Category: Blog

The Credit Crunch has brought a rash of socialists and so-called Christians onto the media to condemn the immorality of bankers and capitalism. My advice to all who feel a strong urge to do so is to remember the Christian injunction, let he who is guiltless throw the first stone.

The moralisers think the crisis is an easy story. A small group of very greedy bankers lent too much so they could pay themselves huge bonuses. The answer recommended by these self appointed national preachers is equally easy. Nationalise the banks, and in some magic way lending too much and paying bankers too much will no longer be possible, whilst at the same time the economy will miraculously grow again. As we have seen, the nationalised banks still seem to pay large pensions and salaries to people working for loss making concerns, whilst the government itself decides it and its nationalised banks need to lend and borrow more, not less. Meanwhile the economy goes from bad to worse, with all too many people losing their jobs or their businesses.

If lending too much was greedy and wrong, wasn’t it also wrong for so many people to borrow so much, especially if they cannot now repay it and are going to walk away from their obligations? Who was more guilty – the lender or the borrower?

If the bankers who did the lending were greedy and wrong, weren’t the shareholders in the banks similarly guilty as they were happy to receive the dividends from all that excessive lending? Didn’t that include most people in the country? The Church Commissioners who pay the clergy salaries doubtless owned lots of bank shares, as did practically every pension fund in the country. I don’t remember them speaking out at Bank shareholder meetings asking for the banks to grow less and pay smaller dividends.

If the bankers who did the lending were immoral, surely the governments and Regulators who allowed them to do so by signing off their balance sheets and business plans were also wrong? Weren’t they employed as upholders of public morality, and didn’t they set the tone for the age of irresponsibility?

And if it were morally wrong for us collectively to borrow too much from the private sector, isn’t it even more immoral for us now collectively to borrow staggeringly larger sums through the government, as we are being forced to do?

It it were immoral for the authorities to sanction so much easy credit in the good days, wasn’t it even more immoral for them to bring the whole system crashing down in the bad days, by hiking interest rates too far and by demanding the banks suddenly held more capital? Why is too much private sector credit immoral, whereas too little private sector credit is moral? And why above all is too much public sector credit moral? Is printing money the height of morality and responsibility, a new kind of public duty, as some now have it?

I think it unwise to make this a morality tale. I could take no pleasure in thundering against the immorality of one or two scapegoat groups. We all lived through the age of private sector irresponsibility, and are now all having to live through the age of government financial irresponsibility. It’s a very one sided morality which condemns lending too much but does not condemn borrowing too much. It’s even more bizarre that over lending only matters if it is done by a private sector bank but is encouraged if done by a nationalised one. If lending and borrowing to excess is immoral these socialist and Christian moralisers should be on the airwaves condemning the excess of public debt now being built up on a scale which dwarfs the credit boom of 2003-7.

It’s the politics, stupid.

We seem to be in a real mess.
So what does Mr Brown have in mind?

He tells us that he need to take the banks into “temporary” public ownership. They can rebuild themselves with some public capital and assistance, and a rash of guarantees against past mistakes. Then they will be floated off, with the shares being sold at a “profit”..

Can he really believe this? I do not know any Minister prepared to say the bank shares can be sold before the next General Election. Is Mr Brown really so altruistic that he thinks he can tidy the banks up , give them a lick of paint, so a future Conservative government can have the pleasure of selling the shares off after a year or so in office at a healthy profit? I doubt it. Looking at the state of the banks he has bought, that is a very unlikely scenario.

What Mr Brown has in mind is altogether very different. Prudence and adherence to Conservative spending plans was a useful device to persuade voters in 1997 that the economy would be safe in Labour hands. After the 1940s and 1960s devaluation crises and the 1970s IMF crisis Labour needed to change the polling which said consistently Labour governments end with too much borrowing and spending in a collapse of financial stability.

By 2000 the polls told him that spin job was done. He started to increase the spending and the borrowing, breaking his own sensible rules – for those rules were just political, they were not meant to constrain him once he wanted to flex the national credit card for real.

When the enormous spending and borrowing started to go wrong the government needed to spin itself out of trouble. The first line was that people should not “talk us into recession”. All would be well as long as no-one forecast a downturn. When that was overtaken by events, we were told “The UK is the best placed to weather the storm, and will have a lighter version of it”. When that fell to bits they concentrated on spinning that they will “do whatever it takes” to get us out of it, meaning there will be a rash of initiatives and mega buck spending.

