I reproduce today a post I wrote almost ten years ago, as one who saw the banking crash coming. I urged lower interest rates on March 10 2008, March 28 2008 and finally proposed halving rates on July 18 2008 to relieve the fierce squeeze and the difficulties rates were imposing on borrowers. I argued against the severity of the money squeeze administered in 2008, and argued that bank shareholders and bondholders should take the hit of the losses incurred, with private sector refinancing to create strengthened banks. RBS, for example, had plenty of assets and trading businesses to sell to generate cash and slim its bloated balance sheet. This approach was finally adopted for future crises, with the living wills idea for banks, but was not adopted for the crisis we were living through. As a result it took longer to sort out the banks and additional resentment grew against them given their easy access to taxpayer investment in shares.
We need a better recovery plan
First Published: October 19, 2008
It is usually dangerous when the establishment unites behind a single policy and says there is no alternative. The last time that happened in the UK we were lumbered with the Exchange Rate Mechanism which gave us a rapid inflation followed by a recession.
Recently in the USA the Republican and Democrat leadership united with both Presidential candidates behind the Paulson plan. That plan turned out to be bad politics, failing its first vote in Congress, and bad economics, leading to subsequent modification by its own author.
Today I suggest a threefold aproach to the crisis.
The first is to amend the governmentās way of handling its approach to the banking crisis.
I fully support the provison of liquidity and longer term loans to the banks. They must take full security for these advances to protect the taxpayer. The withdrawal of too much liquidity at times over the last fifteen months has intensified the crisis.
The government should not spend Ā£37 billion it cannot afford on buying bank shares. It should refuse to finance the HBOS/Lloyd’s merger, leading to Lloyd’s going it alone in the private market for its capital needs. The Regulators should give HBOS and RBS time to increase their capital ratios, whilst the government makes it clear it stands behind both banks with loans and cash if needed. They could both improve their capital ratios by stopping dividend payments, cutting very high pay and bonuses, reducing staff through natural wastage and other cost reducing measures, and reducing their loan books. It should be their choice which combination of these measures they adopt.
The government and Bank are right to experiment with other ways of lending and using guarantees to get the banking markets moving again.
The second is to get control of the public finances. Cancelling the Ā£37 bllion will help. There are many other ways of starting to control public spending, whilst keeping every nurse, teacher, doctor and teacher and other important public service workers.
The third is to take action to stimulate the private sector, which is crashing downwards rapidly. That means cutting interest rates by 200 basis points or 2% immediately, with the prospect of more to come if needed. It means working with the energy, water and transport industries to see which larger investment projects can be brought forward to provide some work for the construction industry. It means redoubling efforts to help people back into work who lose their jobs as the redundancies build up this winter.
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September 15, 2018
You were spot then on as usual.
Currently we have low base rates but very restrictive and over regulated lending from the banks on huge margins and fees. They are also very slow and very inflexible indeed. One Major bank charges (who had tax payers help) now charges a daily overdraft “fee” which equates to about 68% APR even to its most sound and solid customers). It is structured in a way so they do not have to tell you this a new payday lending mis-selling racket surely?
Where is some real fair competition in banking? Cut out these rip off middle men if you possible can. With 0.2% on deposits and 68% on overdrafts it is a nice margin of 34,000%.
September 15, 2018
Consequences.
In this modern world there seem to be few consequences for those who get things wrong which go on to effect others.
The shareholders and bondholders and management of these banks did not have to put things right with their own cash. Many continued to earn silly amounts. Few went to jail or were struck off.
Civil servants do not seem to lose their jobs despite following doctrine rather than good sense.
Criminals are not pursued by the authorities.
Without sanction society suffers
September 15, 2018
What you say is more or less the theme of Black Swan author,Nassim Nicholas Taleb’s, book “No skin in the Game”published earlier this year.
“The best thing that could happen to society is the bankruptcy of (a large investment bank ed)”he concludes.
September 15, 2018
And that is precisely what should have been allowed. Insolvent businesses go bust; the viable parts are bought and run by those more able to do so.
We do not have capitalism…we have crony capitalism, where the favoured bear no risk but garner reward.
September 15, 2018
Why on earth are John Lewis/Waitrose blaming their large profit decline on “Brexit”? The decline is surely due to the difficulty of high street competing with on line. These retailers being over taxed (relative to online) with their high rents & rates, high parking charges, massive over regulation, daft employment laws, the endless motorist mugging, Mr “tax to death” Hammond with is 15% stamp duty, 20% increases in insurance taxes plus all the rest of his increases.
