Author: johnredwood

The Chancellor lurches from muddle to mess on his various battle fronts.

Today we read that a rival bid is being warmed up for Northern Rock. I read in some papers that Virgin was given preferred status and allowed to enjoy great publicity for its bid in the hope that its name associated with Northern Rock would reassure depositors and stop the withdrawal of so much more money. Because the withdrawals continue, it appears the government is keen to give airtime to other bids, or will not stand in the way of their promotion.

When will this government realise that instead of playing media games with important issues like this, their job should be to define the taxpayers interest and get on with managing the banking relationship between the company and the public sector, influencing the sale process in the taxpayers interest? The deposits will only be stabilised when there is an agreed deal the public believes in. Today’s revelation of ??1,000,000,000 a year now being spent on spin by central and local government just underlines how far government time and priorities are distorted by trying to influence the media instead of trying to manage efficiently.

It appears that they still think spin is the answer to the Rock’s problems, when some good old fashioned banking discipline to determine how much taxpayers money is available on what terms should be central to an orderly auction and a successful outcome.

We also read of the growing concern in the City about the very tight conditions in money markets. Readers of this blog will remember predictions of monetary tightness over the year end, and my call for lower interest rates now. I am glad to see the heavyweight members of the Shadow MPC out and about in support of this cause – Tim Congdon and Patrick Minford are both calling for cuts in MPC rates. I will be happier when the MPC itself gets the point.

Market interest rates are almost 1% or 100 basis points above MPC rates. The MPC, if it still thinks 5.75% is the right rate, needs to cut its own indicative rate to try to get market rates back down to around 5.75%. They should ignore the short term price pressures on energy and food, and realise that the credit crunch means inflation coming down again next year.

I also suspect all the worries about further large rises in oil and other industrial commodities are overdone. Oil is now falling from near the $100 a barrel level. At an oil seminar yesterday I learned that barring a major disaster in one of the big oil producing areas experts see no great problem with supply and demand next year. Saudi Arabia can decide how tight the market should be as the swing producer, and I suspect Saudi will be reluctant to tighten too much more given the fragility of the international economy and the views of the USA.

The message from previous “oil” crises was that the bigger damage to world growth was perpetrated by central banks raising interest rates to try to offset the energy price increases, leading to less lending and a slowdown or reduction in activity. The Fed looks as if it wishes to avoid this this time. How about the Bank of England?

We learn today that the Chancellor favours a bidding war for Northern Rock, and that other bidders are preparing to challenge the Virgin bid.

What a shambles!

We recently learned that Virgin was the preferred bidder. That implied there had been a first round of bids under proper conditions, the bids had been evaluated, and Virgin’s was the best. Normally in such a position there is either a declared second round of bids to seek a better answer or the best bidder is given a period of exclusivity to reach contracts. Instead they invented this half way house of “preferred bidder” status, leading the press to believe Virgin was likely to end up the buyer quite quickly. It encouraged the other bidders to come back with new ideas, as if there is a proper second round.

I have been saying for a long time that as this is an unusual bidding process because the taxpayer has a different interest from the shareholders. The government and the company needed to be careful and to set out the rules in advance. Clearly the taxpayer wants to get as much of the Bank of England loan back as possible on sale of Northern Rock, with as short a time scale as possible for repayment of the rest. Shareholders want the maximum price for their shares, and their shares are worth more, the more money there is available from taxpayers for longer.

There were two ways of handling this. I proposed that the government set out in advance how much money was available for how long so all bidders bid on the same basis. The company could then compare how much each bidder offered to shareholders and make the appropriate decision. Alternatively the government could have said it wanted bidders to bid for how much money they could repay how quickly as well as bidding for shareholder value, and the government as bank manager could have insisted on the bidder offering to repay most most quickly winning. That way always left it more likely shareholder and taxpayer interests would end up warring with each other.

From the leaks and briefings we do hear it appears the governemnt made it no clearer to bidders than they have to Parliament how much money is available for how long, so they allowed the bid process to be complicated by the twin bid issues. Now apparently the Chancellor is having second thoughts about the preferred bidder and likes the idea of other bidders coming back in with revised bids.

If they are not careful they will lose the Virgin bid without finding a better one they can get to completion quickly. In the context of more depositors taking their money out, and the Bank of England having to lend more and more money to Northern Rock, time is of the essence. If Mr Darling helps delay an outcome to the bidding process by complicating or changing it he is doing damage to taxpayers, as it means more public money going into the mortgage bank.

It is difficult to rescue the auction because they did not set out in public in advance what people could expect from the government when buying Northern Rock. This obvious error has made this auction a mess, and has delayed a result. They may now have reached the point where however they handle it from here there will be aggrieved losers.

Mr Darling is not up to the job, and taxpayers will all end up paying more as a result.

