Category: Blog

 

        The UK economy is not going to grow strongly unless and until the banks are mended. Many of our troubles today stem from the failure of regulation and bad banking in 2004-7 which got some of  the banks into an extreme financial position. This was compounded by the decision to nationalise or subsidise them without forcing changes upon them.

           The weakened banks are now under a regulatory cosh to improve their balance sheets. They are told they must have more cash and capital to back up a given quantity of lending.  They are doing so not by raising more capital but by lending less. This constrains recovery.

          I am not advocating a debt soaked dash for growth to repeat the mistakes of 2004-7. I do not want to see a further surge in house prices and crazy mortgages. I would like to see enough credit around to finance larger infrastructure projects from broadband to tollroads, from new power stations to better water supply and flood protection. I would like to see sufficient credit available on reasonable terms for small and medium sized enterprises needing to expand, to buy capital equipment or to meet sensible working capital needs. I would like to see a decent supply of mortgage finance to pay for homes for a new generation of first time buyers. This is not going to miraculously happen by doing nothing. Nor is it likely to come about with another bout of Quantitative easing.

              I suggest the government creates three new UK High Street general purpose banks out of the assets it holds through RBS. Each bank should be given assets and liabilities from RBS, an initial number of branches and staff. These new banks should then be floated on the Stock Exchange. At the time of the float they should raise say £5 billion each in new capital. Their remit should be to provide excellent competitive banking facilities to businesses and individuals in the UK. They could be called RBS, Nat West and Coutts, if you wanted to keep current brands and some  of the  existing identities. You could call them  Tom, Dick and Harry, or any other new name for a new brand. I would want them to be pioneers of better customer service , persuading people that banks can be good allies and service providers to reasonable customers.

             The remaining RBS Group  could start out again by setting up a replacement UK clearing bank network if it wished. It might need to be called a new name if the RBS brand and name had been sold as part of the break up. The government could still hold on to its shares in the overseas and investment banks that are the rest of the RBS Group if it wished, in the hope that one day the management will get the shares into profit. Or it could press on with the piecemeal disposal or wind up of all the remaining  overseas and investment banking assets. The important thing is that three new clearing banks with balance sheets that allow them to expand their UK lending would have emerged from the broken shell of RBS.

               These banks could lend on more than the £15 billion of new capital they had raised. They could lend a sum of money that would have a visible and benefical impact on the UK economy. This would be better than QEII. It would provide a market tested stimulus, financing projects that the three new  smaller bankruptable banks thought were worth backing.

             The public might also feel better about banks if the main one which went so badly wrong were made to pay the price by facing full break up. Minority shareholders might fare as well or better by break up compared to  holding on to the current congomerate. If there were any legal and political fuss about the position of minority shareholders  a buy back option for them could be part of the scheme.

 

             The talk is once again of another round of quantitative easing. It is not being introduced immediately for two good reasons. The first is UK inflation is still high. The second is there are more sceptics second time around about how effective another dose of it might be.

                The US experience is argued by both sides. The bulls of QE say at least two big doses of it in the US avoided deflation and helped the  modest recovery which the economy experienced in 2009-11.  The bears say it put prices up, squeezing consumers and cutting real incomes, added to world inflation which forced China and India to hike interest rates and try to slow their economies, and failed to lift the damaged US housing market.

               The first round of UK QE was a strange device. The Uk government had to issue a large number of UK gilts to pay its bills. Meanwhile the Bank of England created new money to buy second hand gilts in the market place. The idea was the Bank would buy the gilts from individual and collective savers, who would then use the money from the sale of their bonds to buy a riskier investment or to spend on more consumption. The money would circulate through the banking system , which in turn would multiply the money deposited, helping the recovery.

               In practice there were at least two problems with this. Firstly, many of the sellers of gilts simply bought the new gilts sold by the government instead of doing something more positive with their money. Secondly, the banks were placed under strict regulatory controls, making it difficult or impossible for them to increase the amount of lending  and private sector money out there. They had to keep the newly deposited cash from the bond sales as cash or buy gilts themselves. Inbstead of expanding the money supply, the government created a closed loop. It printed money. It bought up its own debt with the money. It then sold more new debt to the people who had sold their gilts to the Bank of England. The net result was cheaper government borrowing by a very roundabout route. The £200 billion of money created was just over a year’s borrowing, at the high level of deficit the government was running.

