Category: Blog

Alan Greenspan became a popular figure. Everytime there was the threat of a downturn or a suggestion the US should draw in its belt, he slashed interest rates, created more money and allowed the good times to go on rolling.

More recently he has become less popular. His successor, fighting to deflate the bubble his policies helped create, has attracted some support for the view that Mr Greenspan overdid the bubbles It was Mr Bernanke’s decision with colleagues to deflate the bubble and restore some balance in the US economy that helped create current conditions. In the UK the Bank of England followed a similar course with its interest rate strategy over the last ten years, preferring always to inflate the housing bubble than to correct the imbalances until they became so gross around three years ago.

When governments saw the results of their monetary authorities new austerity they moved from “teach them a lesson” to “let’s panic”. They now want the authorities to try to puff up a bubble again. In the UK the governemnt thinks one more puff will enable them to emerge from the electral hole of the opinion polls, and in the US Mr Obama, only used to being popular, thinks one more bubble could make him a hero just as Mr Greenspan used to be.

That’s why they want to support rather than mend the banks. That’s why they are committing unbelievable sums of money to underwriting business that has gone wrong, more large sums to “reflationary packages” and still more money to what they hope will be new lending. They are gambling the credit worthiness of the state on the hope that short term it will spark things back into life.

I have news for them. The way out of this mess is not another bubble, but working through all the past excess and winding it up, paying it off or netting it out with as little loss as possible. The private sector banks should take the hits, not the taxpayer. The Central banks should stand behind the banks that have a solvent future, and should force the pace of making the larger banks solvent in the long term by insisting they raise more of their own capital by asset sales, cost reductions and other marks of better management. We can neither afford to lose a major bank, nor afford to feather bed it with state capital. If in need the authorities should lend short term money against promises of better management and against what security they can find.

The loss of most of the £37 billion the UK government foolishly tipped into three banks here in just two months should be a warning to them. The rate of loss is too high. They should have blocked the LLoyds/HBOS deal, as advised here, so LLoyds was untainted by all this. They should have required substantial change at HBOS for any loans they asked for from the state to tide them over. They should have demanded that RBS wind up, sell or otherwise reduce the extent of its risks in the investment banking side of its activities. We have a large bank attached to a medium sized government. The bank is in danger of capsizing the public finances.

The pound has just halved against the yen, so the government proposes buying a huge number of new coaches and locos from Japan at a very high price with little UK manufacturing offset. When will they ever learn? The Unions are rightfully up in arms about it. The Opposition has to say it is the wrong deal at the wrong price, and point out the country cannot afford this kind of open ended expensive commitment stretching far into the future.

If we are ever going to be competitive at making machines now should be the time. We have unemployed people, cheap capital, and a collapsing currency. We need to plug the huge hole in our balance of payments. If they must order Japanese items, they must make it a condition of the contract that we make and buy more of the kit here in the UK under licence.

The trains in question are too heavy and too fuel inefficient. Green ideologues often tell us to go by train to save the planet. They actively promote more train travel, whilst condemning all other forms of mechanised movement. These trains represent too small an improvement on the heavy fuel inefficient ones currently using our network, and will prevent us hitting greener targets for trains for years to come. All forms of mechanised travel create CO2 emissions. Rail travel can be a bigger contributor than road travel, given the low loadings on many of our trains (30% seat use overall) , the poor efficiency of the engines, and the way we generate the electric power some of them use.

If the government were serious either about saving the planet or about saving our economy it will recognise this is a bad deal and decline the sign the detailed documents. These trains are too dear in every sense.

Not long after we get confirmation that all £20 billion taxpayers put into RBS has been lost in the write offs and trading losses at the end of last year, we hear that HBOS has lost £10 billion. There’s not much left then of the £37 billion we put in so recently to the three banks.

It shows the expensive folly of setting a price and promising the money in a hurry. They then had to wait some weeks before they could actually pay the money in, whilst the documents were drawn up and shareholders agreed. Why not announce the intention to put money in, and then use the following time to get a new valuation of the assets and agreement over a price that was better for taxpayers?

Better still, why not offer cash and short term loans against security but not buy equity? These three banks are too big for taxpayer comfort, and the losses are eye watering. Why didn’t the government realise this? Why didn’t it protect taxpayers more? Never has there been so little pleasure for the expenditure of so much public money. Now we all have to work harder to pay those debts off, as it is all borrowed money they have lost.

This is an amended post. The media first reported a loss of a mere £8.5 billion, but the small print reveals it is £10 billion. No wonder departments in the government now have become even more casual about their budgets when huge numbers swing around in bank loan books owned by the state. This banking crisis is creating an unreal world in public finance. Labour’s dream of limitless spending will turn into a nightmare of debt.

