Author: johnredwood

            When Mr Bernanke of the Fed speaks, the world listens.

             Last month he made the commonsense point that Quantitative Easing would not continue for ever. It is surprising so many people needed telling. He explained that sometime it woudl be  tapered back and eventually ended. Indeed, on two past occasions US programmes of QE have ended without major financial disruption.

            This week he provided a little more detail. QE will be tapered later this year, and ended possibly by the middle of next if the US economy continues to grow well. There did not seem to be anything surprising or even worrying about that. Surely it is good news if the world’s largest economy can soon manage without the artificial stimulus of printing extra dollars to buy its own debt.

              It fits in with the progress made to restore most US banks to health, to have more normal credit creation in the private sector, to see a recovery in growth, progress in getting more people into work and relatively low inflation. The US has experienced a sharp downward adjustment in property prices, and more recently a good bull run in shares reflecting the better prospects.

           So why has there been such a sell off around the world? These days large operators in markets move rapidly and together when the mood changes. They decided Mr Bernanke’s speech marked a change of mood. So now everyone is hunting bad news around the world to justify the sudden reversal in attitudes. They have been selling gold, usually a safe haven in a crisis, as well as selling  emerging market shares. Japan had a bear market in a  few days, falling 20%. They have sold bonds as well as shares, fearing and creating higher interest rates.

             Commentators looking for bad news turn to the Brazilian and Turkish riots, to the slowing of growth in India and the build up of credit in China. The outlook is not as bleak as some now suggest. Forecasters are beginning to move their forecasts for the US, the UK and even Euroland up . There is no likelihood of higher short term interest rates on either side of the Atlantic this year, and little likelihood of any increase in the UK or  Euroland next year either.

              There is still a big bond bubble, but the western authorities will not want to explode that too dramatically yet.

         The Chancellor’s Mansion House Speech on Wednesday night marked an important new policy towards UK banks.

          He clearly supported policies to promote more banking competition within the UK market. He underlined the importance of more competitive banking capacity in  the Uk domestic market to finance the recovery.

           Challenger banks will be created and sold from both Lloyds/HBOS and RBS. TSB will be floated off by Lloyds soon as a newly quoted  bank in the marketplace.

            The biggest changes will be at RBS. They are asked to sell off US based  Citizens Bank. I have never seen the point of UK taxpayers owning a wide ranging global banking group that still holds good business assets like Citizens, when they can be sold and the capital realeased to assist in the rebuilding of the rest of RBS. They will sell off a challenger business in the UK. They will slim their Investment bank more. This could include sales of talent and assets where it can be profitable in the future.

             The Chancellor is also going to undertake a rapid review in the Treasury of whether to have a Bad bank/Good bank division. This might speed the sale of the good bank and permit the Good Bank to make a bigger contribution to financing the recovery. There are capital issues for the Bad bank, and the view of the minority shareholders to accommodate.

             The Chancellor rightly said “While the bank (RBS) is healing, let’s be frank it has not healed as quickly as we all hoped”. I am pleased he is now taking action to split it up and speed its recovery and improve the contribution it can make to the UK economy. It was an unusually important Mansion House Speech.

              I disagree with those who say the government should not  intervene or influence strategy in this way. The government  is the taxpayers’ representative, and is  responsible for the overall economy. It is good to see them making decisions about RBS, as the future of this bank is central to our economic progress. The UK economy has done well in the last 3 years taking into account that it has been against the very strong headwind of its largest commercial bank shedding £900 billion from its balance sheet.

              This week the Speaker made clear that Parliament would have a vote on a substantive motion before arming the rebels in Syria or otherwise changing policy towards the Syrian conflict. The Foreign Secretary was present when the Speaker confirmed this and did not challenge it. It is agreed that Parliament if it wishes can insist on debating and voting on military engagements undertaken by the UK, as has always been the case in effect.

               I think this makes the government coming forward with proposals to intervene militarily in Syria unlikely, all the time Labour remains opposed. It does not mean, however, that any military action that could be undertaken were Labour to change its mind  following a Parliamentary vote is necessarily legal under international law.

             In the case of Syria we know that Russia would veto any move by the Security Council to approve NATO military intervention. This means that anything we do would lack the legal cover of UN approval. We also know that NATO intervention would not be at the request of the Syrian government or other legal authority in Syria. It would therefore pose all sorts of legal issues about our right to use force and the consequences of using force.

               This I suspect means the UK is not even contemplating sending troops in to intervene in the civil war. What would their rules of engagement be? What would the legal advice be concerning who they were allowed to kill and in what circumstances?

              The issue of arming the rebels also poses moral and legal issues. This country would take great exception to any outside power sending weapons into our country to arm people who feel they have a grievance or strong disagreement with the government. We would point out that we are a democracy with legal rights for minorities and the ability of them to find redress.

