I have been chided for daring to write about this on my blog. You all understand only too well the Labour spin machine, and why this story suited the BBC.
It’s a nice irony that you have now all done what I did – written about something that is a non story – in larger numbers than write about most of my pieces on the economic collapse.
I was telephoned and Thursday and invited onto the Today programme for Saturday to discuss the successes and failures of the Govvernor of the Bank of England . I readily accepted and said I would adjust my Saturday morning to get to a studio.
On Friday evening they left a message to say I would no longer be requried.
So I listened this morning, to hear two others agreeing in a technical discussion about quantitative easing. Both said they thought printing money to buy government debt was a good idea. Both said they thought the Governor had made a mess of it, by his recent comments. The interviewer got frustrated that the interview was so technical, punctuated by “quantitative easing” “driving down long term interest rates” and “corporate and government bonds” instead of talking about the rates we have to pay to borrow from the banks, the absence of interest on our savings, printing money and the persistent inflation in the prices of food and other imports.
I guess the reason I was not invited on was they did not like my viewpoint. On the Thursday they wanted a long conversation to find out what I thought about the current position. So I will share it with you here, as it was kept off the airwaves.(This is a reconstruction rather than a transcript)
BBC Question: What do you think of the performance of this Governor and the Bank?
Answer: The Bank has failed in its two given tasks, to prevent the collapse of banks and to keep CPI price rises down to 2%. Never before has the Bank presided over the near collapse of five important banks, all rescued by large injections of public money. Inflation is still 60% above the target given, despite a severe downturn in activity and substantial unused plant, equipment and labour.
Not all of this should be placed on the shoulders of the Governor. As he has pointed out, the credit boom which led to too many price increases was partly created by the government’s decision to switch inflation targets to keep interest rates down prior to the 2005 election.
The Bank of England was stripped of its powers to supervise the banks day to day in 1997, which made it much more difficult for them to understand the degree of banking risk built up in the credit bubble and to take action to stop it.
BBC Question: Was the Governor right to intervene on fiscal policy as he did this week?
Answer. He was right about the substance of the issue. More spending and borrowing now would be wrong for the UK economy and could damage the government’s ability to raise money and lead to further weakening of the pound. It is a pity he has to do it in public, but it is a sign of how the system is not working well that he feels the need to. There are clearly tensions at the top, when these things should be sorted out in private.
It is clearly the BBC’s new tactic to waste my time telling them my thoughts only to discard them. Last week the BBC wanted me to make a film of my views on how to sort the banks out. I cleared my diary for the Friday afternoon, organised a local business who would help us set out the case in tele language, and laid on a windows and conservatory showroom as the film set with script based around breaking glass and difficult times in the building industry. They came, they filmed, they said it was great – and then they failed to show it!
I am all in favour of a Princess inheriting the Crown if she is the older child. This is a very good time to make this change, as it does not affect any current Prince or Princess likely to inherit. We have two generations of male heirs under either system
I am also all in favour of religious toleration, but this issue is much wider than that. It is a big constitutional issue which goes back to the Reformation foundations of the English and then the British state.
We need to hear from the Church of England on the issue of a Catholic monarch, as the Reformation settlement made the King or Queen Head of the Protestant Anglican Church.
Would the government intend to dis-establish the Church? Would a Catholic monarch agree to be Head of the Anglican Church? Would a Catholic monarch appoint another Anglican member of the royal family Head of the Church? What would happen to the style of religious services which the Head of State had to attend?
Would this re-open the Act of Settlement between England and Scotland. How would it affect the Scottish Church? As always, Lib Dems and Labour know they do not like the inherited tradition, but have nothing to offer by way of sensible replacement.
Today there are rumours of a Premier League Club in a debt crisis.
That’s not surprising. Just like the banks, some clubs pay their employees far too much money. They mortgage the hope value of future revenues and profits, whilst crippling themselves with crazy costs.
If someone wants a multi million pound wage packet they need to identify millions in revenues that they have added by their efforts. Guaranteed bonuses, high base wages and the like cannot be afforded if the business is suffering from bad loans or from lower advertising and TV revenues.
Sometime things need to be brought down to earth. I am all in favour of successful entrepreneurs making good returns, or employees earning big bonuses where they have added revenue and profit and share the success with their shareholders. What cannot be sustained is high base wages and guranteed bonuses out of all proportion to the earning power of the bank or football club.
So it happened yesterday. It was the first market warning, the first inkling of trouble. Is it the first shockwave in a larger earthquake, or will the authorities take heed and shift to stronger ground?