Above all the total lack of any positive Brexit vision from May, Hammond & Carney or any confidence in this government or their bloated state green crap, EU appeasment policies.
This is quite likely to lead to the real disaster that Venezuela/Corbyn/SNP/Mc Donnall would give us.
Is it any wonder confidence has declined when Carney idiotically talks of 35% decreases in property values?
September 15, 2018
I do hope MPs will request a detailed hearing with Mr Carney and ask him to explain the workings behind his conclusion that trade with the EU on WTO terms will lead to a 35% drop in house prices (& likewise that accepting Chequers-BRINO will give a Ā£16bn boost to the economy). The future is of course unknowable so people can predict whatever they want, but influential public figures like Mark Carney need to be required to justify their utterances.
September 15, 2018
I saw that, and thought:
1. We have a Prime Minister for whom the Thirty Year Rule applies when she wants it to apply, for example when she does not want to give too much away by providing a “running commentary” on Brexit negotiations, but who is perfectly happy to see supposedly confidential proceedings of the cabinet immediately leaked to the mass media when that suits the purposes of her propaganda campaign to dupe her MPs, her party members and the general population into supporting her crazy and treacherous Chequers plan.
2. With UK GDP around the Ā£2 trillion mark a Ā£16 billion boost would be about a one-off lift of about 0.8%, which is similar to the natural growth of the UK economy during the period that she and her favourite euromaniac civil servant Olly Robbins have been cooking it up that plan, and is also in the same ballpark as the likely gross benefit to the UK from the creation of the EU Single Market and the gain over WTO terms that might accrue from a special trade agreement like CETA, the EU – Canada trade agreement.
3. Contrary to Carney’s claim, as relayed by “a cabinet source” in breach of cabinet confidentiality, there is no clear evidence that the EU referendum result has had any negative effect on economic growth which had already started to slow in 2014 or earlier, when the referendum was still no more a glimmer in the eyes of opponents of EU membership.
4. When did the Bank of England acquire the technical ability to perform anything more than approximate analyses of the economic past, let alone the ability to provide worthwhile forecasts of the economic future, which it clearly lacked ten years ago?
September 17, 2018
” as relayed by āa cabinet sourceā in breach of cabinet confidentiality”
This one amazes me too Denis, these people attending have surely signed confidentiality undertakings, if they keep ignoring breaches of this policy and get away with it, leaking will become custom and practice and the next leak (of something they don’t wish to be leaked) will be hard to defend in court as there is so much ineptitude being accepted at the moment e.g. photographed briefing documents, talky gossipy leaks.
September 15, 2018
My understanding is that Carney was taken totally out of context. The 35% being a Stress Test Scenario condition.
Which raises the question – Why was this not instantly rebutted by both No.10 and the Treasury?
Why is No.10 embarking on Project Fear yet again?
Yet again the media launch into overdrive on a false premise and perpetuate a lie.
I know communication isn’t one of Mrs. May’s greatest strengths but why didn’t she start off with the Basics?
“Brexit means Brexit –
“No deal is WTO rules.
“With co-operation from our friends in Brussels we can do better than that.
“We need to work together in a number of areas to ensure the minimum of disruption.
So, we are where we are by design.
Ireland is a distraction; Border ‘difficulties’ are concocted, it’s an Admin problem, watch “Click”.
We saw off the dissidents in Ireland without the sophisticated technology we have today, it’s a chimera.
Freedom of Movement should be a benefit, ergo our demand for control should be to our detriment, not my definition of ‘cherry picking’.
Continental Euroscepicism is growing. European Elections are due in May.
Does Brussels really want the loss of our trade just before them?
I can well understand why M. Barnier keeps saying No, there is no downside to letting us tear ourselves apart.
But equally well there is nothing to be gained by our conceding anything beyond our bare legal/moral obligations.
We don’t need to pay Ā£39 Billion to buy expensive food we are subsidising in the first place, and we seem to waste an equal amount of food to that we actually import.
September 15, 2018
Richard, can I suggest you need to know where these predictions come from and how they are derived. The BoE and Treasury use variants of macroeconomic computer models known as DSGE and CGE (Google them). The principle source of BoE -Treasury macroeconomic prediction nonsense (Brexit = 800,000 unemployed etc) comes from the NIESR (National Institute for Social and Economic Research).
Brexit will be bad for the bottom 70% of the UK income distribution, make no mistake, but take these BoE /government predictions with a large pinch of salt.
