection among Tory voters that the Conservatives couldn’t win, even against such an awful government.

          The most unpopular policies of the previous administration appear to have been reinforced under the Coalition.

  2. Alex
    Posted March 14, 2012 at 10:45 am | Permalink

    Another significant reason for US growth; they are extracting huge amounts of natural gas from shale; therefore US energy prices are dropping in real terms. What a pity we can’t do the same, despite probable large shale resources, because the Greens are in charge of energy policy and want to drive up prices.

    • Disaffected
      Posted March 15, 2012 at 8:38 am | Permalink

      The Green agenda is okay to cast aside if you want to travel in a Boeing 747 for a 70 minute flight in Airforce 1 to a basket ball game.

  3. forthurst
    Posted March 14, 2012 at 11:10 am | Permalink

    “They taught the bankers a lesson by allowing Lehmans to fail.” “They” of course being banksters from a rival organisation wearing different hats.

    http://www.nytimes.com/2012/03/14/opinion/why-i-am-leaving-goldman-sachs.html?pagewanted=1

  4. Alan Wheatley
    Posted March 14, 2012 at 11:22 am | Permalink

    “…one intervention leads to another, some of them pointing in opposite directions…”.

    Looks to me like an indicator of a lack of vision, or a lack of understanding, or more likely a combination of the two.

  5. Neil Craig
    Posted March 14, 2012 at 11:28 am | Permalink

    I think the promary reason is another one.

    In America the development of shale gas has proceeded with relatively little government interference. Probably largely because Obama never noticed it and partly because the US constitution provides a preumption towards freedom.

    As a consequence US gas prices have plummeted and electricty and related prices are falling.

    Economic Freedom + Cheap Energy = Growth

    In Britain, though we know shale gas is available under Preston, in quantities rivalling North sea oi every effort has been made to slow iits development and the prevoius energy minister, Chris Huhne, specifically promised to suffocate it to prevent it it further undercutting subsidised wind. Our energy prices have been rising and are set to rise at least another 60%.

    All the fiscal measures in the world may steer the economy in a good or bad direction but technology and energy provide the motive force without which we inevitably lie dead in the water.

  6. Denis Cooper
    Posted March 14, 2012 at 11:39 am | Permalink

    I see that Andrew Tyrie has said that Greece should leave the euro:

    http://www.telegraph.co.uk/finance/financialcrisis/9139702/Greece-should-exit-the-euro-says-Treasury-Select-Committee-chairman-Andrew-Tyrie.html

    That is obviously right, from several points of view.

    I wonder when our government will finally come round to seeing that far from tamely co-operating with whatever attempts are made to preserve the present eurozone intact, it should be actively working for the eurozone to be cut down to a size which is intrinsically stable and so does not need the establishment of something like a dictatorship to prevent it from falling apart.

    Reply: As you know this has been my view for sometime and I have sketched how it could be done legally. Ministers are unlikely to argue for this in public, as they know it would be seen as unfriendly and unhelpful to the Eurozone members. Let us hope they move to arguing it in private, as it would be good advice.

  7. Lindsay McDougall
    Posted March 14, 2012 at 12:18 pm | Permalink

    One thing that America has not yet got right is its fiscal deficit. America’s total government debt is in excess of 90% of GDP and still rising at a fair pace. That country is run by a neo-Keynsian who seems to be fond of wars but won’t finance them the honest way, through taxation. It doesn’t matter how rich and powerful you are, too much red ink will bring you down in the end; the bigger they come the harder they fall.

    Why is David Cameron cosying up to Barack Obama so much? He would learn much more about containing public expenditure increases if he were to talk to Mitt Romney and Ron Paul.

  8. David John Wilson
    Posted March 14, 2012 at 12:31 pm | Permalink

    Why is it that both of the major banks where the government holds all or most of the shares have in the last week declared redundacies that include jobs being allowed to go abroad? Surely even if as a result these banks make slightly less profit it is the governments responsibilty to stop this happening.
    The tax take from around 250 people plus the resulting savings on unemployment benefits surely far outways any savings that the banks might make.
    The government needs to take action to reverse this export of jobs immediately.

    • lifelogic
      Posted March 14, 2012 at 3:58 pm | Permalink

      You ask “Why is it that both of the major banks where the government holds all or most of the shares have in the last week declared redundancies”

      I assume they have just decided to sack all the lending manager and replace them with an answer phone saying “no you cannot have a new loan and also we want the old one back too.” as they clearly have so little money to lend to business.