The failure to sell all their offering of long dated government stock – a 40 year IOU which we the taxpayers have to pay interest on for that whole time period and then repay the capital – comes as no surprise to readers of this blog. What else could you expect?
We had comfirmation yesterday that they have sold £145 billion of IOUs so far in 2008-9 financial year, as well as billions in National Savings. I think that reinforces the £157 billion figure for this year’s borrowing I have been using (lifted from government documents), rather than the £78 billion the media and Chancellor have been using. That is, by the way well over 10% of National Income!
The auction flop was either incompetence or naughtiness by the authorities. It all goes back to Gordon Brown’s wrecking of the financial architecture when he first arrived in 11 Downing Street. He took debt issue away from the Bank of England and gave it to the Treasury. More recently the Bank has been given the task of printing the fivers and buying up the government’s own debt to keep the market up. Clearly this week the left hand of the Treasury and the right hand of the Bank were uncoordinated, did not understand what each other was doing.
In one clumsy move the Bank and the Treasury wiped out all the “gains” they had made in the government debt market by buying up government bonds with printed money. Prices fell back to where they were before the government buying as news came out that they had not managed to sell all their offer. The Governor also did his bit to undermine prices by saying he might not spend all the £75 billion after all. That is monumental incompetence. Surely you can sell all a gilt issue if the government itself is a massive buyer of gilts?
The Treasury decided to offer a very long IOU. The Bank is not buying long ones. The Treasury presumably thought the Pension Funds, effectively made to buy long government debt by the Regulator and the Actuaries now so many funds are “mature” (closed to you and me), would welcome something that long. Despite the pressure to buy these lovely gilts, clearly pension fund managers are thinking twice about lending so much at so low a rate of interest to the government.
So it was either incomeptence, or the Bank and Treasury had hatched a plot to have a little failure to warn the Prime Minister against more reckless borrowing. When in doubt, go for incompetence as the explanation.
Yesterday I met local FE College Heads. Top of their list of issues is the sudden cessation of money for their building plans, brought on by the incompetence of yet another government quango that “funds” them. Ministers cower behind their quango, denying responsibility and making sure the well paid CEO leaves, presumably with plenty of freshly printed fivers to see him over the next few months.
They asked me what a Conservative government would do about their bids for more money if elected next year. I told them that currently we have two parallel and totally different approaches to public spending.
On the one hand the business of government goes on as if things were still normal. FE Colleges, hospitals and schools compete against bureacrats, spin doctors and management consultants for limited sums of “new money” in a traditional budget round. The Colleges are currently losing. People argue over just tens of millions of pounds, as if they were significant to the public accounts.
On the other hand, the cuckoo banks now in the public sector ask for hundreds of billions. They are asked in turn if that will be enough. Hundreds of billions are showered on them in the form of loans, guarantees and new share capital. The government doesn’t argue over the odd ten milliion or even the odd hundred million. We have moved from considering tens of billions to now considering hundreds of billions.
The government seems to think bank money is different from other public spending. The sad truth is they are the same. They are all spending which taxpayers have to pay for, ultimately through taxes. If the cuckoo banks take more, other types of public spending will take less.
So what can the Conservatives afford? They can only tell you that when they have got in charge of the banks, and turned off the money taps to them. The sooner the banks are told to sort themselves out, the sooner we might have some money for more worthwhile purposes. At the moment the government’s answer is they cannot afford new building schemes for FE Colleges, and the ungrateful banks are reluctant to lend to some FE Colleges as well I was told. There’s the final irony for you.
As readers of this blog will know, you can only understand UK public finance in the age of public sector irresponsibility if you see it as two large banks with a medium sized government attached. The two bank cuckoos in the nest got there well before spring. They now determine the future of public spending and the prospects of the rest of the brood.
President Obama has triangulated with the masters of the universe from Wall Street. His Treasury Secretary this week proposed the world’s largest Hedge fund to be created with around one trillion dollars of largely public money. Yes, one trillion. Why not? It’s a large round number. You are nobody in public finance these days unless you talk trillions.
This Hedge fund will lever private capital raised from Wall Street with large sums of matching public capital, expanded by even more massive sums of public borrowing. In the FT worked example a private investor might put in $6, the taxpayer put in $6 and then the state guarantees borrowing of another $72. All this cash is used to buy up $84 of what used to be called toxic assets from banks, but are now to be called “legacy” assets to make it sound more worthwhile.
I thought it was this kind of massively leveraged hedge fund operation which had gone wrong for the Investment banks in the Credit bubble. I thought we were all trying to stop this type of thing, and have more sobre less leveraged financial activities, so the masters of the universe could no longer lend to everyone at cheap rates and earn mega bonuses on the back of it. I thought we had worked out that such activities led to a big balance of payments deficit and people unable to repay their borrowings.
