Author: johnredwood

The BBC Today programme had a second go at Northern Rock this morning, and did allow Lord James to set out some of the reasons why nationalisation would be a bad thing. He reminded us that managing the Group would be very difficult for the government, there would be conflicts of interest with their role as Regulator and that there could be competition complications if a nationalised Rock used public money to take busienss away from others.

He might have added the biggest reason of all – taking on more than ??100 billion of liabilities would be a huge commitment for the taxpayer. We the taxpayers would undoubtedly lose substantial sums of money we could ill afford to lose, even if they did nationalise it for ??1 and faced down the lawsuits of aggrieved shareholders who would object to such a confiscation.

Lord James proposed something he called “work – out” instead. This is more commonly known as “run-off” in the financial world, and is used for for example for insurance companies in trouble where they have to be closed to new business. The existing book of business is then managed to a successful conclusion over the years. Of course that is the fall back option, should the current shareholders and directors fail to make a success of running it as a going concern, and if the takeover bids do not result in an agreed deal.

The governnment needs to do some straight thinking and some straight talking for a change.

IT HAS TO BE A TOUGH AND FAIR BANK MANAGER, MANAGING THE LOANS WITH A VIEW TO GETTING THEM REPAID AS QUICKLY AS POSSIBLE.

IT HAS TO REMAIN THE REGULATOR OF THE FINANCIAL MARKETS BUT SHOULD STRENGTHEN THE INDEPENDENCE OF THE BANK OF ENGLAND IN THIS FIELD WHERE IT TOOK SO MUCH OF ITS POWER AWAY TEN YEARS AGO

IT SHOULD RULE OUT BECOMING THE ONWER OF NORTHERN ROCK, AS THIS WOULD COMPROMISE ITS ROLES AS BANK MANAGER AND REGULATOR.

Today was vintage “Today”. We had the plug for Vince Cable’s idiotic idea that we should nationalise Northern Rock, with no alternative comment or criticism. No-one has explained how taking over responsibility for all ??100 billion of the Rock’s liabilities would be better for taxpayers than merely lending them less than a third of that sum against security from their assets.

Then we had an interview with some inarticulate government Minister about forthcoming cuts in physics departments in Universities. Aggressive repititon of the same question – would the Minister cough up an extra ??80 million which someone had said they would like – wrecked any chance of the rest of us understanding the issues or the problem. His repitiatious statement that the cash available had increased did not advance our understanding much either. Neither questioner Sarah nor interviewee Minister had anything to say about where all the money that had been approved was going, and why the “cuts” all have to fall on physics teaching. It is pathetic that public debate is reduced to a slanging match or a dialogue of the deaf, with one side saying the money has gone up and the other saying it’s not enough. There is never analysis of how much is spent, how it is spent and how efficient and effective the recipient is. Politics should be about priorities, not about sandbagging the taxpayer at every available opportunity.

It was yet again a very expensive Today programme for taxpayers- after wanting to take on ??100 billion of Rock risk saving some physics for ??80 million was a bargain! Will they never give voice to those of us who want to save the taxpayers money and run puiblic services better?

Vince Cable is given endless airtime by the BBC to rubbish any bid or serious interest in Northern Rock and to propose nationalisation. It is typical of the BBC’s bias that they invite him, and refuse comment from those of us who have positive proposals to salvage the taxpayers money.

Mr Cable’s wish to nationalise is fatuous. His logic is flawed. He tells us rightly that ??30 billion at risk for the taxpayers is a lot of money,and the risks are considerable. He then concludes that the taxpayer should put ??100 billion at risk by taking over the whole balance sheet of Northern Rock! If he thinks the Rock is a bad bet, why does he want to more than treble it?

Nationalisation is the last thing we should want to do. Northern Rock’s assets will be worth more when the credit squeeze abates. The issue is how to get them through the worst part of the squeeze at least cost to the taxpayer. Nationalisation would maximise the risk and cost.

What we need is a Bank of England which acts as a strict bank manager, rationing the credit, setting repayment schedules and monitoring the use of the cash. They should not be letting Northern Rock put up pay, award bonuses, or make other unnecessary payments. Every action at the Rock should be husbanding cash, to maximise the repayments. Meanwhile the taxpayer needs to take plenty of collateral or asset protection. If we took over the lot, we would have to suffer the losses on the less desirable assets. That is not a game taxpayers should be playing.

