Category: Blog

Mr Hester, the CEO of RBS, figures prominently in today’s papers with a plan to sort out the mess at RBS.

Some of what is reported makes sense and is welcome. There appears to be a realisation that the investment bank is undertaking too much risky business, and using too much capital This needs to be slimmed down drastically, with bits closed and other bits sold off. There is the outline of a cost reduction plan, which will need to go further than currently indicated.

There is some wish to sell off some overseas subsidiaries and assets . The more the merrier, given the stretch the whole bank imposes on public finances. One version of the story has a substantial programme with some urgency – the course I would recommend. Another version has a lesser programme with less urgency.

There is some suggestion the bank might need to make a further provision or write off of £2000 million to cover the costs of restructuring, on top of the £28 billion of losses and write offs. Let’s hope someone who understands figures is giving and independent view of whether this is fair and reasonable or not in the circumstances, as very soon we will be talking real money here.

Readers of this site will know that I have always thought RBS is too big and risky for taxpayers to take on. Once the government committed, I argued strongly for organised disposals and wind up of risky businesses, to limit our risks and likely future costs and losses. I restated the view at some length in “It’s the banks, stupid” on 3rd February.

The government and UKFI should encourage Mr Hester to go further faster than the outline plan we have seen today. The government should also be very wary of buying out loads of dodgy debts from the banks. The UK state is already overcommitted, so why do they think we can take on more debt? World markets may only a limited appetite and limited patience when it comes to UK government borrowings.

Can spinning get any more trivial?
What matters is the content of any meeting between PM and President, and whether it is in our interest and the US interest to develop the relationship.
Do we agree with Obama’s warlike moves in Afghanistan?
Can we advise the President to a wiser course in the Middle East?
Can we protect mutual intelligence from EU incursions?
Let’s talk about the real issues, instead of trying to cock a snook at other world leaders for being slow into Washington.
It’s so juvenile – playground tests for who’s whose best friend.

In January both share prices and government bond prices fell. This meant that most pension funds in the UK lost money, some of them very large sums.

In the through the looking glass world of pension calculations, the deficits of the UK funds actually fell a little. The combined deficits of all the funds coming under the Pension Protection Fund reduced from £194.5 billion to £`190 billion. This is because as government stock prices fall, interest rates rise. This is taken as good news for pension funds, meaning they might to be able to buy more income in the future for any given amount of cash.

It still seems to me losing more money by holding bonds that go down is bad news for them. If they had held more cash they would be in a stronger position today, able to buy bonds or most other investments at cheaper prices. I fully agree with those who work out the sums that losing lots of money in equities was unqualified bad news for the funds. In 2008 overall they lost 14% from holding equities, and in January 2009 another 3.7%. February so far has brought no relief from the plunge.

Why does all this matter? You could say these sums are all notional, that one day markets will rise again, that most companies will meet their obligations to present and future pensioners over the long haul. If you took such a relaxed view, you would be missing the serious crisis now facing many companies with final salary pensions.

The UK government set in train three different policies which have combined to undermine final salary pensions.

The first was the Pensions tax on investment income, costed inaccurately at around £ 5billion a year(the government refused to let us have the true figures). This removal of substantial income from the funds both hit their earnings on the investments, and helped drive down the capital values of the shares so taxed. If shares yield a large class of investors less income, it usually means they are worth less as a result. The funds also had less investment income to reinvest, so cumulatively it became a big hit.

The second was the decision to set up a Pension Protection Fund with powers to levy an additional tax on successful pension funds, to pay for the funds that got into financial difficulties. The danger today is that more companies will go bankrupt, placing their pension funds in the hands of the Protection Fund. This could strain the resources of the Fund further, requiring ever bigger levies on the funds that are still being supported by their sponsor companies. Sponsor companies strapped for cash to run their businesses will not only have to tip more money into their own fund, but will have to find extra to pay for other people’s funds that have got into an even worse mess.