Last night the Oxford Union debated the motion “ This House blames the bankers”.

Months ago in a moment of weakness I had agreed to speak against the motion. By yesterday, steeped in the theatre of the Westminster Show trials of bankers, and fresh from the hothouse atmosphere of the Commons smelling blood in the water surrounding the government’s own favourite bankers, I made my way through the driving snow and rain of this economic winter wondering why I hadn’t opted for a night off instead.

I looked on the cheerful side. I had not agreed to defend Dr Shipman’s approach to care for patients, or to defend the actions of the Australian fire razers. Even in the cauldron of censorship of current British politics there were far worse things that everyone must agree non bankers had done.

The debate itself was not what I expected. Geraint Anderson, the City columnist, laid in to his former City colleagues with a gusto, accusing them of serious crime as well as of bringing the financial house down. A communist don reminded us of the lack of power of Marxist analysis, condemning capitalism more generally for the very income inequalities which allowed him as well as the other guest speakers to earn more than the average, whilst Rachel Elnaugh of Red Letter days didn’t seem too impressed by bankers either.

On my side of the argument Ron Sandler, now head of Northern Rock, quietly reminded the House of the complexity, importance and diversity of the modern financial industry, asking why just the bankers, and did they mean bankers. He pointed out that many people got jobs and bought homes during the long period of growth. Dr Yaron Brook from the Ayn Rand Institute made an impressive speech explaining how the Federal Reserve Board and the UK monetary authorities were to blame, cataloguing their mistakes with interest rates and the volume of money and credit which they are meant to control. I also had a few words to say on the roles of the Regulators and governments.

To my surprise, after the debate, I was told the Motion had been defeated . Indeed it had been overwhelmingly defeated, by 131 votes to 51 votes, with a substantial number of abstentions. Well over half those present had voted No.

Many will say Oxford is not representative. There may have been other special factors at work. It is nonetheless interesting that an audience of bright young people who will have to get jobs in a difficult climate and help to pay off all the debts the government is taking out voted the way they did. It shows that outside the Westminster and media bubble blaming the bankers is not the automatic and easy way out that it is in the spin doctors scripts. The students, in a debating chamber known for its love of entertainment and funny quips, were eager for something serious and for some explanation of what had happened. They did not take the easy way out. Let’s hope the government listens.

The government has encouraged the myth that banking was unregulated following the “Thatcher” reforms and this caused the problems of recent years. This begged the question of why the government left such a sorry state of affairs in being for more than a decade if it had been true, but like so much in the “explanations” of this crisis it was false.

The truth is simpler. They inherited a system of banking regulation which did control solvency and liquidity, demanding higher levels of share capital and cash than the present government required on its watch. This government transferred the successful banking regulation they inherited from the Bank of England to the tripartite structure they set up in 1997 under the control of the Chancellor.

We now learn that the FSA did its job and understood that the HBOS model was too risky. Why then under the new government’s structure did they not have the powers to require the bank to change its model? Why didn’t the Chancellor intervene or give them the powers to do the job? Or if he thinks they had the powers, why didn’t he enocurage them to use them?

It is a sign of times disfigured by spin that the former heads of banks make headlines, whilst the current heads who could solve our problems or make them worse will doubtless attract far less interest.

The questions we need the current management of RBS to answer include:

1. Will you trade at a profit this year, after last year’s huge losses?
2. What action are you taking to cut the costs of your expensive bank?
3. Will you cancel all descretionary bonuses for 2008 given the large losses?
4. Will you ask all senior executives to forgo contractual bonuses for 2008 given the large losses, to instil some sense of collective responsibility?
5. Which assets and trading businesses are you planning to sell this year, to reduce risks to the taxpayer and bring in some cash?
6. How long will it take you to net out your positions in sophisticated financial instruments, and reduce the capital at risk in such activities?
7.What interest rates are you going to offer savers to encourage more UK deposits?
8. What are your plans for new UK lending in 2009?

Yesterday the media’s attention was on the Treasury Committee’s cross examination of the failed bankers, men who have lost their job because they lost their shareholders and now taxpayers so much money. It was never going to be a very informative session. Their apologies will not pay any of the bills.

Meanwhile in the Commons chamber itself something far more important was happening. The government sought approval for unlimited sums of money to be spent on propping up or nationalising any bank or similar financial institution they choose.

We were given just 45 minutes of time to discuss this item, which was not nearly enough. I did manage to speak, but under time pressure because other colleagues wished to talk as well. The Minister introducing it said very little in his introduction. It was a Money resolution, but he gave us no figures at all of how much money might be involved or what we might be buying for it.