Throughout they have told us this is a “global problem”, without pointing out that the downturns in Japan, Germany and China are very different from the downturn here. They don’t have the same excess of too much borrowing and very broken banks. Their downturns result from the UK and US crises, because they were too dependent on exporting and lending to us. They told us the crisis was made first in the US, glossing over how a British bank, Northern Rock, regulated by a British Regulator and lending to British people experienced such a catastrophe.

They now think the crisis gives them cover to do what they have always wanted to do: spend limitless amounts of money on everything they want to do in the public sector. They will borrow as much as they can. Frightened that maybe the markets will rumble them and deny them too much lending, they have now decided to buttress their position. They will instruct the banks, especially the ones the taxpayer owns, to lend more to the government itself. And they now have instructed the bank of England to buy up government debt to keep the price up. In other words they will now print as much money as they like to spend as much as they like in the run up the election.

Taxpayers – and the incoming government – will be left to clear up the mess.

The economic stragey has ended just as one feared – in too much debt, a vioent boom/bust cycle and a weak pound.

The politicians think they can ignore that cruel reality by the spin cycle. We will be told the government is on our side, has done all it can and should. This government believes it can buy votes with taxpayers own money, and now believes it can buy votes with money it simply prints.

The government may even be happy now. It thinks they can spend and spend their way to the election like there’s no tomorrow, paint the Tories into the cuts corner, and await the applause of a delighted and subsidised electorate.

The polling and the electoral responses suggest many voters see it otherwise. They know the reality is a broken economy, a massive debt , and years of lower living standards as we wrestle with how to pay it all off.

In the distorted world of Westminster and its client media Mr Brown and Mr Cable are held up as economic and financial experts. After all, we are told, Mr Brown was Chancellor for many years, and Mr Cable was once an energy economist at Shell.

Neither man has ever run a large private sector company – or for that matter a small one. Neither knows what it is like to be responsible for paying the suppliers and the wages, keeping the bank manager happy and trying to make a profit all at the same time. They have no comparable experience to that of trying to run a big bank.

Nor has either any especial expertise at money markets, government bonds markets and how banks work. Neither has held a job which depends on reading and understanding fast moving markets and acting to make a profit in such markets.

Both are intelligent and hard working people. But both are to their very finger tips modern politicians. They live by the soundbite of the day. Their lack of experience in what matters in this crisis has led them both to the misguided view that we need to nationalise the big banks. It leads the government to mumble that having nationalised them they should be left to get on with their own business without undue political interference, as if the owner can ignore its main investment and offer no leadership or even set out consistent and sensible aims for that investment.

Taking on banks with assets – and liabilities – well in excess of £3 trillion when the annual revenues of the state are less than one fifth of that sum is to take far too big a risk. To do so without setting out how you are going to cut the risks and manage the assets sensibly is dangerous.

We need to control the risks, sell the foreign assets, wind up the casino banks within these banks, take the losses and create a more stable and smaller footing from which they can trade sensibly. Doing it Mr Brown’s way means the taxpayer has to foot the bill. What have we done to deserve such brutal treatment?

We need the government to get a grip on these wayward banks. They do indeed need to be “cleaned up” and cleared out”. So why is there no statement of how this will be done, how much it will cost, how long it will take and when it will start? Why can’t public and Parliament see the business plan, as we are paying dearly for it.

RBS and LLoyds now dominate the public finances.

Bigger losses.

We now know that if you force a merger of a loss making bank with an OK bank you end up with a bigger bad bank.

We are about to find out that if you own two big loss making banks, they own you. Hold onto your purses and wallets.

If buying one very large bank was careless, buying two is lunatic.

When the government bought RBS instead of assisting it short term and at least cost it bet the farm. Now buying control of LLoyds/HBOS it is betting the farm, the shop, the factory and everything else of value in our overborrowed country.

When I pointed out that buying RBS meant you could lose the annual defence budget with a 2% fall in the value of the bank’s assets, some Labour MPs looked worried. With both LLoyds and RBS as state pensioners we can now lose the health budget with an adverse movement of a little over 3% in their “assets”.

I used to ask where did they think all the money was going to come from to buy all this financial ironmongery. Surely there was some limit to the possible borrowing? Didn’t they realise it was the same money they borrowed to pay the nurses that they were now borrowing to pay the bankers’ bonuses? Which should be the priority? Can you really afford both?