The third is the regulatory system developed by the government. The Regulator for understandable reasons demands repairing the damage done by falls in values of investments within a limited time period. It means that companies have to start filling in pensions black holes whilst they are still struggling to generate cash in their own businesses. There becomes an unintended additional pressure on the company itself, where the demands for larger contributions to support the pension fund could be one of the straws that breaks the camel’s back in companies running out of cash.

Keeping the company going is probably the best way to underwrite the pension fund. Taking too much off the company to buttress the pension fund may make short term sense for the fund, but may make the longer term position worse, placing yet another fund into the hands of the stretched Pension protection fund.

What should we conclude? We can conclude that there is no substitute for pension funds making or preserving their investment money, and no substitute for each pension fund being backed by a strong company. The present combination of regulation, taxation and poor economic circumstances will spell the death knell of quite a few pension schemes, as well as the companies that went with them.

It will confirm the corporate sector’s view that final salary schemes cannot be afforded and are too risky. They are going to be a phenomenon primarily of the public sector where people still think money grows on trees. In the meantime, if the government wishes to save some pension funds and ward off more corporate collapses, it needs to do some constructive thinking about the system of creeping death it has invented for so many pension funds. If it hadn’t bought so many bank shares it could afford to do more to help. The problem is the government itself is showing itself to be a worse investor than Pension trustees, capable of losing more money more quickly.

The government’s stealth taxes have slowly but surely taken more of our incomes. Tax Freedom has crept later, from May into June.

Now the UK government takes financial responsibility for a very large bank with a medium sized government attached, Tax Freedom Day will advance still later, beyond the half way point of the year.

You need to add annual borrowing to the annual tax take. It is now well over 50%. The borrowing takes money away from the rest of us as surely as does taxation, leaving the state free to spend more and more of our national income. Sooner or later, depending on the whims of the markets, extra borrowing will need to become extra taxation, as we seek to repay some of the debt and meet the soaring interest bills.

You cannot run a truly free society nor a successful economy at these levels of state intervention. The government needs to get rid of its overmighty banks, back to the private sector, before they gobble the available cash and jeopardise the governent’s credit worthiness too much.

Iceland and Ireland should be a warning to them. The UK is not in such an extreme position as these two small countries, but the UK state is cruelly over exposed to risk and financial commitments. The £1 billion of bonus payments the government has seemingly accepted at RBS is £ 1billion more of loss for the bank, £1 billion less the government can spend on something more worthwhile in the public sector. There is no magic money or special pot money for the banks. It is all ultimately a caim on the poor taxpayer, who is under the cosh of excess government.

The Labour government is getting several of the things it said it wanted, but discovering they are not what they were cracked up to be

They said they wanted homes to be more affordable. Now they have house prices in free fall, they are not so sure it was a good idea.

They said they wanted fewer lorries and cars on the road. Now a deep recession is bringing that about, they are in a panic about it.

They said they wanted to balance up north and south, to stop the south outpacing the north as it did in the credit boom years. Now the southern economy is being sandbagged by the credit crunch the government is worried by the impact.

They said they wanted us to generate less CO2. Now our industrial demand is collapsing, the CO2 output will contract. They are no longer so keen to bring it down, if that is what it takes to do so.

The Unions are right to be worried about the future of British car manufacturing capacity. They are not necessarily right to say we need to preserve the capacity and the model ranges we currently have. We need to export more vehicles.

Even at the height of the over borrowing in 2007 the world had too much car capacity. Many of the west’s factories were geared to selling expensive and complex vehicles to the successful and to the affluent in the west. Some manufacturers concentrated on selling second and third cars to the very rich. Volume manufacturers often specialised in company car products to middle managers or ever more sophisticated vehicles to discerning individuals who could get access to large car loans. These markets are badly damaged by the end of easy credit, and may not return to their former levels for a long time.

