Category: Blog

Yesterday was a defining day for the Obama Presidency. He fulfilled the two obvious predictions made on this site – just like George Bush he would spend and borrow more in response to the crisis, and just like George Bush he would send more troops to the Middle East to intensify America’s war there. Obama’s bank package is just another variant of Bush’s largesse to Wall Street.
Yesterday marks the day when he ceases to be in opposition to an unpopular Bush Presidency, and now has to take responsibility. His honeymoon has been short owing to circumstances.From now on people will look at the economy and ask if his policies are working, as he has made so much of his twin packages, one for further bank subsidy and the other to pass more money through state hands. From today the strategy in the war in Afghanistan will be his strategy, even though there is still vagueness about the long term aims of the conflict.
I am pleased he wants to sort out Guantanamo sometime, pleased with his wish to uphold more civil liberties somehow and pleased that sometime he intends to try diplomacy more. What we need is a clearer grip on public spending and borrowing, and a more certain touch at running the US money system to get us over the downturn. It would be a sad legacy for this President of promise, if the main change he sees through is to undermine the excellent work Presidents Clinton and Bush did in reducing welfare dependency.

State bail outs are usually bad news.

They are clearly bad news for taxpayers. We get lumbered with having to pay for businesses which have lost money and become too expensive for their shareholders and bankers to keep going.

The British experience demonstrates that they are often bad news for the very people a bail out is designed to help. In the 1970s UK government put huge sums into leading industries, only to make them some of the worst employers, endlessly sacking staff despite the hand outs. The nationalised coal, steel, and rail industries fired large numbers of people, whoever was in government and however much taxpayers money was tipped in.

The bailed out industries were not good news for their customers either. Far from enjoying cheap subsidised prices, they often faced big real increases in prices. Where bail out was allied to monopoly customers were clobbered.

In “Going for broke” I made the case against state subsidy of industry in the early 1980s, based on UK experiences in the 1970s. We won those arguments. A new generation of politicians, Labour as well as Conservative, started to repeat the new mantras – “Government is no good at backing winners” and “ Subsidy just delays sorting the bad business out, it doesn’t save the jobs”.

It is worrying that these crucial lessons seem to have been lost on both sides of the Atlantic. The US and the UK authorities seem to think these rules do not apply to banks, for some unspecified reason. Now the US is considering a second bail out of GM and Chrysler, just a few weeks after the first bail out. When will they learn?

It is not difficult to see why bails out rarely work. If senior management think cash comes from taxpayers, they devote their energy and time to wooing the state instead of wooing their customers and sorting out their businesses. If employees think the state will rescue their job it takes some of the pressure off to help the company find the new customers it needs to pay the wages. Above all it stops the energy and thought of how to change the business to make it successful.

What would happen, some ask, if the state does not step in and buy shares in banks and car companies? The answer is the radical restructuring needed takes place more quickly, perhaps reducing the total loss and pain brought on by subsidised delays to the process. Of course no main bank should be allowed to go under, as the Central bank is their lender of last resort. If they need last resort lending, it should be made available on promise of radical restructuring and slimming down, to get the bank back into commercial shape. If a car company needs money it can get it from its own bankers. If they are not obliging, then it needs to sell assets and find new equity backers. They will be there, even in these conditions, for a business plan which makes sense. Only the state finances dud business plans as a matter of course.

Ignore the RPI – it is just reflecting the huge cuts in interest rates. Although it is the rate that matters from the point of view of many contracts, for once we should examine Mr Brown’s chosen rate of the CPI.

It is obstinately still at 3%. The authorities should not be surprised. That is the price of falling sterling, which we will see reflected to some extent in rising prices, despite the general gloom and the discounting. For once CPI is giving a more meaningful impression of inflation than the RPI.

Council taxes are too high, and in many places are rising too quickly. I welcome today’s news that a Conservative government would give local electors the right to demand a referendum where they thought the Council Tax was too high and should be brought down. We need such a countervailing power. We need some way of standing up for the taxpayer. I also welcome the news that they want to scrap some bits of regional government at the same time: the more the better.

Why can’t more Councillors and Councils do this? Most of them if asked agree that many voters want a lower tax. I have been consulted this year by some Councillors on the detailed budget making of a local authority (not Wokingham). It has been a useful reminder of just how difficult a task it is for Councillors.

The first problem they need to tackle when budget making is the information they get sent. All the Councils I have know over many years receive budget papers in the same useless form. Officers start on the basis that everything being spent in the outgoing year is a given. They then compile a list of “unavoidable” commitments to add to last year’s total. On goes the revenue consequences of last year’s new projects, the need to make crucial repairs to capital assets which they otherwise have not provided for, pay rises agreed, automatic bonuses, the consequences of government circulars seeking more actions by Councils (whether they are statutory or advisory), and any other item they can kitchen sink. They usually claim Council inflation is much higher than CPI inflation, and put a large figure in for that as well.