      • David John Wilson
        Posted March 14, 2012 at 11:48 pm | Permalink

        If the banks paid a reasonable rate to depositors they would have more money to lend.

        • Dr Bernqrd JUBY
          Posted March 15, 2012 at 4:18 pm | Permalink

          Couldn’t agree more! There is a huge grey “pension power” sitting out there but with such a miserable rate of return on our savings we need everything that we can ger just to keep pace with inflation, cost of living and energy bills.

  9. Antisthenes
    Posted March 14, 2012 at 12:31 pm | Permalink

    The USA is in many ways is heading in the same economic direction as Europe especially with Obama in charge with his ever more social democratic policies. The difference is that the USA is much further back in the decline than Europe is and is still wealthy enough to weather a few more financial storms. However even though some indicators are giving ground for optimism others are sending signals that any recovery is being built on very shaky foundations. The problem is that minor improvements are given greater credence than they deserve especially when it is noted that the low bases from which they are being calculated from are being ignored.

  10. Mike Stallard
    Posted March 14, 2012 at 1:43 pm | Permalink

    Our government deals in billions of pounds.
    The RBS and the other banks deal in hundreds of billions.
    We are still facing Iceland’s bankruptcy if just one bank goes broke.

    Nobody seems to care though.

    The Americans with $14 trillion or so to manage cleverly avoided nationalising the banks. And one was, as you say, allowed to fail. The Scottish Genius really dobbed us in, didn’t he.

    • APL
      Posted March 14, 2012 at 4:08 pm | Permalink

      Mike Stallard: “The Americans with $14 trillion or so to manage cleverly avoided nationalising the banks.”

      Citi was more or less nationalized over one weekend.

      AIG failed and was bailed out

      Bear Sterns collapsed (good, the punishment for running a business badly)
      Lehman likewise.

      The USA has been buying 20% of their GDP by borrowing, they cannot continue to do that forever.

      As it represents a largely government directed ‘investment’ you can pretty much guarantee that 20% of US GDP has been wasted.

      For a taster ..

      • forthurst
        Posted March 14, 2012 at 6:14 pm | Permalink

        … and of course there was TARP, steam-rollered thro’ a Congress having been scared witless by the ex-bankster Treasury Secretary; this scheme benefited his old employer both directly (after it had converted to a proper bank) and indirectly as AIG was then able to pay out 100 cents in the dollar to holders of its CDSs.

  11. Shade
    Posted March 14, 2012 at 1:52 pm | Permalink

    Two significant reasons for US improvement are that they have better exposure to high growth areas, and the government takes much less out of the economy. Their trade with the BRICs is a greater proportion of exports than the UK which has put far too much faith in the EU. Government spending is around 40% of GDP and has reduced recently whereas ours is 50% with little real sign of reduction.

    Toodlepip

  12. AJAX
    Posted March 14, 2012 at 1:53 pm | Permalink

    The USA appears at the moment to be doing better than Europe because the Federal Reserve has been printing the $ as if it’s going out of fashion & flooding the markets with it hoping to re-inflate a ripped bubble, a process which it began before the ECB – which is now running to try to catch up – due to political structural differences, i.e, a lack of a single central government will. The European Unionists are already trying to use this as an excuse for spurring on to their USE objective.

    The USA’s Bureau of Labor Statistics’ figure are highly suspicious (check U6 unemployment figures compared to the headline figure being used as an example), & a check of the scale of Americans now requiring food stamps from the Federal Government welfare programmes & a glance at its Debt Clock online show another side to the story of Ben Bernanke’s master-plan, which appears somewhat similar, just on a massively ramped up scale, to Alan Greenspan’s (remember him – the “genius” of the Noughties’ prosperity who no one now mentions?), & we saw where that led

    A little surprising to see a free market champion buying into the biggest government debt fuelled tax subsidy experiment in the Anglosphere’s economic history without any reservations

    What happens when the money printing has to stop? How is this ever increasing Everest of debt, which has assumed a life of its own in seems, to be serviced?

  13. lojolondon
    Posted March 14, 2012 at 5:09 pm | Permalink

    Stop borrowing – this is how you sort out our banking crisis – include FSA and senior government figures over the last 13 years :

    http://www.britannia.com/history/docs/1124-27.html

    The Anglo-Saxon Chronicles – 1125AD.

