Category: Blog

Mr Darling has three aims for the Finance Summit this weekend – to borrow more money, to borrow more money and to borrow more money. It’s a strange way of sorting out a crisis brought on by borrowing too much.

His three way plan consists of
1. Countries to agree to borrow more to spend more
2. Countries to agree to find ways to get bad banks to lend more
3. Countries to agree to borrow more to put more into the IMF so it can lend more to overborrowed countries.

No wonder we are in such a mess, with thinking like this at the top.

He forgets the nature of the crisis. The UK, the US, Spain, Ireland, the Eastern Europeans and a few others borrowed too much. Banks got over extended, and then the authorities called abrupt time on the party leading to a huge hangover. Meanwhile China, Germany, Japan, and some others worked hard and saved hard, building up large surplsues which they lent back to the overborrowed.

The different countries need different solutions to help resolve the crisis. The saving and exporting countries could afford to spend more and create more demand at home. That would be very helpful. The countries that have borrowed too much need to control their borrowings and learn to live closer to their means. They need to save and export more, not reflate by borrowing too much.

The bad banks should not be bolstered and subsidised on the collosal scale this government favours. They should be made to own up to their losses, cut their costs, and get their businesses into shape. Far from lending more, they should be getting their risks into line with their capital. If the government must see more lending to UK businesses and individuals it should be done through good banks and new banks, not through the costly and distorting mechanisms of the bad banks. The government should learn that business does not need more loans, but more orders, not more bank debt but more revenue.

Putting more money into the IMF may be timely – who knows which country may next be in need of an emergency loan. They should also discuss what the IMF is going to make the over borrowed do to sort themselves out. Why not start doing it before having to seek an IMF loan? And why doesn’t the UK government see that we need to put our financial house in order as well.

This debtaholic Chancellor seems wedded to more debt. It is not the answer. We need to sober up and sort things out.He should start by calling time on more cash for bad banks. They just pay themselves too much and make bad investments. Haven’t we had enough of that? There has to be a day of reckoning for them. It is wrong of the government to delay it, putting the taxpayer at massive risk. Don’t let them go bust, but keep them short of cash so they have to sell assets, cut high salaries and get wise with their investments.

Most people now seem to agree the Regulators should have been tougher on banking cash and capital in the private sector, to stop the private sector credit excesses.

Instead of talking about how to prevent the last crisis, as they are now doing,we need to look ahead.

Shouldn’t the Uk Regulator today be warning about excess credit and borrowing in the public sector? And shouldn’t a tough Regulator be taking action to ensure that does not get out of hand? Don’t they have a view on how much banks should lend to the government, and on how much money should be printed? That’s all pretty important to the stability of the system.

I have always been careful to go along with the conventional wisdom and with the government spin that there are banks that are too large to be allowed to fail. I have done so knowing how powerful the spin against me would be if I ever suggested otherwise.

To concede that does not mean, however, that I have to support the huge sums of money the government has made available to bail out bad banks, and certainly does not mean I agree with buying shares in them which delays sorting them out. If the authorities are stupid enough to get themselves into the position where some banks are too big to fail, it is even more important they take prompt action to break them up so they cease to be too big to fail. The correct strategy with an unwieldy conglomerate like RBS is to break it up into its constituent parts and find answers for each of them. Some could be sold immediately. Some will need managing to health and some like the Investment bank can be closed down after the bits of value have been sold. You should also keep RBS short of capital and cash to force it to raise more of its own, and to prevent it from paying the absurdly high salaries and bonuses it is still paying when it is no longer making profits and raising private money to do so.

This is a good policy for the taxpayer, cutting the taxpayers risk and getting some cash back. It is a good policy for the banks’ customers, leading to more banks and therefore more choice in the marketplace. It is good policy for the regulators, making it easier to see what is going on with each business having its own balance sheet and its own more visible and accountable management team.

The Competition authorities were asleep on the watch in recent years. They should not have allowed the Lloyds/HBOS merger, nor some of the constituent mergers that created RBS. Allowing banks to come that big does damage the market, putting too much banking under common decision making and ownership.

I read yesterday that the FSA is now going to hire 280 extra staff and is going to make life frightening for banks. I don’t think that is the right response. The regulatory failure in the UK occurred thanks to the former Chancellor. He was the man who split responsibility for banks capital and solvency by making the Bank of England responsible for the banking system and making the FSA responsible for individual banks. He became the chief Regulator himself, as the Head of the tripartite system. He must take the ultimate responsibility for what went wrong.

What he failed to see was obvious. Banks were allowed to expand their balance sheets far too much. It does not take 280 people to work that out. Just one person who knew what they were doing could have seen that the top four banks were all expanding too quickly and had too little capital in relation to the amount of business they were writing. If I could see that from the sidelines, surely the Chancellor could see it aided by all the advisers he enjoys at the Treasury, Bank and FSA. They had the powers to make them have more capital for any given volume of business and should have used them.