              It would have been cheaper and easier simply to print the money to pay the government’s wages, which was what underneath all the sophistication was happening.

              Today there are people arguing for QEII in the UK with a variation. They say that instead of buying up government bonds, the newly printed money of QEII should be spent by the Bank of England on buying corporate bonds, or mortgage packages. The aim should be to buy riskier assets. This, they say would have a more direct effect on triggering recovery.

                     The Fed did do some of this in its QE programmes. It is true that if the Central Bank would relieve the corporate and banking sector of some of its riskier positions, that might free these organisations to undertake new loans and investments to promote growth. The problem with it is it represents in effect yet another subsidy to a banking system that has been awash with subsidies in the case of RBS and Lloyds/HBOS  for many months. It would be bad politics, and I suspect also not very good economics. Why do we think RBS and LLoyds/HBOS  would suddenly be transformed into dynamic generators of new businesses and wealth, because yet another way has been found of relieving them of past mistakes?

              Tomorow I will set out an alternative to QEII which I think could address the problems of past bank errors, insufficiency of bank competition, and sluggishness of cash and credit for worthwhile new projects.

 

              Growth is the key to the government’s strategy. Let’s begin with a reminder of what the government forecast in its Budget Book  in June 2010:

2010-11   1.8%

2011-12    2.4%

2012-13     2.9%

2013-14    2.8%

2014-15     2.7%

Total:      13.23%

         The March 2011 Budget book raised 2010-11 to 1.9%, cut 2011-12 to 1.8%, cut 2012-13 to 2.7%,  and raised each of the last two years to 2.9%. This left total growth at 12.8%, with much more of the growth coming in  the second half of the period.  The loss of growth between Budgets One and Two would mean £6.5 billion less output and £2.5 billion less tax revenue in the fifth year. This forthcoming downwards revision might have to cut another 1% off the total, losing around £15 billion more output and £6 billion of tax revenue by year five. Even such a cut would still leave the growth rate from 2012-13 onwards at a high level for current conditions.

         This week the Chancellor has told us he is likely to face a downwards revision to the growth forecasts for this year in the autumn. The OBR  may well have to revise down next year as well, given the international background. I do not think the OBR  could  revise subsequent years up to make up for the loss.

          As so much of the government’s deficit reduction strategy is predicated on extra tax revenues from growth, accelerating the current growth rate is the government’s overriding priority. In addition the government’s politcal strategy presumably relies on getting real incomes rising again after a nasty period of decline in recent years. This too requires decent rate of growth in the next three years to bring it about. The government is currently reviewing its opitions to induce stronger growth. They are looking at tax, regulation, and banks.

           Allister Heath yesterday added his voice to the economists who think the government does need to cut the top rate of Income  Tax from 50% to 40%. Politicians are wary of this, as taxing the rich is always popular with many voters. The problem the government  faces, as Allister points out, is the best way to tax the rich is to set a competitive rate. In 1981-2 when the top rate of tax was 83% the top one perecnt of earners only paid 11% of the total Income Tax. By the end of the last century with a settled top rate of 40%, this figure had shot up to 21.3% of the total Income tax raised. The rich were paying lots more, and a much bigger proportion.  This rose further   in the last decade.  

                 The Chancellor is awaiting a Treasury study into how much revenue loss or gain there is from a 50% rate. Meanwhile, expect other studies showing that  we could tax the rich more by reverting to the rate that Gordon Brown thought was correct throughout his period as Chancellor.

 

 

            Matthew Hancock and Nadhim Zahawi, two talented MPs elected in 2010 for the first time, have produced a thoughtful and challenging book about the banks.  They are rightly critical of the greed and rashness which drove some in the banking system in the run up to the Credit Crunch. They are especially critical of the strategy pursued by RBS, which put the bank at great risk and ended with the taxpayer taking it over. They are also critical of the failure of the elaborate system of regulation put in place by Gordon Brown, which so lamentably went wrong  in 2005-10.

             Their major remedy makes a great deal of sense. They say we need to move from the highly complex and detailed rules based approach to regulation that so obviously failed in the last decade, to Big picture regulation. They want the newly strengthened Bank of England to have the authority and the power to be able to tell a large bank that its strategy is too reckless, and needs to change if the bank is to retain regulatory permission.