    A.D. 1125 . In this year sent the King Henry, before Christmas,
    from Normandy to England, and bade that all the mint-men that
    were in England should be mutilated in their limbs; that was,
    that they should lose each of them the right hand, and their
    testicles beneath. This was because the man that had a pound
    could not lay out a penny at a market. And the Bishop Roger of
    Salisbury sent over all England, and bade them all that they
    should come to Winchester at Christmas. When they came thither,
    then were they taken one by one, and deprived each of the right
    hand and the testicles beneath. All this was done within the
    twelfth-night. And that was all in perfect justice, because that
    they had undone all the land with the great quantity of base coin
    that they all bought.

    • BobE
      Posted March 14, 2012 at 9:18 pm | Permalink

      That would make Gordons eyes water!

  14. uanime5
    Posted March 14, 2012 at 8:14 pm | Permalink

    Lehmans was an investment bank so it would fail because there weren’t any savers who would suffer, unlike RBS or Lloyds. Had investment and saving banks not been allowed to merge then none of the banks would need to be bailed out.

    One of the main reasons why the US is doing so well is that Obama invested a large amount of money in the economy to kick start it, unlike the Coalition which didn’t invest in the economy and fired large numbers of people who worked in the public sector; both of which resulted in little or negative growth.

    Reply: Public spending cuts in the US are larger than in the UK, especially at States level.

  15. Mark
    Posted March 14, 2012 at 10:05 pm | Permalink

    Surely you do not support the measures to prop up prices of newbuild properties? You have rightly been complaining that banks continue to retrench on lending to businesses and are uncompetitive. They will stay that way until they sort out their mortgage books, and cut the sums tied up in mortgages.

  16. Electro-Kevin
    Posted March 15, 2012 at 12:58 am | Permalink

    America seems unaffected by it’s downgrading to AA over poor deficit reduction.

    Is this anything to do with it’s overwhelming military firepower and global reach ?

    • Electro-Kevin
      Posted March 15, 2012 at 1:01 am | Permalink

      PS – the domestic housing market ought only to be the product of an economy and not its engine.

  17. Robert K
    Posted March 15, 2012 at 8:05 am | Permalink

    The Lehmans point is vitally important. The established wisdom (i.e. that propagated by the banks and their collaborators in the government) was that if the banks went under the financial system would collapse and the world as we knew it would end. Having rightly let Lehmans fail, the US government then chickened out and bailed out several other banks and financial institutions. Okay, they didn’t nationalise them, but the bad businesses were allowed to survive.
    The crucial thing about Lehmans is that within a few months important constituent bits had been bought out – by Barcap in the US and Nomura in the UK – and now, less than four years on, the rest of it has come out of bankruptcy.
    What should have happened in 2008 is that all the duff banks should have gone bust. The short term upheaval would have been huge, but by now the US and UK economy would be storming ahead.
    Also, the US is only doing well relative to Europe. Job creation is anaemic and the Fed’s money printing policies will create havoc down the road in terms of inflation.

  18. Dr Bernqrd JUBY
    Posted March 15, 2012 at 4:21 pm | Permalink

    At least Cameron has grasped the nettle with Obama over our totally unfair extratidition treaty. Perhaps he will finally wake up to realities, scrap Theresa May and then start on the EU Human Rights???

  19. James Reade
    Posted March 17, 2012 at 1:24 pm | Permalink

    What an incredible desecration of historical events. Letting Lehmans go bust was a good thing?! I assume you then closed your eyes to the subsequent turmoil that followed because having seen Bear Stearns and other interventions, banks expected government assistance. I assume you just think all those that reasonably argue this pretty much unprecedented market panic pretty much helped cement the real effects of the financial crisis are plain out of their mind? I don’t agree with bailing out banks, but the US government made a total pigs ear by bailing some out, not bailing others out, and to somehow claim that this policymaking was inspired and is creating their current recovery is simply nonsensical.

    I’m sure you’ll retort that somehow their tight fiscal policy is everything that matters for their current strong recovery too, forgetting my point made umpteen times last time you raised this about (1) expectational effects of fiscal policy announcements and (2) correlation and direction of causality. It’s way, way too early to be able to say the direction of causality, and we all know all too well that austerity, if it ever arrived in the US, arrived much later than the UK and without the fanfare which damaged expectations and confidence in the UK.

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    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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