Now we know their answer. They will print the money to buy “whatever it takes”. Your farm, your shop, your factory is now on the line for the biggest national overdraft in history. And if the global bankers and savers start to call time on the national overdraft, worry not. They have already borrowed the money to buy the electronic printing presses.

The government is in a muddle with its policy of “quantitative easing” – printing or creating money.

It wanted us to believe this was a policy of the “independent” Monetary Policy Committee. Hence they enacted the charade of the MPC writing to the Chancellor and the government responding. In a moment of inconsistency the Chancellor yesterday announced the policy on the media and sought to defend and explain it. Clearly he is in full knowledge of it and has given it his blessing. It therefore becomes his policy, whatever the truth about who first thought it should be adopted from within the MPC and the government. He dropped the old pretence that these are matters under independent control which we leave to the Bank and do not comment on.

I am glad he did seek to explain it and defend it. It is a big step to take and one which the senior elected official needs to be happy with and needs to defend. Why then did my colleagues get a brush off in the Commons when they rightly asked for a government debate? Have we now got to such an undemocratic pass in this country that a government creating or printing the large sum of £75 billion does not have to announce it first to the Commons in a statement and then allow a debate? Shouldn’t a democratic government want to explain it to those paid by the taxpayer to approve or criticise these decisions? Once again I am driven to the world of the web to make my points.

Every Thursday the government holds a so called “topical debate” without a vote to require most MPs to be present . If they chose genuinely topical matters that could be a good thing. Instead they usually choose the government’s spin topic of the week. They do not let the Opposition ever choose their preferred topic. Yesterday should have been a debate on the economy and money. Of course it wasn’t. The Opposition asked me to speak in a full day Economy debate to be scheduled in Opposition time next Tuesday . I willingly said I would. Subsequently I was told the Chancellor was not available to take part, so the debate has had to be postponed.

So, like the rest of you, my opportunity to understand the government’s approach to all this was confined to watching Miss Cooper ( alias Mrs Balls) on Newsnight. She may have gone home thinking she had triumphed. She had put across the government’s highly political spin line. They say that the crisis is global, that they made no mistakes, that Gordon Brown is leading the world out of the crisis, that the Conservatives want to do nothing, and the Conservatives have opposed the very measures they are taking which will alleviate and then solve the problem. One of their dwindling number of supporters has put this all eloquently in a recent posting on this site.

If she did think this I fear she is much mistaken. Their points about the Conservatives are simply untrue. The Conservatives have proposed various actions, and have not voted against government measures which they think might help.

What I think we wanted to hear from Miss Cooper was something different. We wanted a serious tone, an admission that mistakes have been made by this government in the conduct of monetary policy, fiscal policy and banking regulation, and a better explanation of what quantitative easing means and how it might make things better. I do not think most viewers will have warmed to Labour as a result of her partisan performance.

Some think quantitative easing will have little impact. On the first day of its formal announcement bond markets did not respond greatly, and sterling remained mercifully unmoved. The Japanese who tried this found in their circumstances it did not work. Nor did it trigger inflation.

Some think quantitative easing marks our adoption of a Weimar or Zimbabwean approach to monetary management, fearing that addiction to it could eventually trigger a major inflationary problem. Government should remember that on its chosen measure inflation is still at 3%, and there are still price increases a plenty to come though from last year’s big fall in the pound.

Some think this will prove to be the right sized stimulus that could help turn the corner.

Miss Cooper seems to belong to the try everything school. She did not claim last night this policy is the magic missing ingredient. She may be adopting a monetarist policy, designed by people she used to condemn regularly as part of her ideological mantra, but she has not been completely bowled over by their claims. She said it was just another measure in a long laundry list of initiatives. As the Opposition pointed out this week, several of last year’s initiatives still have not got beyond the press release and planning stage.

So what do I think of all this? I think the government should realise that doing everything is not necessarily the right answer. I think inflating the deficit massively, spending huge sums on subsidising very large banks, and undertaking monetary easing increases the risks substantially. The government is overflexing the national credit card and national financial credibility.

The main problem that is different this time round is the state of the banks. The government should concentrate on making the banks heal themselves, instead of shovelling obscene sums into them. They should await the results of lower interest rates. They should stop savaging savers at a time when savers are needed in a country which has collectively borrowed too much. If you are going to print some money, you need to have a prudent course for future public finances. The government has not merely divorced Prudence but is holding a drink and drugs party on her grave.