When I wrote the Conservative Economic Policy review Foreword I read the banks balance sheets and described how the fast growth of the previous few years rested upon the weird and wonderful expansion of financial instruments in the banking and shadow banking system. I explained how this would now come to a stop and how times would get tougher. This has been selectively quoted by the Guardian website to suggest I thought the expansion was a good idea! They just refuse to quote the crucial following passages and the recommendation that the Bank of England needed to be given back its powers to control banks cash and capital.

For those who have read the quote about how the easy credit created good times, misinterpreted on the Guardian site, here is the following quote in the same Foreword about what could happen next, written in June 2007 well before the run on the Rock and the events which followed:

“As we write, there is considerable uncertainty about how far the Fed, the ECB and the Bank of England may go in raising rates to squeeze inflation out of the system. They must know there are huge pyramids of debt throughout the system, and inflation will not be killed unless the appetite for more debt is blunted. They also know (perhaps they didn’t!) that if they push interest rates too high for too long they could bring the debt structures crashing down, as we have seen with the sub prime mortgage collapse in the USA, leading to falling asset prices, rising unemployment and even recession. “

I rest my case.

Some have written in to praise, and some to express cynicism about the Conservatives announcement that they will be pulling out of the European People’s party.

To those who think they are saying this now because there is a European election coming up, I say, Yes of course. But this is not a cynical ploy. This no new policy, but a policy delayed by Conservative MEPs elected last time on a different platform who would not agree to pull out. They had after all told their electors something different.

This time all official Conservative candidates are standing on a platform of pulling out of the EPP, so we assume it will happen immediately after the European election. I voted for David Cameron as Leader partly because he made this promise. I believe he will keep it, at the first opportunity, which is immediately after the Election.

Yesterday I heard an inspirational speech from a member of the Shadow Cabinet. Yes, honest, I did. Don’t stop reading. I am not fibbing. Central office did not ask me to write this.

When I went to hear Caroline Spelman talk about the future of local and regional government in England I did not expect she would blow my socks off with her vision. But she did, in her gentle, understated way.

Listening to her, I saw in my minds eye the democratic cavalry massing on the hill. She wishes to sweep them down onto the battlefield after a General Election victory , to remove bureaucracy, waste, and hated regionalism. Just listen to this:

Unelected Regional assemblies – abolish
Select Committees for the English regions – abolish
Regional housing quangos – abolish
Regional planning quangos – abolish
Regional spatial strategies and housing targets – abolish
Targets and surveillance of Councils by Whitehall and regional government – abolish
Many of the specific grants – abolish – to be replaced by general grant
Council Tax capping – abolish

What would happen if a Council performed badly? The electors have to sort it out by voting for a change. What would happen if a Council wished to put the tax up too much? They would need to win a vote to do it.

Brilliant Caroline. We will save billions by sweeping away this hated regional bureaucracy and the panoply of regulations, guidance, controls and checks national government imposes on Councils.

Governments today can bask in the pleasure of the latest figures which show a sharp decline in the number of billionaires. Turn that round, and it means equality is rising at last.

You may not be able to make the poor rich by making the rich poor, but you can create a greater equality of misery with a really good Credit Crunch and recession.

Today we are told the Bank of England will create £2,000,000,000 to buy government bonds back from the people and institutions who had bought them. The reason given by the Monetary Policy Committee is that they need to create more money.

We need to ask why? If you take the last three months figures for money supply and express them as a an annual rate, the recent rate of money creation has been lively. The latest figures show notes and coin growing at 12.2% – that is literally printing money – and wider money including all our deposits in banks growing at 22.6%. Yes, 22.6%.

It is true that in August 2008 notes and coin was only growing at 2.7%, and a year ago wider money was growing in single figures. It is a pity the Chancellor was unwilling to come to the Commons to explain why he has given the MPC permission to go ahead with this experiment, and why he has been silent on how much money he wants to create. If 22.6% is not a fast enough growth rate, can he tell us what growth rate he does want? I guess, given the sums involved, he wants to boost the money growth rate above 30%, which would certainly be racy.

The hope of the scheme is that this extra money will be spent on home produced goods and services, bringing factories back into use and leading to more people having jobs. Unfortunately it can also go elsewhere. It can go into pushing up prices, it can be spent on more imported goods and services, it can linger in bank tills and book entries and go nowhere as the broken banks throw an extended fit of caution after their past excesses.

The government is doing it in the spirit of “we will do whatever it takes”, and this is just one of many initiatives. I think it is dangerous to be putting so much at risk in the banks and running such a huge borrowing requirement at the same time. The pound is taking another pounding on the back of the government’s risky gambles. It means we are getting poorer by the day, as our money buys us less and less from the world market. Expect more price increases in the shops as the lower pound works it way through.

A few readers have said, can we hear some good news occasionally?