The car market is a good illustration of the imbalances that bedevil the world economy. In the east are millions of people who have never owned a car. Many of them work very hard for low wages. A sophisticated and expensive vehicle is way beyond their dreams and current capacity. They would like the chance to buy a simpler, cheaper more rugged vehicle suitable for their pockets and local conditions. The Indian industry is now experimenting with just such a product.

In the west are millions of workers with cars, who are now finding it difficult to take out the loans to buy more modern and better specified replacements. When people fear for their jobs they rein in spending on cars. When banks are stretched, cutting down the car loans is an easy option for them.

The industrial renaissance of post war Germany in part revolved around production of the Beetle. A simple relatively cheap car became a popular icon, because it was affordable and reliable. Asia needs several such products to lead the expansion of domestic demand for cars. Is the west’s industry going to come up with something, or is it going to ignore that opportunity, watching the switch of leadership from western to eastern car companies?

Come to think of it, some smaller more fuel efficient cheaper products could go down well in the West as well. Many retired people, unhappy with the attack on their savings, might be persuaded to buy a realistically priced run about from some of their savings before government policy destroys more of its value.

The industry has to rethink its strategy. The Western regulators also have to take on board that their many requirements have been adding cost and weight to Western vehicles, putting them out of reach of many people round the world who would like to buy a car.

UK government policy is to cut private sector living standards for many, by increasing taxes, increasing borrowing from private sector savers, and slashing interest rates on money saved. That means we will not be able to buy so many cars.

I asked the Treasury to tell me if they were going to start underfundign the deficit, to aid a policy of printing more money. Yvette Cooper assures me not. She says:

“The Government intends to continue to finance the Central Government net cash requirement using the framework that was established in the 1995 debt Management Review. The Government aims to finance its net cash requirement plus maturing debt and any financing required for additional net foreign currency reserves through the issuance of debt.” Elsewhere she says they are not planning more use of short term debt.

The Office of National Statistics tells us today that we can add £1 to £1.5 trillion to the £700 billion national debt to allow for the banks coming into the public sector. That makes our national debt up to a collosal 150% of National Income on the official figures. We could add some more for pensions liabilities and other off balance sheet items.

So after all those months of being told the UK has low public borrowing around 40% of National Income, at last the government’s own statistics office tries to make an honest institution of the government with these much larger figures. I am not going to argue today over over the odd trillion of understatement, now they are coming up with some more realistic figures. I just want to know why it has taken so long,and why we had to put up with all those denials when I tried to set out the true figures in the Commons and elsewhere.

Bloggers have asked me what do I think of printing money (quantitative easing).

It can be necessary when an economy is in slump and there is no danger of a collapse of the currency or inflationary tendencies from doing it. It is dangerous if there are inflationary tendencies, and if the currency is vulnerable.

The recent views of the Monetary Policy Committee continue to alarm me. They should remember their job is to keep price increases down to 2% on the CPI. They have singularly failed to do that, with the CPI still showing 3% despite the general slump in activity. We are now in Slumpflation thanks to the government and them.

Monetary easing could be part of the answer to our current decline in activity. It needs to be accompanied by spending and borrowing less in the public sector. This is easy to do – all they need to do is spend a lot less on subsidies to wayward banks for starters. The future course of sterling matters a lot. Any further decline in the pound would be inflationary. Sterling now responds to news on RBS and the other nationalised or semi nationalised banks, because overseas holders can see the dangers of the UK state taking on too many debts and obligations from the banks.

The MPC should be writing to the Chancellor to point out not merely that monetary growth was too slow at the end of last year for comfort on activity, but also to point out that the sharp decline in sterling is a matter for concern and does prevent them lowering interest rates. Indeed they should not have lowered them as far as they already have. They could add that the government’s policy towards banking support is now one of the forces driving the pound down. In recent days similar fears about continental banks have adversely affected the Euro.

We need government action to control public spending, and to start to sort out the banks problems instead of just paying for the mistakes. We need higher indicative interest rates to encourage savers and debt repayment. Then we would have a safer background for monetary easing to get activity advancing again.