              Those who favour sending arms to Syria rightly point out that the  Assad regime is murderous towards its own citizens, claiming this gives us the right to arm the citizens against the state. However, as Syrian experts tell us, the rebel forces comprise  a wide spectrum of people and institutions. Many of them do not wish to create a liberal democracy where minorities are respected. What if our arming of moderates allowed extremists to grab more complex weaponry? What if the people we are arming committed a massacre inadvertently or deliberately? There would be a moral case against the UK government if arming certain people made the situation worse. There could also possibly be a legal case if weapons supplied got into the wrong hands one way or another.

             The latest car sales figures confirm that the UK is beginning to grow and recover whilst the Euro area remains mired in deep recession.  The five months to May saw car sales in the UK rise by 11%. In Germany car sales fell 8.8%, in France they fell by 11.9% and in Italy by 11.3%. Continental car sales were very weak in 2012 as well.

            In the UK the inflation figures for last  month came out a little higher thanks to air fares and petrol. The underlying inflation figures were better and point to likely further falls in the rate . A more stable pound and falling commodity prices will also help.

            Confidence is picking up in the Uk economy according to latest surveys. House prices have started to advance and there is a pick up in building as a result.

          Yesterday in Parliament several weighty EU documents were considered by the Commons. It was a timely reminder of the huge scope and breadth of the EU project. It underlined how much power has already gone to Brussels, and how much more they need and want to complete their Euro union. We had just 90 minutes to consder 294 pages of  documentation on the financial and economic matters alone. It meant some of us were unable to speak in detail on these issues.

             Bill Cash, the Chairman of the European Scrutiny Committee, highlighted how the EU is now seeking to assert the primacy of the European Parliament over the UK and other national Parliaments. I supported him in objecting to this development. The Minister confirmed that the government is well aware of this attempt and are themselves seeking to prevent any such claim becoming established.

               The central documents related to the Financial Transaction Tax, where the UK is refusing to join, and the enhanced economic and banking integration for the Eurozone which the Uk is not part of . It is becoming increasingly clear that the UK needs a new relationship soon. The growing tentacles of the Euro project are forcing the Euro members to surrender more power and pool more of their decisions.

                  Belonging to a single currency is like sharing a bank account with the neighbours. The countries that pay most money into the common bank account at the ECB are wanting  more central control over  the ones who draw money out. They understandably want controls over banks to prevent weak banks undermining the system, and controls over states to stop them  borrowing and spending too much. There is in effect one overdraft, and the prudent do not want it to expand at their expense.

                  I sought assurances that UK banks would still be regulated here and not by the common banking regulators of the Euro system. It is becoming more difficult to keep control of UK matters within the UK, given the all embracing plans and the relentless pressures, often mounted under cover of the so called single market.

Later than some of us wanted, today marks the end of Nato responsibility for the security forces and combat roles in Afghanistan. It is a fitting day to thank our troops for all their brave and loyal service, and to wish the Afghans well in assuming full responsibiltiy for the security of their own country.

We still have troops at risk. They have to remain vigilant at base. Let us hope they are not called on to undertake more combat roles by the Afghans, as that would imply continuing high levels of violence and remaining issues with the training of the Afghan troops.

It also means we can plan a different kind of defence force. Freed of combat duties in Afghanistan, and staying out of other Middle Eastern wars changes the role of the military. It  will mean for the first time in many years the British army is not preoccupied by a major conflict or heavily involved in difficult policing in divided communities resorting to violence. It also stops  a major drain on the budget.

The new military that emerges from the Defence Review and budget reductions needs to have a well armed expeditionary capability in case of future need and trouble. It also needs to be modelled around its prime function, defending the UK from any possible attack. This means proficiency in cyberspace as well as by land ,sea and air. It also means having the naval and air capacity to help police the world’s sea lanes and trade routes. It certainly means retaining a credible nuclear deterrent. It is a different role, but still a vital one.

Sometimes international meetings turn out to be timely. There is some global crisis which needs attention. Whatever the agenda of the summit may say, however well crafted it may be, events take it over. Sometimes there is mercifully no such crisis, so the Summiteers have to concentrate on the pre arranged agenda and feel under some compulsion to come up with an answer or an agreed policy.

The latest G8 has partly been overtaken by the changing stance of the USA on Syria and the Russian response to it. There are limits, however, to what the Summit can do, given the sharp differences of view that we know about between Russia and the USA over this issue. The West will be aware that the UN is not about to give cover for any military intervention by the west. They should also know that escalation in these circumstances can be a dangerous game. It is good that Mr Hague has recognised that neither the UN nor the UK Parliament wish  the Uk government to become involved militarily. He has reaffirmed that no decision has been taken to arm the rebels, and would be well advised to understand just how much opposition there is to this course of action.

The G8 should move on to the issues of jobs, trade and economic growth. I do not think there is much by way of a showy communique they can produce. Best of all would be some movement in favour of more free trade around the world, taking down obstacles to economic progress. Sometimes the best outcome is that there is no real outcome.