Yes, of course. I told you about an excellent play recently. Last night I watched the English bowlers and fielders show some real commitment, skill and hunger to win a game of cricket. The played brilliantly, bottling up the West Indies batsmen and letting us live in hope that they might have won the match. In between overs and during the ads I could turn to watch Liverpool playing as if they were on fire. They swept aside Real Madrid as if they were a second division team.

Recessions do end. During them around 90% of economic activity usually survives. Most people keep a job. If you work for the public sector or depend on a public sector pension, you can be assured the government will “do what it takes” to carry on paying.

It was another very expensive day for taxpayers in the Commons yesterday. First came a statement from a junior Treasury Minister committing taxpayers to back £260 billion of Lloyds toxic assets. This was the Ministerial spin on the real statement that we were taking a controlling interest in a £1 trillion bank. Then came the Supplementary estimates, weighing in at a modest extra £36 billion. There was still no mention of printing money, and all attempts to ask about that were blocked with the surprising answer that this was a matter for the “independent” Bank of England. Funny that. I distinctly remember them asking permission of the Chancellor.

Neither the Chancellor nor the Chief Secretary to the Treasury was willing or able to explain these huge sums to us. The Chancellor, we learn, was busy dreaming up new financial lame ducks we go and help, with his scheme to lend lots more money to Eastern Europe, as if we had not yet borrowed enough!

The Lloyds bank package was bizarre. Apparently taxpayers are to stand behind the potential extra losses on £260 billion of Lloyds assets, but in the process of doing so will gain control of the whole bank.

I asked what was the point of taxpayers “insuring themselves” in RBS and Lloyds. Are there any circumstances in which the government would let RBS or Lloyds go under, now we are the majority owners? I assume not – or otherwise what was all this spending on bank shares about? Given that we do stand behind these banks, lock stock and barrel, stand behind every CDO, commodity future, loan to a foreign oligarch and every failed mortgage, why then do we need a separate insurance scheme for some of the toxic debts? We the taxpayer have to stand behind all the possible losses on all the assets of these mega banks.

Was it just a device for consultants and advisers to charge more fees to the taxpayer? Why didn’t these mega banks have a handle on their toxic assets already, and why can’t they just get on and manage all the assets for us in the normal way? The Minister could not be bothered to answer this question, so he tried to answer a different one. As always one was left wondering whether he simply hadn’t a clue, or whether he knew the answer was embarrassing and it would be better not to go there.

The Conservative front bench concentrated on what we were meant to be getting for committing our trillion (or £260 billion). The government triumphantly told us this huge financial commitment would mean Lloyds would lend an extra £14 billion this year. Asked by Mr Hammond if they would continue to use their normal lending criteria before making an advance, the government confirmed they would. It is difficult to see that on this basis we will get £14 billion of lending LLoyds would otherwise have not made. It would be a very expensive way of gaining an extra £14 billion of lending, if that’s what you really want to do. I doubt even that will work.

Yesterday’s Commons debate on the estimates – or more spending – was pathetic. The government fielded a clutch of junior Ministers to discuss the Business Department’s estimate, and the Transport Departments estimate. The Autumn and Spring Supplementary estimates are the way governments get Parliamentary approval to spend more than the budget figure for the year. Most of it is usually paying extra for errors and overruns, with the occasional increase for something that is worthwhile. This year the Supplementaries ran to 700 pages of detail in two volumes, totalling £36.446 billion (total net resource requirement, as HMT says). That’s a whopping supplementary. There was of course no Index to help you find the place you wanted, and often tiny items received much more explanation than the big numbers. The documents were a masterpiece of expensive obfuscation.

I discovered that there were just two large items within the wealth of detail. £20 billion was described in just 23 words “Raising the rate of sustainable growth and achieving rising prosperity and a better quality of life., with economic and employment opportunities for all”. I asked the Treasury Minister what that meant. It was clearly written in newspin, as there is no sign of growth out there, sustainable or unsustainable. The Minister either hadn’t a clue or had no intention of telling us. Further on in the bumper book of mad spending it did hint that this could have something to do with financial assistance to banks and other financial institutions, but there was no breakdown of the sums involved in a heading which also included extra spending on “honours and dignities” and the soon to be overworked Debt Management Office. I did not even find it reassuring that there was an offset, with a decline of spending of £3.7million, as this was on actions to “protect the integrity of the coinage”.

The Transport supplementary was the other large one, weighing in at £8.2 billion. I asked the Labour Chairman of the Transport Select Committee who led the debate what the large £7.55 billion item within this was for. It was called “Financial Instruments”. The detail supplied told us this was to “set up a non cash resource provision under a new Section for:Financial Instruments to reflect the opening value as at 1 April 2008 of FRS26 government guarantees….”

The lady was unable to answer, and the Minister was keeping mum about this one as well.

And so the Mother of Parliaments gladly passed £36 billion of extra spending after several hours of debate about something other than these two large estimates. All’s well with the spend more borrow more world.