This produces typically the “need” for a 6-10% increase in Council Tax for a so-called “standstill” budget. If Councillors accept this work of fiction, they are on the hook for a bruising and ultimately unsuccessful budget process. If Councillors counter by saying they want to do something new in one or two areas, that is extra making the Council Tax increase even higher. If they request a reduction in the proposed tax increase – and they usually do – officers then come forward with “cuts”. These are usually carefully chosen to cause maximum political pain. They typically propose surrogate tax increases – higher car parking charges, planning fees, congestion charges and the like, and insensitive reductions in service, often aimed at the most vulnerable.

In the bargaining that follows the worst of the “cuts” are avoided, the fat in the budget is left untouched and neither side are happy with the result. Opposition Councillors have a field day if the process is public or news leaks out, as they can condemn the incumbents for daring to look at the uninviting list of cuts and charges the officers have dreamt up to try to keep the budget high.

So what should Councillors do? They should do what they do with their own family and business budgets. In tight years all items of spending are under review. The aim is to cut out the least desirable items, not the most sensitive, and to deliver the same or more for less by spending more wisely. To do this the first round of budget papers should n ot present existing spending as a given, but should question why the Council is doing its more marginal things., and question how it can do everything needed more effectively. Councillors should ask amongst other things

1. How much is the budget for Consultants? Why can’t this work b e done in house by existing officers? Why are we often paying twice for the same thing?
2. How much is the Council spending on energy? Would spending on insulation, heating controls and better management of buildings use slash this budget in year? Can the energy contracts be renegotiated on more favourable terms?
3. How much is the Council spending on transport? Can the contracts be better managed? Can more transport be grouped to minimise journeys and maximise use?
4. What is the budget for “fact finding travel” and conferences? Is all this necessary?
5. What is the budget for PR? Why can’t Councillors do more of their own communication, without relying on officers who have to be careful not to be political in their messages with Council money?
6. How many surplus assets does the Council have? Can some of these be sold to cut debt?
7. How good is the Council’s cash management? Can they earn a better return on balances without putting it in an Icelandic bank?
8. How many layers of management does the Council have? Why can’t this be slimmed down through natural wastage?
9. Wouldn’t a staff freeze generally be a good idea to make manning more efficient? Couldn’t the Council cut the number of committees which need servicing, and concentrate on the big issues that matter.
10. Why is the Chief Executive’s office so large and expensive. Doesn’t economy begin at the top?

Councillors are part time, and face clever officers often determined to expand their empires. Leaders need to tell officers many of the present budget papers are not fit for purpose. They need to introduce commonsense budgets, as many of them run elsewhere.

Dame Stella is right today to complain that the government is using fear of terrorism as an excuse to take away liberties and create a police state. The only thing I take issue with in her statement is that the government is not using the fear of terrorism of the people so much as its own fear of terrorism.

We need a government which polices our borders better, but respects our traditions of innocence until proven guilty, trial by jury, no detention without charge or trial, and the right of most to go about their daily lives without government spying and intrusion.

Above all we want a government which targets its enforcement activities against violence on those who can be reasonably suspected of possible violence, not by placing everyone under surveillance. Guards and gates are expensive, clumsy and often do not work if there are dedicated groups who want to carry out acts of violence.

Place suspects under surveillance, and uphold the freedoms of the rest of us. Learn to target. Most people are not potential terrorists, so don’t waste time checking them, and don’t waste money watching them as if they might be. If you watch the borders better, you can interview people who arrive who have a history of association and statements that causes concern, and can interview UK citizens who have been to places where terrorist training occurs. Those are two small groups most worthy of investigation.

Today we are back to playing the absurd media/government/Lib Dem game of threatening nationalisation if a bank share price goes down too far, only to see the share price go down because investors fear nationalisation.

Why can’t they all understand that a falling bank share price is no crisis unless they make it one. If the bank does not want to raise new share capital from the market any time soon, it can live with a low share price. If a bank has something to prove because it has just lost a lot of money it might have to live with a low share price until it can publish some figures showing it is back making profits. So what?

It doesn’t help to have instant pundits opining that if the price falls too far the company needs to be nationalised, and it does not help to have Ministers refusing to rule out nationalisation. Where are they planning to get all the money from to nationalise another bank? And why do they think a falling share price matters? If the bank has cash and capital, as they tell us the main regulated banks have, there is no problem. Leave the private sector ones alone.

Here on this site:

27th September 2008

“Nationalisation is the worst option….By all means strengthen deposit protection. By all means act behind the scenes to help a private sector solution, but do not promise to buy it or take it over”

November 4th 2008:
“It’s great news that another group want second thoughts on this deal.(LLoyds/HBOS) Let’s hope they can come up with a persuasive enough proposal for more shareholders to vote for it.
It would be better if the government vetoed the merger on competition grounds. They should stand behind any bank as lender of last resort, but should not be buying shares and acting as midwives to mergers which cut competition, choice,and pressure for more efficient banks.”

I have been asked to sum up the mood of the bloggers. I think it is quite like the mood of the students I met at Oxford last week as well.

There is a new seriousness. The many who found economics dull are now straining to understand what is happening and are hungry for more news and views. Most share a sense that we are living through unusually worrying and dangerous times.