Even the Today programme could not ignore the Labour donor row this morning.
The blogger who came to their editorial defence yesterday when I criticised them for playing down the biggest political sotry of the year had as little editorial judgement and news sense as the programme he was defending.
If even the “Today” programme has to give this story some attention, you have to conclude this is big news and is changing the political climate in an important way.
John Humphrys this morning showed little enthusiaism for the story but did ask some of the questions he needed to to stay in touch with where the political and media worlds are going.
He also revealed his insouciance towards free enterprise by misquoting the extent of the Stock market rise yesterday and by saying he could not understand why Stock markets went up when the economics news was bleak. The answer, John, is simple. Markets look ahead. They understand the current problems. Buyers believe the authorities on both sides of the Atlantic, led by the Fed, will cut interest rates substantially to get things moving in a positive direciton again. Cheaper money would be good for business. Sellers look to the remaining bad news to come out as the credit crunch unfolds.Sometimes the buyers win. Markets usually move off the bottom long before the bad news is all out of the way.

The Bank is right to warn that inflation will go up again, but wrong if they think this means they need to keep interest rates up. They cannot stop inflation rising a bit this winter – they set that up by fixing interest rates that were too low during the boom times. Today they can decide how quickly we bring the credit crunch to an end,and how much damage it will do to jobs, property prices and activity over the next couple of years.

I find the dithering of the Chancellor and his Bank advisers pathetic. They have lost control of interest rates – rates in the inter bank market are well above the indicative rate the Bank of England is setting. They argue with each other, sometimes in public, about how tight or loose condtions are and whether the economy is slowing down. The MPC is as much use as an academic seminar at the moment. If they want to get back in charge the Bank has to start to lead rates down from the high real levels in the market. (4.5% above CPI inflation)

Let’s make it easier for the authorities – let’s keep it simple.

Commercial property prices are falling sharply.
House prices have started to fall.
Mortgage loans are sharply down.
Other loans are more difficult to obtain.
Credit is getting scarcer and dearer.
Banks are short of cash.

Whenever did you have a future inflation problem on the back of a credit squeeze?
How tough do they want it to get?

It has taken the Bank of England and this Chancellor a long time to undersatand the need to supply liquidity to a strapped banking system – and a run on an important bank. The US and the European authorities got the message much earlier and did not have runs on their banks. It was easy to forsee, as this blog did.

Now the UK authorities have grasped this point, can they not also understand why the US authorities have started to cut interest rates and are talking about cutting them some more?

The Chancellor talks about this credit crunch as if it were a US phenomenon. Let’s try again:

THIS IS A CREDIT CRUNCH MADE IN THREADNEEDLE STREET AS WELL AS ON WALL STREET.
SHORT TERM RISES IN INFLATION ARE INEVITABLE AND CANNOT BE STOPPED.
IF INTEREST RATES STAY HIGH TOO MUCH DAMAGE WILL BE DONE TO THE REAL ECONOMY.

If more evidence is needed by the Bank of England and by some the bloggers to this site that things are slowing down rapidly, it has come tonight in figures showing mortgage approvals down by more than a third and house prices falling, on top of the evidence of larger falls in commercial property.

The Bank of England has let it be known it will make more money available to the money markets ahead of the year ends for the leading banks. That is welcome – better late than never. The Bank should also realise that conditions remain very tight, and interest rates remain too high for the conditions. Every bank is going to want to show a strong balance sheet with good liquidity over the year end, so there will be a scramble for cash and for smaller stronger balance sheets. That is not the background to higher inflation!

Why does Mr Cable want to wreck any proposal to solve the Northern Rock crisis? Today he sought to belittle the Branson bid, telling people it was unlikely to go ahead. I won’t repeat what he said about the risks to the taxpayer as the statement was unacceptable. He also accused sharebuyers of being “spivs and sharks” and said he wanted to stop any shareholder, big or small being able to sell shares any more by suspending them in the market!

Mr Cable’s shrill interventions are not going to win the Lib Dems any friends amongst the business community, and will put off anyone who cares about the small shareholders, depositors and taxpayers caught up in the Northern Rock crisis. If Leader Clegg (or Huhne if there is a late swing) has any sense he will terminate Cable’s role as Treasury spokesman before he is allowed to do much more damage.

Today we hear Richard Branson has become the preferred bidder for Northern Rock. It is good news that there is some movement, and there could be an outcome which keeps some of the Northern Rock staff trading with a new owner and looking after the customers and loans.

The scheme outlined on the radio implies the Bank of England and the Treasury did not take proper security for all the loans they advanced. It is high time Mr Darling explained the true position about this, and if they failed to take sufficient security for all the lending to explain why they made such an extraordinary decision.

According to the briefings so far, the taxpayer will get around half the money back immediately, and the other half back over a 2-3 year period. In the meantime the taxpayer will get similar security to other creditors. Presumably it also means no more government lending to Northern Rock, compared to the current position where the taxpayer is on the hook to lend more all the time there are deposit withdrawals. That would be a welcome development.

That may be a good outcome. To be able to judge it, the taxpayers’ representatives need to know how bad our starting position is. What, if anything, has been promised on repayment dates for the current loans? How many of them are secured on specific assets, which is better than a floating charge assuming they are secured on good assets in sufficient quantities? I have asked all these questions, but the taxpayer is still in the dark about how much money has been committed and on what basis.