I pointed out to the House that if you added up all the loans, guarantees, share purchases and other financial provisions the government has made or promised in recent months to banks, it comes to around £1 trillion of cash and guarantees (£1,000,000,000,000). It was the largest sum ever sought from Parliament. It is larger than the government’s version of total current liabilities of the UK government.

The Minister did not deny it could be £1 trillion. He did not leap to his feet with an official figure, or even suggest I was exaggerating when he came to sum up the debate. Once again I might have been too prudent in my calculation!

Worse still, the measure confirmed this government’s belief in nationalising very large banks. I reminded the House that we now preside over a large bank with a medium sized government attached. The government’s version of the state’s balance sheet has it that total state liabilities are under £1 trillion. The share purchases at RBS add a whopping £2 trillion to the liabilities on that balance sheet (and we hope they add to the assets a similar amount). RBS puts at risk more than three times the annual tax revenue of the state. As we saw last year, it can in a single year lose almost as much as the annual defence budget.

My colleagues Richard Shepherd and William Cash called a division on this spending. It went through with a minority of MPs voting for the government.

The Commons needs to sharpen its act on holding the government to account on spending. Each item under the banking packages should be given proper time for debate and a vote if MPs wish. The government would do better if these issues were scrutinised more. It is a disgrace that I am prevented from tabling many of the sensible questions we need to ask on the risks and costs of running RBS. Now the government itself says it is crawling all over the remuneration and bonuses of that bank, it is high time they agreed to answer some questions on it. After all, we now have more money at risk in RBS than in the state’s annual budget. It is high time we were able to hold them to account for it.

President Obama chastised Wall Street yesterday, for daring to fall 4.5% following the announcement of his “rescue” packages. He sounded like a cross parent when a young child receives a very expensive present and honestly explains it is not what he wanted and he has no intention of playing with it.

The President should do what he said he would do when campaigning – listen, and try to build consensus. He has now had two warnings concerning his economic policy – the refusal of most Republicans to vote for it, and the immediate reactions of markets over his first month in office.

He should remind himself that this was a crisis born of borrowing too much, and should go on to ask whether borrowing lots more is the best way to resolve a debt crisis. He does need to help mend broken banks, but should so so in the least risky and expensive way for taxpayers.

Most of us know that if we try to walk on water we get wet.

On both sides of the Atlantic we are waiting for the next plans to save the banks and reflate the economies. The US market has rallied a little in expectation of agreement on the Obama reflationary package, as the Senate debates the balance between tax cuts and spending increases, and its overall magnitude. In addition the money markets actions are beginning to have some effect. In the UK we are awaiting the detail on the revised banking package, to see how much insurance is going to be offered for bad loans held by banks, and what it will cost..

The authorities both sides of the Atlantic are committing large sums to the tasks of assisting the banks and reflating the economy. There have been differences of view on how to do it, but each side has now been influenced by the other – or by similar ideas – to the point where there are common strands to the actions. The US has injected some new capital into banks, the UK is now looking at purchasing or underwriting bad assets. The US did nationalise a couple of mortgage banks, as did the UK. The only difference has been the UK’s decision to take a substantial stake in RBS as well. This difference could turn out to be important, as it has placed a large sum of taxpayers money at risk in the UK and posed big management questions for the government over how far should it intervene and what should it try to do with its large bank?

The publication of Barclays results in the UK highlighted the contrast between their performance in 2008 and that of RBS. Barclays announced a profit of £6.1 billion, with write offs at a manageable level, where RBS is suggesting total write offs and losses of £28 billion. This leads people to ask how could two large UK registered global banks end up with such a different performance.

There are two possible explanations. The first is that RBS was badly managed, complicated by their decisions to acquire a large number of overseas assets near the top of the market, whilst Barclays has been better managed. The second is that RBS’s new management have decided to take a very pessimistic view of their banks assets at the beginning of their regime, to make recovery easier. I would hope that auditors and the government as owners would ensure the figures are realistic and in line with current understanding of potential bank losses, so this rules this explanation out.

The most likely explanation is that RBS was less well managed, and took on too much in its acquisitions which have cost its shareholders dear. It remains surprising that the government did not undertake proper investigations of their likely 2008 results before finalising the purchase of the shares. I remain to be convinced that things were so desperate they needed to finalise everything in a single week-end. It subsequently took a long time to get round to buying the shares and putting the money in, time which could have been used for due diligence followed by changing the terms of the deal in the light of the discoveries. That would have protected the taxpayer interest more.

As Barclays points out in their 2008 results, it was the Regulator’s demand for higher capital requirements at such a sensitive time which has led to Barclays not paying a dividend. That call to increase the demands at that worst of all possible times was the background to the panic share buying by the government. It did not help the banks re-establish confidence, and it left the taxpayer stranded with some shares which soon dropped in price.