Most who blog on this site accept that government and regulators are deeply implicated in the banking crisis. Many agree with me that the government cannot simply spend and borrow its way out of it. They want to see some commonsense and business expertise applied to sorting out broken banks. They want the government to target its spending better on people and projects that need public spending, whilst reining in the runaway state with its spy cameras, its thought police and its overweening arrogance.

Most are appalled by public profligacy and waste, by the gross unfairness of job losses and more rules for the private sector, and better expenses and bonuses for the public sector. People are hungry for change for the better, but know they have to live with another year or more of the current government. They fear for their jobs and their savings and have a sense of powerlessness.

So what can we all do? We have to take to the airwaves and the blogsphere, answer the endless surveys and pollsters enquiries, to persuade the politicians in power of our views. The government is uniquely unsure of itself, and vulnerable to polls and media advice. We need to be noisy in asserting a different reality to the government’s parallel universe. Bailing out big banks and spending more money in the public sector is the route to undermining state credit and the currency, not the way to prosperity.

When I heard the BBC tell me this morning that the CBI had called for £100 billion extra public spending in order to prevent a deeper recession I was ready to blog about the CBI’s economic illiteracy. When I read their Press Release I was interested to see the CBI said no such thing. They merely reported the obvious, that as the economy falls so public spending and borrowing will increase automatically, to pay more benefits to the unemployed against a background of declining tax revenues.

The CBI’s latest press release makes sense. It is a distinct improvement on their dangerous advocacy of the Exchange Rate Mechanism in the late 1980s, when I took a large Stock Exchange quoted company out of membership of the CBI in protest at their wrong headed stance. I remember their incomprehension that I felt so strongly about it as to cancel membership. I subsequently had to face taunts in government when I opposed our membership of the ERM that I should be supporting it as a DTI Minister faced with the strong representations of the CBI in favour.

Instead I can blog about the BBC’s sloppiness and their misunderstanding of how an economy works. Let’s try again. If you order another £100 billion of public spending on top of what is already happening, you need to increase taxes by £100 billion to pay for it. If the taxes fall directly on companies they will be worse off by at least the costs of collecting and spending the money. If the taxes fall on individuals, the companies will lose that part of their demand as people’s incomes are cut by higher taxes.

If the BBC’s idea of the CBI idea is that the £100 billion should be borrowed, then the taxpayer in the longer term will be even worse off, as the government will need to increase taxes some time to pay not just the £100 billion but also the interest on it. In the short term if the money lent to the government would otherwise have been lent to the private sector we are not better off. Indeed, borrowing from individuals and companies is a bit like increasing their taxes in its economic impact, as money they might other wise spend is taken by the government as a loan instead.

President Obama’s naïve “Keynsianism” is being well and truly
criticised in the USA. The BBC does not seem to understand why.

We are stuck in slumpflation. It is time for some commonsense amidst all this bank nationalisation madness. We need some hard truths for hard times.

This crisis began because the UK had borrowed far too much. You do not get out of a debt crisis by borrowing more. You get out of it by paying some off and taking your losses.

If you have a set of banks that have too many bad and doubtful debts, you do not get rid of them by transferring them to the taxpayer. If you transfer too many to the taxpayer, you bankrupt the state.

It is said that some banks are too big to go bust. Fine. Shrink them. If they want public assistance, make them sell assets, close down unruly books of trading positions, cut costs, weed out poor business. Lend them enough short term to keep them going, but leave them under pressure to cut costs and bring themselves down to a sensible size. Giving them access to limitless share capital just gives them the money to pay bonuses they do not deserve, to pay too many people too much money, to take unacceptable trading risks and to avoid hard choices which sometime they have to make.

Understand that the UK Parliament now has to supervise a large bank with a medium sized government attached. If they nationalise LLoyds as well as RBS the banks balance sheets will be more than twice the national income and more than five times the annual tax revenue. That’s taking a crazy risk.

The governing class now all tell us the banks took too much risk at the peak – though they as regulators allowed that and even encouraged it at the time. Why then is it now acceptable for the state to take so much risk, accepting the very instruments and loans which went wrong before? Have they learnt nothing? Remember we should not be discussing whether we set up a bad bank, when the state already owns three bad banks with plenty of bad and doubtful debts. How many more bad banks do they want?

Meanwhile even with all the taxpayer money going into the banks we have a deep recession. If at the same time as shrinking the bad banks we already own we have a sensible monetary policy we could turn the recession. Sorting the banks out instead of subsidising them would help restore confidence in the UK.

On current policy sterling is taking the strain, as the currency and international bond markets do now understand that the financial health of our banks is the same thing as the financial health of the state itself. This policy can best be called Slumpflation. Prices will go up thanks to sterling, despite very low levels of demand.

I’m fed up with slumpflation, and the banking and monetary madness which has brought it on us. Please don’t nationalise another bank. Please start to sort out the bad banks, and please run a monetary policy that finds the right balance between too much and too little.

The monetary authorities have been in the shower, tugging the control from cold to hot to cold to hot again. Set it for comfortable and stop fiddling with it. Let’s hope they haven’t broken it with their violent moves.