September 16, 2018
That depends on policy post Brexit. If for example we go for unilateral free trade and cut all tariffs that will be a boost to real incomes, especially, proportionally, for lower income households. Other sensible measures would be tax cuts funded with the Ā£39bn leaving present, cancelling HS2 etc etc. Itās not rocket science.
September 16, 2018
“… we go for unilateral free trade and cut all tariffs”. Are you saying we abandon all protection for UK domestic production, of Agri-food products; we go for the Singapore option and import all our basic life support requirements?
That’s OK as long as the countries we import from, are prepared to continue to get paid in Pounds Sterling. A lot of them will. UK imports reduce unemployment in the countries we import from.
Those countries will use the Pounds Sterling they have acquired as “foreign currency reserves”. They can use it as collateral to issue more of their domestic currencies, into their own domestic economies.
Have you spotted the downside of the above?
September 16, 2018
I repeat what I said to somebody else yesterday:
“If you have had any experience of modelling complex systems then you will know that it is almost always possible to adjust the model and/or the input data to produce the conclusions that you want to obtain from it.”
September 16, 2018
Indeed and his past predictions have mainly been hopeless.
September 15, 2018
The management of John Lewis are blaming Brexit because that means it is nothing whatsoever to do with themselves.
September 15, 2018
Lifelogic
“Why on earth are John Lewis/Waitrose blaming their large profit decline on
Brexit? ”
Oh so it’s gone from blaming online shopping to blaming brexit then !
The toe rags blame anyone but themselves. The real reason their profits decline is because they’re so bloody useless, not stocking what the punter can get the next day online rather than wait six weeks, and with the high street retailer in effect merely acting as transaction facilitator between the supplier and purchaser.
September 16, 2018
To be fair to Charlie Mayfield, Lifelogic, I believe he said ‘some’ of the cause of this massive drop in profits was down to uncertainty over Brexit. However, even that is odd when one reads of The Co-Op’s apparently splendid recovery after having been a basket case for years.
Maybe Remainers patronise at John Lewis, whereas Leavers go to The Cop-Op?
September 15, 2018
I don’t believe 10 years have gone. I only remember it as my school head teacher was called Miss Lehman. John you often predict things out of common sense , but they don’t want to know , they want what they can get.
September 15, 2018
It was an excellent and prescient post. It was at this time that I started to follow your blog, when you were one of very few MPs to oppose the disasterous Labour Bank bailout. The words make salutary reading – imagine if Brown had not been the obstinate statist he was and had heeded them! The proof of how right they were is that the policy you then proposed has, more or less, been accepted around the world as the treatment for any future crisis. The knowledge of that alone is enough to make the financial system more secure.
I fear in 11 years time we may be looking back 10 years after BRINO and wishing Mrs May had not adopted the same Brownian obstinacy, but rather had listened to voices of reasoned logic, such as JRās, and gone for the Canada+ model which seems to be the obvious sensible solution to Brexit.
September 15, 2018
Richard1
” I fear in 11 years time we may be looking back 10 years after BRINO and wishing Mrs May had not adopted the same Brownian obstinacy, but rather had listened to voices of reasoned logic, such as JRās, and gone for the Canada+ model which seems to be the obvious sensible solution to Brexit. ”
Adding further insult to the nation’s injury and humiliation, she’ll probably get a peerage.
September 16, 2018
May must be stopped from her vassal state, no Brexit, Checkers deal. And indeed from her half witted Tax and regulate to death economic policies.
September 15, 2018
The easiest thing to have done would have been to nationalise RBS,at zero cost to the Treasury. Keep the basic retail part operating and sell off the casino bits. Short term debt and equity holders get paid last.
September 15, 2018
But, of course, the banks have not been “sorted out”
They remain too big to fail and favoured over other businesses. No prosecutions resulted, unlike in Iceland, no personal liability inflicted on those knowingly trading whilst insolvent; nothing whatsoever has changed in reality.
If Corbyn made a manifesto commitment to right the wrongs of the banking sector he would win by a landslide.
September 15, 2018
mickc
Not so …
Bankers charged in UK
Number of people charged by UK authorities: 28
Number of people convicted: 5
Number of cases yet to be decided: 15
USA
402 individuals facing criminal charges, including 97 bankers charged with fraud.
324 people convicted, of whom 222 were sentenced to prison.