Mr Cable should be ashamed of himself, rubbishing every sensible effort to save the bank, and recommending such a dangerous and stupid approach for the taxpayer.

The authorities stumbled forwards yesterday as they sought to tackle the twin and related crises of Northern Rock and broken money markets.

The 25 basis point (0.25%) off the MPC interest rate was a belated and hesitant step in the right direction. It just goes to show if we all shout loudly enough at our so-called independent MPC they throw their economic essays out of the window, eat the words of their recent speeches, and change their minds. We need to do it more often.

Cutting interest rates on its own is not going to correct all the damage to bank balance sheets that the MPC and the regulators have done,but it does help begin the repair job needed. It means fewer people defaulting, which in turn means a better value in the market for packages of loans, which in turn gives stressed banks another option to raise cash.

The government should now tell the international community it cannot press on with the Basel II regulations, which compound the folly of encouraging banks to take on off balance sheet instruments which lie behind the current international banking difficulties.

The arrival of the Olivant bid for Northern Rock has perked up some of the shareholders, who think it offers better value for them than the Virgin bid. It means there is now some healthy competition to take over the distressed bank.

The tragedy is the failure of the government to use this situation to get a better deal for the taxpayers. According to today’s media accounts of the rival bids, the improvement in Olivant over Virgin has come in the terms to shareholders, not in the terms to the taxpayer.

The government is making us all pay for its own incompetence. Either it should have set out tough requirements for repayments in advance that all bidders had to hit – tougher than those offered so far, or it had to demand that bidders bid on how much money they could repay how quickly and tell the shareholders that otherwise the government would demand early repayment.

The government has failed in its duties to both taxpayers and Parliament.
It has failed to act as a responsbile bank manager, lending cautiously, taking plenty of security and insisting on repayment timetables.
It has failed to tell Parliament – and the market – what it expects from an owner of Northern Rock.
It has failed to tell Parliament how much it has lent on what basis, or to seek Parliamentary approval for this massive sum.

Putting some fo these mistakes right would still help the government dig itself out of the hole, as well as creating a more orderly market in Northern Rock’s shares and expediting the auction process.

Presumably Virgin now loses its preferred bidder status, unless that had some legal force we have not been told about.

Oil prices down – you read it here first!
House prices down.
Commercial property prices down.
Mortgages down.
New borrowing for everyone down.
People’s spending squeezed.

How can the Bank think this is the background to higher inflation in a year or so?

Overall price increases are still a bit above target – that’s because the Bank and the MPC got it wrong a couple of years ago, keeping interest rates too low for too long. It is also because the government owned or influenced monopolies like railway fares, Council tax and fuel tax have gone up.

Yesterday sterling fell and the UK Stock market rose sharply. Markets are clearly expecting an interest rate cut today.

Whether the Bank does or does not cut rates, expectations of more cuts will build up in the days ahead, as no-one in the markets thinks the Bank can remain unconcerned about what is going on in the banking sector for much longer. Today’s problems for the banks are tomorrow’s problems for everyone else, as money makes the economy go round and banks supply the money.

If the Monetary Policy Committee of the Bank of England wishes to be anything more than overpaid members of an academic seminar watching as the money markets go their own way, they need to cut interest rates tomorrow.

Market rates are almost 100 basis points or 1% above the MPC’s rate. Money policy is far too tight. The MPC is not in control of the markets.

If the MPC dithers and concentrates on the short term increases in prices, it will make the credit crunch worse. It will be as incompetent as the rest of the Brown government. House prices are falling, commercial property prices are falling, consumer confidence is falling. What more do they want? How much damage do they want to do?

Surely by now MPC members have learnt that changes in interest rates have an impact many months into the future. The inflation we are living with today is the result of keeping interest rates too low many months ago, and the consequence of ill considered banking regulations that encouraged off balance sheet excess. When will the regulators of the world revisit their folly, the Basel rules? When will they start to take some of the blame for the mess?

Today the credit crunch is the result of the unravelling of that mistaken banking regulatory model, and the result of interest rates that are too high.
The Bank of England, shorn of its old responsibilities to manage the public debt and to monitor the day by day balance sheets of the clearing banks, has lost its touch in the money markets. Gordon Brown’s botched “reforms” of the Bank of England did not make the Bank more independent, they made it less powerful.

IT IS VERY EASY : CUT RATES, CUT THEM BY AT LEAST 50 BASIS POINTS, CUT THEM NOW.

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.