Yesterday the Institute for Economic Affairs gave me a platform at one of their lunches to set out my analysis of the Credit Crunch and my proposals for resolving it. The lunch was unsually well attended. There was little dissent from what I had to say. I set out why I thought the government should be the intelligent bank manager to the banks, not their owner.

Most seemed to agree that the crisis had been brought on by a broken Bank of England, by loose regulation of cash and capital, by an MPC that made the wrong calls, by Competition authorities who allowed over large bank mergers and by banks that did not understand how much excessive risk they were running. Many agreed that nationalisation was an expensive and dangerous option. The audience liked my intelligent bank manager approach, based on rebuilding the Bank of England as a competent Central Bank with the full range of central banking powers and duties. All seemed to agree we need to break up RBS, cutting taxpayer risk and disposing of assets.

The main disagreements centred around why this view did not regularly get represented on the BBC and wider media, and over Glass Steagall.

I am always surprised that people expect to hear intelligent and rational analysis on the BBC from an anti government position. BBC journalists take their lead from government spin doctors. The last thing they want at the moment is any idea that the idiotic “rescue” of the banks last autumn was anything other than inevitable or inspired. Conservative critics either have to be kept off the airwaves, or made to sound out of touch or extreme. Mr Cable is put up as the voice of “opposition” and given soft appearances as well to be made to look good, for he also suppports nationalisation. I have set out this alternative thesis many times, on this blog, in public and private meetings and in the Commons. All these methods are good ways of keeping it secret from the BBC audience.

If I asked the BBC why, they would probably say because the main Establishments do not agree with you so it is not going to happen your way. I think in the end they will even be wrong about that. I suspect any Conservative government would follow a risk reduction strategy on the nationalised banks they inherit, and would say No to any more nationalisation. I suspect even this government will be forced into asset sales and risk reduction, as the magnitude of the sums involved becomes more apparent.

As to Glass Steagall, I do not think in modern banking it is easy to make the distinction between clearing banking and investment banking, and keep them seperate. To cut banking risk you just need a regulator who demands more capital for both activities. Banks would soon work out that low margins on risky large trading books is not such a good way of deploying capital.

England is the country that is not allowed to speak its name. It is the country that has to be wiped from maps of the EU.

The UK government was at it again this week in the Commons. I need to tell you as it was little reported, because the Labour spin doctors did not recommend it for news exposure for obvious reasons.

The House was invited to approve members of Regional Committees for England, as part of Labour’s lopsided devolution to Wales, Scotland, Northern Ireland and “the regions”. Once again England was to be balkanised and obliterated.

This is not an official Conservative site, and I do not seek to use it to retail official Conservative soundbites. Perhaps I may this morning say, however, that I was proud of the Conservative party on this occasion. They have refused to put any member onto these new regional committees, and have confirmed they will cease to exist after the next election if Conservatives have the majority.

They are all part of Labour’s attempt to cover over the chasms in their devolution policy. The decisive rejection of elected regional government in the North East meant the rest of England was never given the chance to tell the governent how much we hate the attempts to split England into artificial regions and then to charge us for ever bigger bureaucracies to govern us in this sad condition. Labour thought that maybe setting up regional committees in the Commons would overcome the “democratic deficit”, the lop sided devolution. No chance.

One newspaper did invite me to give a quote they had already made up, to define English nationalism by being anti Scottish. I declined, for that is to misunderstand the nature of the English. Most of us have no wish to define our belief in our country by being unpleasant about the neighbours. For almost two hundred years the English were happy to wave the Union flag rather their own and to sing the UK national anthem when supporting their teams. Labour and the EU have awakened English consciousness to the point where we wave our flag and recognise St George’s day. We still wish to understate, and reject the notion that we must fashion our pride in country out of denigrating others. Lop sided devolution is unfair and is creating ill will within the Union. Regional committees make it worse.

I congratulate the Democrats on their sweeping victories here in Congress. I congratulate your new President on his superb campaign. We all recognise the significance and symbolism of his victory. His arrival in the White House marks the final success of the civil rights campaigns that started decades ago.

Thirty years ago my country first elected a woman Prime Minister. I accorded her the respect of opposing her every inch of the way, as we disagreed about many political issues. Now she has been safely retired for 19 years I can say that her three victories showed that there is no glass ceiling in UK politics for an extraordinary woman. Margaret Thatcher was well known and much loved here in the USA. In her day there was a special relationship with your President Reagan. More recently my colleague and predecessor, Tony Blair, had a great understanding with President Bush.

We meet today against a grim background for our two great countries. Once again we find ourselves together in adversity.

