Author: johnredwood

           Let’s hope the Co-op’s decision to withdraw from buying the Lloyds Bank branches will make the authorities think again. The Co-op said that the increasing regulatory burdens on UK banking made it no longer in  their interest to expand their banking business. The weak economy they said  also impedes decent profitability.  Indeed, they are reviewing their existing bank at the same time, and could decide to sell or cut that as well.

          It is good it was the Co-op which took this view. People who hate banks on the left of the conventional political spectrum will find it more difficult to criticise the Co-op when it stands up for the need for sensibly regulated and profitable banking. Their statement was moderate and considered.

           Most participants in  the banking debate have come round to the view long proposed here that we need more banks to offer competitive services. If we are to achieve this the Regulators have to be realistic in their demands for cash, capital and staffing levels. The market has to sustain profitable banking, however loud the cries of bank critics everytime a bank dares to make a profit. It is profits that allow banks to increase their capital base and sustain more lending to people and companies that can make good  use of it.

           It is a difficult debate to conduct, against a background of such hsotility to banks and bankers whipped up by polticians keen to find a group more unpopular than themselves. The Archbishop of Canterbury called for the break up of RBS, a sensible cause. He did, however, also state that the banks had made two big mistakes – borrowing short and lending long, and lending to people who could not repay.

         The truth is all banks have to borrow short and lend long to some extent. That’s how they make their money.  Some current and on demand deposit account money can be lent to others for longer periods, as long as the bank keeps enough cash to handle demands for withdrawals.

          They also have to lend to some people that will not in the end be able to  repay. They back businesses, and not all will succeed. Good banks manage the risk of the different term structures on their balance sheets without misadventure, and keep the numbers of defaulting clients under control.

          We need more banks. The Regulators are still not getting it right.

You would have thought the left and the Greens would be very hostile to the Germany economy in general and its car industry in particular. Germany burns a lot of coal and depends on manufacturing to a considerable extent. You might have thought that the EU, a well known leader in trying to curb carbon emissions and excess remuneration, would turn its full attack onto the car industry. After all, it has made its hostility to banks and bankers ever clearer, seeking to regulate their pay, stop some of their activites, and tax others. So much so that many in the UK now think the EU has been picking on its lead activity to do it harm.

The German car industry has been very successful at making large fast cars that appeal to rich people. Indeed, you have to be seriously rich to be able to afford the £100,000 for a top of the range BMW or Porsche, or the £165,000 for the S class Mercedes AMG. No, I am not thinking of buying one, as they are well beyond my budget for a car. I have never yearned for one. Nor am I jealous of those who like them and can afford them. That’s because I am no carbon campaigning green or an envious socialist.

If you do dislike people being too rich and think they ought to be taxed, then taxing luxury cars more heavily would surely be a good place to start. After all, it brings you two gains in your jealous universe. It hits the rich directly, and it may cut the number of high emission large engined cars sold.

In fairness to the EU, they have tried a bit of this. German lobbying and influence, however, has been most astute at ensuring the EU’s carbon attacks do not drive BMW, Mercedes, Porsche and Audi out of business at the luxury end.

Motor manufacturers are also famous for paying their senior executives very high pay. This has not become such a big issue as bankers pay has become, again owing to excellent news management and lobbying. The CEO of VW earned $23m in his best year. Remuneration in excess of $10m a year is common at the top end of the industry. So far there have been no EU proposals to cut this pay.

It all goes to show being good at EU politics is important if you wish to keep these contentious industries and activities going and if your country stays in the EU.

On Monday Parliament received the Treasury’s 2012-13 “Convergence Programme for the UK: submitted in line with the Stability and Growth Pact”.  It was a timely reminder of more powers surrendered by the previous government.

We were told at the time that the UK would not submit its budget to EU scrutiny or decision prior to the Chancellor delivering his Statement to the Commons.  The UK would merely send the EU the Budget Red Book as a matter of record after the Budget.

As so often with EU matters, it is not as simple as that.  The government has sent a 235 page document to Brussels about our budget, spending and tax plans, and economic forecasts.  Part of this, is a series of extracts from the Budget Red Book and part of it a long extract from the report of the Office of Budget Responsibility.

However, page 5 in the introduction and pages 29-30 on the Excessive Deficit Procedure go further than was suggested at the time of the agreement on the Pact.  The introduction explains that the UK has to submit an annual Convergence Programme.  The country is under an obligation “to endeavour to avoid an excessive government deficit” under Protocol 15 to the EU Treaties.

The section of the Excessive Deficit Procedure is even more concerning.  The UK first accepted this requirement under Labour in 2008.  “In November 2009, the Council made recommendations to the UK, including a target to correct its excessive debt by reducing the Treaty deficit below 3% of GDP by 2014-15.”

The new government reports that it “remains committed to bringing the UK’s Treaty deficit in line with the 3% target set out in the Stability and Growth Pact”.  This is now planned for 2017-18, delayed from 2014-15.

This filing reveals the absurd paradoxes and contradictions of modern UK politics.  Labour who now say we should not cut the deficit so fast or so far signed us up to an EU policy which requires us to cut further and faster to comply with the EU Excessive Deficit Procedure.  Conservatives, who think it is right to cut the deficit and get more quickly to the point where debt as a proportion of GDP is falling, do not think the EU should be involved in these UK budget decisions.

It would be interesting to hear on this site from the bloggers who both think the deficit reduction is too fast and who think the UK should be following EU policies faithfully.

Over the last twenty three years Japan has tried stimulus after stimulus in a desperate bid to get back to the pre 1990 growth rates. Nothing has succeeded.