               As thoughtful authors, they challenge the economics assumption that people behave rationally. They comment on how waves of   optimism in the City can lead too many people into excessive greed, with remuneration systems in large banks encouraging rashness with other people’s money.  That is why the banks need a referee who will supervise the way they play the game, and prevent them from excess. Such a regulator needs to have a keen eye for the cycle, and an understanding of human nature. He or she needs to be above the game, and able to see when it is running out of control.

                     They also urge a better balance on Boards, with a stronger role for independent directors who could also in theory offer more restraint at times of excessive enthusiasm. Their proposals on more women on boards have captured more of the commentary than they warrant. Their fundamental point is one about how large banks should be regulated.

                        They also agree with the views on this site that we need more banking competition in the UK market. I hope they will support moves to sell off parts of the UK government’s banks holdings with a view to creating more successful and manageable UK High Street banks. As Matthew himself has said, the disciplines of capitalism including the possibility of failure need to be restored to the banking system. That means more smaller banks. This can be allied to regulation which protects depositors and provides living wills which ensure the orderly wind up of any bank which does still overstretch. Where banks lose money it should be the shareholders and the bondholders who pay the bills, not taxpayers.

                  It is good to see two MPs making a thoughtful and good contribution to the wider debate about the Credit Crunch and banking crisis.  Their book is “Masters of Nothing” published by Backbite Publishing. It’s a good read. As they say:

                  “It is a failure of capitalism to allow power to be accumulated, subsidies extracted and competition stymied by private monopolies as much as by the state.  A truly free market should promote innovative new entrants and allow market leaders to be challenged. ” They condemn the “rewards for failure culture” which were “bestowed on men who drove their banks to ruin”. The FSA enforced its detailed rule book, but without breaking any rules “banks remained under-capitalised, toxic assets were camouflaged in off balance sheet ‘special purpose vehicles’and outrageous risks were taken…”  Exactly. Labour had not deregulated UK banking. It was regulated in great detail. It was also regulated in a way which missed the big picture, which failed to spot the elephant in the room – the underlying weakness of the banks and the extent of the overextended credit.

 

 

            Matthew Hancock and Nadhim Zahawi, two talented MPs elected in 2010 for the first time, have produced a thoughtful and challenging book about the banks.  They are rightly critical of the greed and rashness which drove some in the banking system in the run up to the Credit Crunch. They are especially critical of the strategy pursued by RBS, which put the bank at great risk and ended with the taxpayer taking it over. They are also critical of the failure of the elaborate system of regulation put in place by Gordon Brown, which so lamentably went wrong  in 2005-10.

             Their major remedy makes a great deal of sense. They say we need to move from the highly complex and detailed rules based approach to regulation that so obviously failed in the last decade, to Big picture regulation. They want the newly strengthened Bank of England to have the authority and the power to be able to tell a large bank that its strategy is too reckless, and needs to change if the bank is to retain regulatory permission.

               As thoughtful authors, they challenge the economics assumption that people behave rationally. They comment on how waves of   optimism in the City can lead too many people into excessive greed, with remuneration systems in large banks encouraging rashness with other people’s money.  That is why the banks need a referee who will supervise the way they play the game, and prevent them from excess. Such a regulator needs to have a keen eye for the cycle, and an understanding of human nature. He or she needs to be above the game, and able to see when it is running out of control.

                     They also urge a better balance on Boards, with a stronger role for independent directors who could also in theory offer more restraint at times of excessive enthusiasm. Their proposals on more women on boards have captured more of the commentary than they warrant. Their fundamental point is one about how large banks should be regulated.

                        They also agree with the views on this site that we need more banking competition in the UK market. I hope they will support moves to sell off parts of the UK government’s banks holdings with a view to creating more successful and manageable UK High Street banks. As Matthew himself has said, the disciplines of capitalism including the possibility of failure need to be restored to the banking system. That means more smaller banks. This can be allied to regulation which protects depositors and provides living wills which ensure the orderly wind up of any bank which does still overstretch. Where banks lose money it should be the shareholders and the bondholders who pay the bills, not taxpayers.

                  It is good to see two MPs making a thoughtful and good contribution to the wider debate about the Credit Crunch and banking crisis.  Their book is “Masters of Nothing” published by Backbite Publishing. It’s a good read. As they say:

                  “It is a failure of capitalism to allow power to be accumulated, subsidies extracted and competition stymied by private monopolies as much as by the state.  A truly free market should promote innovative new entrants and allow market leaders to be challenged. ” They condemn the “rewards for failure culture” which were “bestowed on men who drove their banks to ruin”. The FSA enforced its detailed rule book, but without breaking any rules “banks remained under-capitalised, toxic assets were camouflaged in off balance sheet ‘special purpose vehicles’and outrageous risks were taken…”  Exactly. Labour had not deregulated UK banking. It was regulated in great detail. It was also regulated in a way which missed the big picture, which failed to spot the elephant in the room – the underlying weakness of the banks and the extent of the overextended credit.