Could it work from here? Yes it could. That will depend less on the reflationary package of the President, and more on the actions of the main world authorities in money and bond markets. On both sides of the Atlantic there have been signs of second thoughts in bond markets about just how much governments need to raise, with some fall in Treasury bond prices. It should urge western governments to greater caution in their spending, so they do not try the patience of the markets too far and cause long term interest rates to rise too much.

Last night Yvette Cooper, Chief Secretary to the Treasury, put pay to any idea that the government would remain at arms length to RBS and leave them to make their own decisions. She told us they had people going over all the detail of the bonuses and remuneration of the staff of the bank. It’s a strange way to avoid intervening. It’s also an ineffective way to stop bonus payments. All they had to do was to say “No”, at least to all the non contractual ones. Instead of a simple policy, she told us we will be paying the salaries of more people second guessing the management view of pay and bonuses at RBS. Wouldn’t it have been cheaper and fairer just to give them a bonus policy, now we own it?

This morning I awoke to hear that the government line on RBS bonuses is they do not want to run the bank, and have to allow the management to incentivise the staff. What nonsense! If you own a business you are responsible for appointing the management, for deciding how to remunerate them, and setting them objectives. As the taxpayers representatives the government has a duty to tell the nationalised banks what their aims are, who will run them, and what we will pay them. They cannot deny all power or involvement. That’s a stupid cop out.

It’s none of the government’s business how much Barclays pay their staff or how big their bonuses are. That’s still a matter for Barclays shareholders as they refused taxpayer share capital.

At least this weekend saw briefing from RBS that they are at last going to slim the Group down to cut taxpayer risk. Readers of this site will know I have been urging them to do so since they first dreamt up the dangerous idea of nationalising it. Let’s hope the government backs this or even encourages this. Or is this further evidence of banks we own but do not control? Was this a spontaneous policy on the part of the new management, quite unconnected with the interviews and job offers made? What is UKFI doing in all this to earn their bonuses? What guidelines are they setting RBS? I of course as an MP am not allowed to know, as my questions on it are blocked. People should not be so surpised. Many of my questions on all sorts of subjects relating to public money are blocked, and many of the ones that are allowed do not receive anything a normal person could call an answer. It’s just the way this government treats Parliament.

They are looking at cutting back the size of the investment banking activities substantially, as they should. They are looking at disposals of overseas activities. The sooner the better, as we need to get the bank down to a size the government can manage, before completing the return of the viable parts of the business to the private sector.

Liam Halligan this week-end in the Sunday Telegraph wrote a good piece warning about a possible increase in inflation in due course. He is right to remind us that CPI inflation rose last month to a high 4.1% if you adjust it for tax changes, and right to remind us that imports are going to be a lot dearer as the big fall in the pound works through to consumers. Readers of this site may remember my warnings of price increases ahead based on the fall of the pound. We have already seen some car price increases announced, despite the poor demand, as manufacturers seek to offset some of their losses on the Euro. We should expect more for other imported goods.

The Monetary Policy Committee will doubtless come up with some tortured prose to try to justify their further cut in interest rates last week. They clearly are not considering inflation in a year or so’s time as they should be, as prudence would have dictated an increase in rates from 1.5% if they had been. They are once again getting it wrong – they are so mesmerised by the present mood all the time, they find it impossible to think ahead as they should. They are clearly trying to manage rates now with an eye to activity rather than to inflation. Did they not see that despite agressive price discounting and the big drop in activity, some prices are already moving up, with much more to come as the lower pound works its way into import prices? Have they bought any petrol or diesel recently, where the pound has offset a chunk of the fall in world oil prices? Do they watch City attitudes to inflation linked bonds and to future inflaiton protection from commodities?

Once again they are driving using the rear view mirror, and now they even have a blurred view of that. Inflaiton is still too high despite the collapse in demand and output. We are living through slumpflation. There will be more price increases ahead, as a greedy public sector puts up its fees and charges, and as the higher import bill feeds through. The Monetary Policy Committee is meant to take all that into account. Instead, in a state of panic for their past mistakes, they continue to do the wrong things.

Meanwhile the Chancellor kicks bank bonuses into the long grass of a year long review. Why is it so difficult to accept the consequences of his mistaken nationalisation of RBS? Why can’t he come out and say as owner he wants to sell it off bit by bit as quickly as possible before it does more serious damage to the public accounts? And in the meantime there will be no bonuses for 2008, because the bank as a whole lost a stunning £28 billion and needed public money to preserve all its jobs.