Bare in mind that most of the Banks involved in the crash were US banks
September 15, 2018
It is true that senior people in the banking sector have largely not suffered the consequences of their hubristic arrogance. (MrGoodwin still receives a huge pension for life whereas he should be on Ā£28k pa like any other director of a bust company. Some should be or should have been in orange jumpsuits). A little commented on fact is Labourās bank bailout had the effect of protecting much of the $/ā¬ 10millions worth of bank shares which many of those senior bank executives who were filmed walking into Downing Street to āadviseā Brown and his team held personally.
However, bank leverage has come down, and it is now widely accepted that in any new bank solvency crisis, the Redwood solution of a recap at the expense of shareholders and creditors and not the Brown bailout model would apply. This is great progress. But leverage still needs to come down. Many commentators agree on this – the FTs Martin Wolf eg.
September 15, 2018
The Archbishop of Canterbury may consider the CoE should buy out a failing sub-prime lender to stop it being a sub-prime lender.
There’s a business opportunity! Everyone wishing to start a new sub-prime lender.If worst comes to worst the CoE may manifest in times of sadness as a kind of White Knight!!!
Does the tax-payer give the Church of England anything…and for what precisely?
September 16, 2018
Well they get a lot of charitable tax relief and some bishops get a seat in the Lords. Why one wonders when the head man is patently wrong and idiotic on virtually every issue. If he wants people to pay more tax perhaps he should start by giving up all the CoE charitable status and compete on a level pitch with other businesses.
September 15, 2018
I wrote 5p only because people would never ever believe 2p on some
September 15, 2018
Aye. Me again
September 15, 2018
What has happened since then is that over ten years savers have been shafted, and those whose greed led them to take out unsustainable housing loans have been doubly rewarded,
a) by the banks not repossessing but instead offering debtors lower mortgage rates to giveaway levels
b) by ensuring a housing boom via high foreign investment.
Meanwhile, those who want to buy have their savings trashed. The only alternative is the equity market, where even cuatiously invested savings become illiquid – for if housing rates fall to make property affordable, the markets also fall to make investments unrealizable.
September 15, 2018
Why aren’t you chancellor john?
Reply Because I woukd be optimistic and follow policies to promote prosperity when the UK establishment wants to wallow in gloom and slow the economy because they dont like Brexit. I was never allowed to be a Treasury Minister when I was in the govt because I disagreed with the ERM and possible Euro membership.
September 16, 2018
JR would be an inspired appointment as chancellor should Boris Johnson take over. Sajid Javid also might feel he needs an older and long experienced figure beside him as chancellor. Cameron would probably have done better to make such an appointment than the callow Mr Osborne.
September 16, 2018
Great reply John. Thank you. That’s what I thought.
September 15, 2018
You don’t have to justify yourself. You’re ok.
September 15, 2018
So what is the conclusion? Clearly, intelligent people are more often right that dullards but that dullards, particularly accountants, are neither qualified by intellect nor training to run businesses whether banking, engineering or building, hence the demise of RBS, GEC and Carillion. Do the dullards in government believe that accountants should be allowed to preside over businesses whose sole function is to agglomerate viable businesses until they become a supanova? Why is there no special dispensation for accountants to fly passenger jets or undertake surgical operations? It is time for the dullards in government to stop the takeover of businesses which do not benefit the market for the supply of goods or services whether in banking or anything else.
September 15, 2018
The ONE penny for my writing is in the bank
September 15, 2018
And if you think it gives me pleasure in learning at every turn I take even by accident in wishing to Do the Good even casually writing a Comment to a man JR I admire beyond words, forget it.
September 15, 2018
“The second is to get control of the public finances. Cancelling the Ā£37 billion will help. There are many other ways of starting to control public spending, whilst keeping every nurse, teacher, doctor and teacher and other important public service workers.”
I think we shall have to work together… on this, cross-party including the SNP. It has been said by many people of differing political persuasions.
We know basically our priorities.
Something…..we must unite at.
September 16, 2018
RBS lost the plot and the appalling Government allowed them to do so. At the time and not with hindsight the takeover of NatWest should have been vetoed and likewise ABN Amro, which was beyond any financial comprehension. Again as discussed at the time RBS should have been put in administration, it was clear the taxpayer was in for a pasting but the dreaded politics got in the way of reality.
September 16, 2018
Wasn’t the then Chancellor, Mr Brown, officially warned 3 times by the BoE that RBS was on the brink of collapse, but he refused to take heed?
September 18, 2018
It seems you’ve predicted more than David Icke and Nostradamus put together. But somehow I don’t think your absurdly complacent No deal prophesies will be needed, as there will be a deal.