I do not come here to claim a headline that there is automatically a “special relationship” between us. Like all long term relationships, our relationship will mean more or less as needs arise and as people and circumstances change. If we want it to be special both sides have to work at it being special.

If we wish to tackle the current crises of the world together, I and my country are willing to help. We do have an important shared history and set of beliefs to draw on.

Your new President has referred to the relatively brief time in our common history when we disagreed violently. The success of the US in winning its right to independence and democratic self government should no longer give us cause for coolness. You, after all, won. You can be magnanimous and happy in your victory. For our part, we have long taken the view that the Americans were right. We too are proud of the way the American revolution became the ultimate act of free born Englishmen who needed to travel to a new and freer land to create their great society. The tradition of the English settlers here who helped pioneer the revolution also became the winning force in UK politics, as the UK itself widened the franchise and championed democracy.

There are two mighty problems which today confront us both. Yesterday’s dreadful attack on the Sri Lanka cricket team in Pakistan reminds us just how much more there is to be done to help stabilise the wider Middle East. I support your President when he says that more must now be done by diplomacy and less by military means. The UK has not been unwilling to assist the US in her military actions since the horrors of 9/11. Today I ask that we reappraise the position in Afghanistan, consult more widely in the region, and do not ask our troops to do the impossible. Afghanistan needs political reinforcement more than it needs military reinforcement.

Foremost in many minds in both our countries is the economic decline. The US and the UK made similar mistakes. Our regulators did not rein in the banks when they should. Our monetary authorities did not set interest rates to encourage stability. In recent months we have been trying similar policies. We have slashed interest rates, expanded budget deficits, and offered huge sums of financial support to financial institutions in trouble. So far none of this has arrested the sharp decline in output and jobs.

I know as we meet today there is a big political divide over how to respond. The Republicans, along with some Conservatives in my country, are warning that we should not borrow too much, and should not leave future generations with large tax bills to pay off the debts. I have reflected long and hard in private on this. Let me surprise you. I agree with them that there are limits to how much a state can and should borrow, even in times like this. That limit has to be set below the limit of borrowing that markets will readily accept. We need to be careful. We will not save the world if we undermine the state’s credit standing.

This is not the time or place to be precise about the limits. It may well be that conservatives and I will never agree about the prudent limit anyway. What should unite us are these principles:

You cannot get out of a crisis of overborrowing by borrowing too much
You should not cut the payments to those who have been hurt by the economic cycle. Deficits do rise naturally in a recession.
You cannot solve the bad debt problem by transferring them from the private to the public sector. We now need to say to the banks and other financial institutions that have received state aid, sort yourselves out and don’t ask for more money

It is a pleasure to visit our US partner company at a time of unparalleled expansion and success. Our joint formula of “putting the losses back into business” is working well. On both sides of the Atlantic governments are able to report big leaps forward in trading losses from a growing range of talented loss making businesses in which governments have shares. Our joint formula of “never knowingly undersubsidised” is proving especially popular in our financial subsidiaries.

I would like to bring both our US and UK audience up to date with our recent good results. I belong to the school of thought that you never knowingly understate a good loss, and should use every opportunity to remind the audience of success. Following the announcement of £24 billion of losses at RBS we were able to make an additional £26 billion of capital available to them. This means they have needed £46 billion ($65bn)of new capital from us in just three months.

We have now officially reported the £1.4 billion loss for our Northern Rock subsidiary last year. This may seem quite small, but they did achieve it on a reducing book of assets that is now under £40 billion of directly controlled mortgages, so the loss rate is good. The second half loss was, I am pleased to say, well up on the first half. We were able to put another £3 billion into this satisfactorily loss making venture.

I appreciate the UK PLC portfolio does not include such stars as Freddie and Fannie. They truly have become global favourites, a licence to lose money. Nor have we yet found such a gem in our insurance sector as AIG, which has pioneered a wonderful loss making niche in the world financial system. I hope nonetheless our American friends will recognise the huge improvements in our capacity to lose money and waste capital, shaking off the puritan days of Margaret Thatcher when profits stalked the nationalised sector and privatisation was all the rage to limit risks and costs to taxpayers.

Our model depends on ever greater borrowing. Both US Inc and UK PLC are aiming for new and exacting records this year and next. We have both expanded our normal borrowing requirements to new peaks, and can add many billions to those figures through our commitment to loss making businesses. I think adding the capability to print the money needed should markets become reluctant to lend is the icing on a very exciting cake.