Mr. Darling has made it impossible for the market to value the shares, as the market does not know the basics about how much money for how long is available to the company. If he is to persaude us all that he now will do a good deal for the taxpayer and for the UK fianncial system – his two legitimate aims – he needs to tell us more about the current position. The BBC this morning themselves asserted that there is a false market in the shares. The reason must be the lack of government transparency. That is unacceptable, after the Chancellor’s lecture to bankers that they needed to be more transparent!

I do hope Mr cable is getting ready with his apology for his irresponsible behaviour, if there is a successful rescue bid for Northern Rock. He has been so keen to attack Northern Rock and all involved with the company, making a rescue that more difficult.

Over the last decade I have made many speeches trying to point out that Gordon Brown did not make the Bank of England independent, and did weaken the Bank’s ability to respond to financial crises. I reminded any audience willing to listen that in 1997 he took away the Bank’s power to regulate individual banks, and removed its role of running the public debt. He did not even make the MPC completely independent in the way advertised.

These two changes greatly weakened the Bank’s ability to understand and control the money markets. When the mortgage bank crisis hit the Bank of England did not itself monitor the daily cash and credit positions of the banks, and did not itself organise the daily intervention of the government in the market with its own debt instruments.The need to respond to a banking problem in negotiation with the FSA and the Chancellor was bound to slow things down and make it difficult to come to a timely and sensible answer.

I reflected this in the more meaured prose of the Opposition’s Economic Policy Review (Freeing Britain to compete – available as a download on this site). In that we wrote:

“We are concerned about the division of responsibility between the FSA and the Bank over banking and market regulation. Fortunately conditions in the last decade have been benign internaitonally, with no threats to banking liquidity. We think it would be safer if the Bank of England had responsibility for solvency regulation of UK-based banks, as well as having the overall duty to keep the system solvent. Otherwise there could be dangerous delays if a banking crisis did hit,with information having to be exchanged between the two regulators; and there might be gaps in each regulator’s view of the banking sector at a crucial time, when early regulatory action might have spared a worse problem.”

If we could see that from Opposition, why was the government unable to do so?

Typical of the BBC to protect Gordon Brown and Alastair Darling by inserting the word “international” in front of “credit squeeze” when correctly reporting this morning that the credit squeeeze is now hitting the “real economy”.

Do you remember all those pompous commentaries from “experts” when the credit crunch first hit, assuring us this was just a problem for all those overpaid financiers and bankers in the City? Many took a dellight in the llikelihood of the well paid financial sector being brought to earth with a bump. This site said at the time this was a serious credit crunch which would have an impact on all our daily lives and on many businesses. So it is proving.

It is also a credit crunch made in Downing Street and Threadneedle Street. There is no home made credit crunch in much of Asia, and in the USA they are already moving to relax their credit crunch. Only in the UK this summer did the Central Bank resolutely tell bankers to sort themselves out, refusing to supply liquidity to markets and refusing to cut interest rates. I warned at the time they were being too tough.

Our accident prone Chancellor made a speech explaining that banks had made too many dodgy loans and needed to tighten up their lending. He warned banks there would be no bail if they did this, just days before he announced a gurantee for all bank deposits for any institution in trouble! We will now count the damage in falling property prices, cancelled investment projects, shortage of mortgages and loans and fewer jobs.

Mr Cable is being praised by the BBC for his “success” as acting Lib dem Leader. This “success” is to pursue a nasty campaign against the shareholders and management of Northern Rock, in an attempt to politicise a difficult situation and force a nationalisation of the bank. Mr Cable seems to want to wipe out the value of Northern Rock shares, being no friend of either the small or large shareholders of the bank. Rightly asking how the government secures and retrieves the taxpayers’ ??25 billion, he then makes a fool of himself by suggesting taxpayers take on all ??100 billion of the liabilities instead!

I have a few questions for the garrulous Mr Cable:

1. If he is worried about security for the ??25 billion, why does he think taxpayers securing all the ??100 billion of total liabilities which the state would take over if it nationalised the bank would improve the taxpayers’ position?

2. What could the government as owner of the bank, that it cannot do as bank manager to the bank?

3. How much skill would this government show at running a mortgage bank? What skills do they have that the market lacks?

4. Why does he wish to bail out all the creditors of Northern Rock by guaranteeing their position through nationalisation?

5. How would he pay for the nationalisation? I appreciate he thinks he should take over the shares for nothing, but the whole ??100 billion of assets need financing, and all of that borrowing would then fall to the taxpayers’ account.

Mr Cable has shown little understanding of the complexities of a mortgage bank, and no statesmanship. Some of us commenting and asking questions have been very careful not to say or do anything which could make the position worse. When I was warning of the dangers of the UK credit crunch before the run on Northern Rock began I made sure I did not repeat market rumours about Northern and other institutions by name. Mr Cable seems to revel in trying to make things worse. The BBC fails to ask Cable the difficult quesitons about his wish to condemn all involved with Northern Rock, and fails to expose the folly of his nationalisation scheme. Nationalisation would be expensive at a time when the government is already over borrowed and over committed; would delay tackling the real problem of refinancing the Rock in the private sector; and could lead to shareholder actions against the government for failing to recognise the potential value of the Rock’s assets.

If it’s Calamity Clegg, it’s also Calamity Cable.