 

 

        It is not easy changing currencies. Some people now think that would be the least bad option for countries like Greece, facing ever worse choices on tax, spending and borrowing living with the Euro. Greece and the EU have very clearly stated they will not do this, so this is a very speculative musing in response to questions on how it could be done.

         The  easy part is dealing with bank account money.Tthe harder part is dealing with notes.  If Greece – for example – agreed with Euroland and the EU that it should leave the Euro they would all need to move very rapidly to contain the short term damage and to carry out an efficient change over.  They would need to promise putting in place all the legal and Treaty changes needed over a week-end of secret talks. Then they could announce that as from a stated time on the Sunday all Greek bank accounts denominated in Euros would be converted to new drachmas. It would be easiest to do it at one new drachma to one euro. It would be a relatively simple computer exercise.

               The Greek authorities would need to decide which Greek bank accounts were affected. Presumably every  Greek citizen or company with a euro account in Greece would be compulsory converted. Foreigners with euro accounts in Greece might  be excluded.  Greeks with euro accounts abroad would also need to be considered, with the Greek authorities probably wishing to convert those as well.

               On the Monday when the markets opened the  new drachma would presumably fall against the Euro – let’s say to 1.2 new drachmas per euro.  Tourists and  foreign traders with Greece would be 20% better off than locals, as they would still have euros to convert at the market rate.  Greece would have devalued, making her exports cheaper and her imports dearer. It should boost tourism and inward flows.

                     Handling the bank notes is more complex. Let us assume the Greek state would want to compulsory convert all Greek citizen and Greek company holdings of Euros into new drachmas at the 1 to 1 rate, but did not wish to convert foreigners holding banknotes in Greece, or to convert all Greek letter Euro notes held anywhere in the Euro zone.  They could say that all Greek citizens taking euro notes to banks or to the shops would have them acceopted as new drachma at the 1 to 1 rate. Any foreigner in Greece could exchange euros into new drachma at the market rate on showing  a passport. Banks and shops could be given a period of time to gradually convert the euro notes into drachma notes, but for the time being the euro notes could act as  drachma notes. Any foreigner wishing to spend money in Greece would be free to spend euros at the 1 to 1 rate, or eligible to get new drachma notes on conversion at market rates. For a period euro notes and new drachma notes would both be legal tender until enough new drahcma notes were in circulation to replace all euro notes. The banks and shops would convert the notes at as fast a rate as the notes became available.

                This seems to be the least bad way, given that speed and secrecy would not allow the printing of a complete supply of new drachma notes for the switch over date.

 

             Yesterday was another bad day as the Euro crisis rolls on.  Italian borrowing rates rose again, despite recent strong intervention by the European Central Bank to keep these rates down.  The German Stock market, led by the banks, fell 5% .  Taxpayers in the Uk lost more money again on RBS shares.  Reports of the markets speak of investor worries about the state of some European bank balance sheets given the amount of sovereign debt they own, the current weakness of several Euroland country bonds, the large issue programme needed for Italian and Spanish debt, and the general slowdown in economies as confidence wanes. The decision of the UIS authorities to sue various banks for past mortgage losses did not help either.

             German politics is helping disrupt the Euro. Whilst the government probably intends to carry on with bail outs and general support for the Euro scheme, delays in putting in place the European bail out fund does not help. The German authorities are probably still reluctant to allow the ECB to print and lend too much more. Markets feel too little is being done too late. As a result the EU does not get much benefit out of all the various moves it is already making.

               Last week Euroland was pleased to confirm that Italy had succeeded in raising Euro 7.7 billion in the market at a rate close to 5%. Yesterday we learnt that the ECB bought more than 13 billion euros of sovereign bonds last week  to bolster the markets. This may not have all been Italian, but it does make you wonder whether this is a sensible tactic. Why doesn’t Euroland simply lend the money directly to Italy, if it is so costly to create conditions in which Italy can borrow at lower rates?  The ECB is expanding its holdings of sovereign bonds very rapidly, buying Euro 22 billion in the first couple of weeks of the programme. Euroland needs to fix the underlying problem, the market scepticism about the overall levels of debt incurred by some of these countries.