As a result Japan has gone from having a relatively low debt and deficit, to having the largest public debt as a proportion of GDP of all advanced countries. Japanese public sector debt is now over $12 trillion, and more than 230% of GDP. Money has been borrowed to boost current public spending, and to provide investment stimulus through large public capital projects.

Nor has Japan spared the monetary stimulus as well. Japan has tried liberal amounts of Quantitative easing, has run interest rates close to zero for most of the time, and has made clear it would prefer inflation to deflation. The latest programme of bond buying is just a larger version of what has gone before.

So why hasn’t the Japanese economy taken off? Crude Keynsian reflationists would predict that with this much fiscal and monetary stimulus combined the economy should be in overdrive. Some would accept that the extreme bubble created in the 1980s posed big problems whilst asset prices adjusted, and would agree that the banks remained broken by falling asset values and damaged loans for a long time. In retrospect maybe a sharper crash and more drastic bank write offs and recapitalisations might have speeded up the adjustment and the eventual recovery.

This to me is only part of the story. At about the same time as Japan’s bubble burst something else important happened. The Japanese model of incremental innovation in cars and consumer electricals and electronics which had spwaned a series of world beating companies suddenly met its match from competition elsewhere. The Japanese excellence at making things was copied by the US and Europe, adopting the Toyota type manufacturing systems. The US launched the digital revolution, which Japan found difficult to adopt and develop. Later, China and other Asian centres emerged capable of undermining Japanese competitiveness still further.

The truth is Japan’s era of supremacy making the world’s most competitive cars, tvs,cameras and the rest was undermined both by new products and services she did not develop, and by cheaper competition for the products she does still make. Japan needs a new industry or two and more world beating companies.

Commentators always think there is a simple monetary or budgetary fix. In the end earning a good living in a competitive world comes down to having better goods and services. Japan has lost her edge. In the UK the decline of finance and oil and gas, our two high value added lead sectors of the 90s and noughties, is the background to our current sluggish GDP performance. Spending a bit more in the public sector does not fix this, as Japan shows.

The best way to get the UK economy moving again is to boost real wages. The best way to do that is to control price rises.

Since 2007 there has been a continuous fall in real wages in the UK private sector. For the first couple of years it was sharp, owing to the deep recession. Thereafter it was a bit less pronounced, and mainly occured owing to persistent inflation. The Uk experienced higher inflation than most of the advanced country economies at a time of Credit Crunch.

The Bank has clearly decided to boost money despite the inflation outturn, taking the view that that can stimulate growth. It needs to worry more about the adverse impact on demand and growth that insidious inflation has on living standards and confidence.

Anyone who saves has some of their money stolen by inflation. It can make them even more cautious about spending, as they perceive the need to have more savings to make up for the erosion of value of their money. Anyone relying on work income can find their family budgets become very stretched by price rises. The public sector has increased people’s fears on inflation by indexing many more things to the CPI instead of the RPI and refusing to issue any more National Savings Index linked bonds.

The government is part of the cause of the inflation. Energy prices have been especially troublesome. Both the Labour government and the Coalition government have followed policies of taxing energy more highly and pushing up energy prices in the name of fighting global warming. This has strained family budgets, made UK industry less competitive, and given a great advantage to our competitors in the USA and Asia who have gone for cheaper energy policies.

I have written recently to the Energy Minister, renewing my call for us to follow a lower price energy policy. The recent sharp falls in the oil price will provide some temporary respite, but we need to go much further, and we need to end the extra burden we are having to pay. That means ending the carbon tax, generating more electicity from lower cost options, and exploiting more of our natural resources.

The government has also been keen along with local government to put up fees and charges across the public sector. It would be good to have a two year freeze on all public sector managed prices, allied to requirements that the public sector should not simply raise the subsidy needed for these activites on the grounds that they cannot raise their prices. They should be required to become more efficent instead.

The new Governor of the Bank should be told to renew the inflation target, and told that he should be setting out to hit it soon. The latest fall in world commodity prices, and the current little rise of sterling can help bring this about. Lower inflation would be great news for recovery, and for confidence in UK policy generally.

Now he has the job, the new Governor in waiting for the Bank of England is letting it be known that there are limits to what a solitary Central Banker can achieve.

Mr Carney comes from the global establishment. Doubtless some of the new IMF fashion for more deficit stimulus is rubbing off on him. Doubtless the realisation that the UK is getting closer to an election will mean he wants a bit of room for political movement. After all, no-one wants this Coalition government to survive 2015.

The position he will inherit is not all bad, as some bloggers here suggest. It is interesting that when the UK suffered its first rating downgrade from AAA the cost of ten year borrowing was 2.1%. This week-end, with another agency downgrade just announced, the cost of ten year borrowing is under 1.7%.

There are three likely reasosn for this further fall in UK borrowing costs. The first is the UK authorities stand ready to buy more of their own debt. The second is they already own a large quantity. If they eventually decide to simply cancel the debt they now own, the UK state would have a relatively low outstanding debt. Many market participants are sceptical that the UK authorities will get around to selling this debt they own back to the private sector. The third is there are several Euro countries in a far worse plight than the UK, so the Uk is still to some a “safe haven” at a time of Euro trouble.

Any government would, however, be unwise to think there are no limits on how much it can borrow and print. The UK economy is being held back by a public sector that is both too large for the tax capacity of the current economy, and by a public sector that has not matched the best of the private sector in delivering quality and efficiency. Government does need to work away at bringing tax capacity and spending more into line. It also needs to relieve the 5 year squeeze on the private sector. Next week I will look again at ways to do just that. Some tax rates are too high, the state banks are wrongly structured and regulated, energy prices are too high, and infrastructure investment is too slow and too dependent on state finance.