The likely exchange of letetrs with the MPC requesting permission to switch on the presses and the Chancellor likely to say “Yes” is a silly ritual designed to make you think the MPC is independent. If the MPC were truly independent they would tell the Chancellor a few home truths about the runaway borrowing and wasteful spending.

The MPC minutes mainly talk about activity, not inflation, despite their remit. They do acknowledge that the pound has lost one quarter of its value and this could affect inflation, but much of their discussion sounds like Gordon Brown telling us all it is a global rather than a UK problem. They conclude that the pound has fallen to rebalance the economy, and that it “could have been increased risk premia” – so that’s all right then!

They sign off by saying it was crucial “for the Chancellor to ensure that the government debt management policy would be consistent with the monetary policy actions of the Bank of England”. In this unintended side swipe at Brown’s “reforms” of the Bank they are pointing out that it is no use the MPC trying monetary easing if the government decides to sell huge quantities of its own debt! Well I never – why didn’t they think of that when they split up the Bank in 1997 and gave the power of issuing debt back to the Treasury?

In summary, I disagree with the present policy mix and think quantitative easing in these conditions would represent another worrying risk.

The BBC highlighting very high rail fares in the UK today is inclined to suggest the cause is the government’s policy of requiring more of the costs to be paid by passengers and less by taxpayers. It is one of Labour’s policies that I support. The true cause of high rail fares in the UK is the high cost way our railway is run. Fares are a rip off in many cases. They do need to be brought down. Pumping more taxpayer cash in is not the way to do it.

Britain’s railways are neither green nor good value for money. Indeed to some extent the bad policies that damage the environment are the same ones as make the railways too dear. Put simply, the UK runs too many unpopular trains that are more than half empty, too many heavy trains which require too much energy to speed them up and slow them down, and runs too many old and inefficient engines to haul them.

The railway also uses people wastefully, as it does fuel. It runs on too many consultants, managers and non operational staff, living in its own overregulated high cost world. Compare the approach of the railways with that of the low cost no frills airlines, and you will see what I mean.

It would be a good idea to have a blitz on all those costs and requirements which make our railways high cost. We need more trains on popular routes at popular times – especially commuter routes during the morning and evening peak. Unfortunately with heavy trains, poor brakes and old signals it means we cannot run nearly enough trains on the generous amounts of track we have. Let’s buy cheaper lighter trains that can speed up and slow down much more rapidly, allowing many more trains an hour.

Fly over southern England at the morning peak and you see crowded main roads with traffic bumper to bumper, and largely empty railway lines with large gaps between trains for safety reasons owing to the type of train, and the traction and braking system. We need either to fill more of the seats at off peak times by price discounting, or to reduce the number of unpopular trains trundling around the country largely empty. The railways have some of the bets routes in to our city centres, but they simply are not used enough owing to the technology.

Since Labour nationalised Railtrack the costs of providing and maintaining the track have shot up. It has been a consultants field day. The business is most unresponsive to commercial opportunity. Take them a property project to improve a station and make some money from associated commercial development, and they will sit on it or fail to progress it for years. In Wokingham they stayed out of the property boom as they did elsewhere, failing to improve their own property from profits on commercial development on their extensive land holdings.

The nationalised railway in the long post war period failed to put in a simple spur line to Heathrow, the world’s busiest international airport, until the idea of private capital finally brought about such an obvious business move. The rail network was great for Victorian industry, and even managed to update itself for the early twentieth century business estates. The long years of nationalisation saw the railways fail to move with the times. Now much of industry is on newer business parks located by motorways, without spur lines and sidings, because the railway failed to market itself to business to carry goods.

We need a more commercial approach. The railways could have a relative advantage at taking more commuters and more goods traffic. If they did so successfully they could lower the fares, because they would have more revenue and less cost for each journey. They need lighter trains, cheaper trains, fewer consultants and better traction.