            I have been highlighting for a long time  time the folly of weak banks propping up weak sovereigns which in turn prop up weak banks. The Regulators made banks buy larger quantities of their own country’s sovereign bonds, and regarded this as safe money which helped the banks hit their cash and capital targets. Where the country itself had weak finances, this has simply set those banks up for losses as markets sell the government bonds and force the prices down. The Regulators did not include large write downs of sovereign debts in their stress tests, further undermining confidence in the process.

               Now the only way out is for the weak countries to do enough to restore confidence in their own  budgets and borrowing levels. Meanwhile, the blow to confidence may mean still lower growth, which in turn weakens state finances more.

I reproduce the latest government view set out by Damien Green  of how they intend to bring immigration under control, in view of the great interest in this subject:

I am writing with a further update on the Government’s radical changes to immigration policy and on the action we are taking to bring down levels of net migration back to the sustainable rates we saw in the 1980s and 1990s. Under the previous Government, immigration rates broke all previous records and net migration reached 2.2 million – twice the population of Birmingham. A recent survey found that nearly three quarters of those polled supported bringing net migration down to the tens of thousands a year or less.

To control immigration all the main routes of entry – work, family and education – must be addressed, and the automatic link between temporary routes and permanent settlement broken. And that’s just what we are working to do. But the previous Government did not just leave the visa system in a mess. As recent reports have revealed, they spent a fortune on an asylum system that simply failed to deliver. They also failed to address illegal immigration. We are taking action to clear up their legacy in these areas too.                                  

Immediately after coming to power this Government started work to control immigration.  The first route we dealt with was work visas. Within weeks we had a temporary cap in place on non-EU economic migrants, and by April of this year the permanent cap came into effect. This is the first ever annual limit on work visas. The cap is working effectively and the limit has not been reached in any month since the permanent cap came into effect. We expect economic migration to fall by a fifth compared with 2009.

Then we introduced reforms to the student visa system – the single largest route of entry. We found many examples of unacceptable abuses of this route, as well as examples of substandard and even bogus colleges. To tackle these abuses we introduced a proper system of accreditation for colleges and tough new rules on the level of English required for students. We also brought in new restrictions to limit students bringing dependants and ended the post-study work option for all but the very brightest. Our measures will be fully in place by next year and we estimate that this will cut net migration by more than 60,000.

The spotlight has now been turned on the family route. Consultations are currently running to examine a range of measures: we are looking at language tests and considering extending the length of time before settlement – and access to benefits – can be granted. Our conclusions will be announced this autumn, but we have already taken action to address sham marriages – and produced new guidance to help those officiating spot people trying to cheat the system.

In addition, we are taking steps to cut the link between temporary and permanent migration. Under the current system, too many workers were allowed to apply to stay here permanently. In 2010, 84,000 people who entered the UK for employment were granted settlement compared to less than 10,000 who qualified for employment related settlement in 1997. That is why another consultation paper has been published to set out reforms in this area, which include putting an end to the assumption that settlement will be available to those who enter the UK on the skilled worker route.

Meanwhile, we are clamping down on those who have no right to be here. Already in the first half of this year, we removed more than 25,000 people and we are very close to clearing up the previous Government’s asylum backlog. We are taking action to control illegal immigration by creating a Border Police Command, as part of our new National Crime Agency. By April next year, every passenger on non-EU flights will be checked in advance of travel using the e-borders system.  And to give us better control over those who overstay, we will reintroduce exit checks by 2015 – to count people in and out of the country.

Recent immigration figures have shown the importance of taking action to unwind the previous Government’s disastrous legacy on immigration. The figures cover the period before our measures came into effect, underscoring the importance of our new programme of change. After almost two years of increasing net migration, the figures stabilised in the last quarter. The recent figures also showed how the vast majority of net migration is made up of non-EU movements. This confirms that the action we are taking to tackle non-EU routes is key to controlling net migration.

 

               Mr Darling’s book is an important contribution to the UK debate. It confirms what was so strongly denied at the time – many in the Labour party thought Mr Brown was a disastrous Prime Minister. He argues that Mr Brown did operate through a small cabal, was extremely political in everything he did, and did try to sack Mr Darling at a crucial point in the Credit Crunch crisis.