Apparently, in Obama’s public sector world, having the world’s largest hedge fund trying to make money out of bankers’ past errors is a must have. He is trying to fix yesterday’s problems by adopting yesterday’s mistakes as public policy, doing it all over again with public money.
Let’s try again. There is no substitutue for working through all the toxic assets of the banks. They have to decide which to carry on with in the hope they will be repaid, and which to write off. They have to decide which investments will come good good, which can be sold, and which are now valueless. Switching them all to a taxpayer funded hedge fund does not solve the problem. It just lumbers the taxpayer with even more risk.
Wall Street’s immediate response was very favourable to the scheme, because they hoped it would mean the banks could dump all the rubbish on the taxpayer. Time will tell if this mega hedge fund gets off the ground on the scale imagined. There are still some interesting questions ahead, like which “assets” will the banks want to offload, and how much should the taxpayer pay for them? Then there is the little matter of how they are managed.
Yesterday the Governor said four very important things.
1. The change of inflation target from the RPI to the CPI was a government mistake, which led to a bigger credit bubble.
2. There are lags – we have not yet seen all the effects of much lower interest rates, and need to be patient.
3. The deficit is very large and should not be increased further.
4. He may not use all the money printing authority the government has given him.
Meanwhile the inflation rate ROSE to 3.2%, 60% over the target set the MPC. This useless committee has now comprehensively failed. It held rates too high for too long, causing mayhem in the real economy. Now it has slashed rates too far, undermining sterling and causing a lot of imported inflation. They had a lot of help from the government’s boom and bust economic policy.
None of this should come as any surprise to readers of this site. I called here for much lower rates of interest well over a year ago, before the end of 2007, to stave off deep recession. For the last six months I have been calling for higher rates to avoid a sterling collapse.
I am pleased the Conservative party has taken up the advice to recreate a stronger Bank of England, capable of regulating the banks and the money markets and running a more sensible monetary policy. It is much needed. The Governor has done the cause of a stronger Bank much good by his sensible and honest comments yesterday, admitting past failures and proposing greater fiscal restraint.
The government yesterday published a document entitled “Rights and Responsibilities: developing our constitutional framework”. Only seven backbench Labour MPs stayed to hear about that. Those absent made a wise call, as the Statement was beyond parody.
I give you a flavour from the supporting document:
” A declaration or charter of rights and responsibllities expressed as common beliefs might build on the precedent provided by the French Declaration of the Rights of Man or the Universal Declaraiton of Human Rights, both of which make reference to responsibilities as well as rights. Such a declaration would be intended to have no legal effect in the courts. It would enable Parliament to set out a comnmon and explicit understanding of the values underpinning reciprocal rights and responsibilities, including the rights of individuals, the responsibilities of public authorities to respect rights and the mutual responsibilities we owe each other as members of society. It could reflect the consensus which emerges …..”
When I asked Mr Sraw if we could have the referendum they promised on Lisbon as one of our rights, the answer seemed to be No. Apparently there is no responsibility on governments to do what they promise. Nor did Mr Straw rule out every citizen being sent a copy of Gordon’s little red book of citizens responsibilities (Number One the Citizen must pay all requests to keep the government in the style to which it is accustomed)
The Prime Minister yesterday reported on the European meeting he had recently attended. Once again he used the occasion to lower his office, playing crude politics instead of answering the questions put. At a time of financial crisis the nation would appreciate engagement with serious points from all parts of the House and country rather than juvenile political tricks and ill informed propoganda.
The benches behind him were far from full. He ploughed on, lecturing Mr Cameron that he was isolated in Europe. The PM seemed isolated in the UK. All his grandstanding as a Euro statesman is ceating an ever bigger gulf between him and the electors,and between him and his own MPs. Once he had finished both his Statement and his prepared rant against the Leader of the Opposition, it became embarrassing to him that there were not nearly enough Labour MPs willing to ask him a question to keep the show going. The House had to continue with just Opposition questions until proceedings could be brought to a merciful end for a PM who was losing the plot.
He didn’t even try to answer my simple question of how much total UK state borrowing and guarantees now amounts to.
The two main poitns he made from his “summit” were his enthusiasm for more transparency, and his dislike of protectionism. He fails to explain why this transparency does not extend to an honest balance sheet for the UK as a whole. He has yet to tell us how a large devaluation and heavy subsidies for the banks relates to his crusade against protectionism.
He did honestly report his continued love of more regulation and more borrowing as the ways out of the crisis, which was itself brought on by overborrowing and wonkly regulation.