               More importantly, it argues that Mr Brown did not understand the depth and magnitude of the economic crisis which engulfed the government he led. In 2007 and 2008 this site continuously pointed out that the UK authorities were making a banking crash inevitable. I urged them to  allow more liquidity in banking markets, to prevent runs on banks and to provide a substitute for the inter banking cash which had dried up. Instead we watched in horror as Northern Rock, Bradford and Bingley, HBOS and RBS got into severe difficulties and had to be rescued at much greater cost than if the authorities had lent more  short term money against security earlier.

            The government sought to ignore this view. When challenged over it, they claimed with the Bank of England  that the errors were all the banks, and they deserved what was coming to them. It was  a case of moral hazard. The regulators and the Bank had done no wrong. Later when I proposed cheaper ways of saving what needed saving from the ruined banks, I was told I wanted to take the whole system down by letting them go to the wall, by the very people who had presided over the wrecking of the system by their refusal to listen to good advice.

           In Mr Darling’s book we now learn that he came round to my view, that more liquidity had to be supplied. The account of the meeting with the head of RBS in the business pages of the Sunday Times makes interesting reading. Mr Darling blames the Governor of the Bank of England for refusing to accept that there was a liquidity crisis which the Bank could do something about and had a duty to do something about. Mr Darling was told he could not override or intervene.

            So far so good. I am pleased to learn that someone at the top did come to see the obvious truth, which a few of us were shouting from the sidelines. The other truth is, however, that the senior elected officials, the Chancellor and the Prime Minister, can always take aciton in such extreme circumstances if they need to. Mr Darling could have instructed the Bank to supply cash to the markets. If the Governor disagreed the Chancellor could have made the instruction public and I am sure the Bank would have done it.  If it needed legal changes, they could have been put through the Commons in a day. I do not think legal changes would have been needed. Later in the crisis the MPC was effectively told to lower interest rates – rightly so- as part of concerted international action to tackle the problem. They convened a special meeting and made the change, claiming it was something they wanted to do. Their independence, we were told, had not been damaged! Under politicial pressure, the Bank could prove flexible.

 

 

               Mr Darling’s book is an important contribution to the UK debate. It confirms what was so strongly denied at the time – many in the Labour party thought Mr Brown was a disastrous Prime Minister. He argues that Mr Brown did operate through a small cabal, was extremely political in everything he did, and did try to sack Mr Darling at a crucial point in the Credit Crunch crisis.

               More importantly, it argues that Mr Brown did not understand the depth and magnitude of the economic crisis which engulfed the government he led. In 2007 and 2008 this site continuously pointed out that the UK authorities were making a banking crash inevitable. I urged them to  allow more liquidity in banking markets, to prevent runs on banks and to provide a substitute for the inter banking cash which had dried up. Instead we watched in horror as Northern Rock, Bradford and Bingley, HBOS and RBS got into severe difficulties and had to be rescued at much greater cost than if the authorities had lent more  short term money against security earlier.

            The government sought to ignore this view. When challenged over it, they claimed with the Bank of England  that the errors were all the banks, and they deserved what was coming to them. It was  a case of moral hazard. The regulators and the Bank had done no wrong. Later when I proposed cheaper ways of saving what needed saving from the ruined banks, I was told I wanted to take the whole system down by letting them go to the wall, by the very people who had presided over the wrecking of the system by their refusal to listen to good advice.

           In Mr Darling’s book we now learn that he came round to my view, that more liquidity had to be supplied. The account of the meeting with the head of RBS in the business pages of the Sunday Times makes interesting reading. Mr Darling blames the Governor of the Bank of England for refusing to accept that there was a liquidity crisis which the Bank could do something about and had a duty to do something about. Mr Darling was told he could not override or intervene.

            So far so good. I am pleased to learn that someone at the top did come to see the obvious truth, which a few of us were shouting from the sidelines. The other truth is, however, that the senior elected officials, the Chancellor and the Prime Minister, can always take aciton in such extreme circumstances if they need to. Mr Darling could have instructed the Bank to supply cash to the markets. If the Governor disagreed the Chancellor could have made the instruction public and I am sure the Bank would have done it.  If it needed legal changes, they could have been put through the Commons in a day. I do not think legal changes would have been needed. Later in the crisis the MPC was effectively told to lower interest rates – rightly so- as part of concerted international action to tackle the problem. They convened a special meeting and made the change, claiming it was something they wanted to do. Their independence, we were told, had not been damaged! Under politicial pressure, the Bank could prove flexible.