Category: Blog

We learn today that LLoyds TSB has to pay a large fine to the US authorities for its conduct over money transfers and sanctions. If this were private shareholder money it would be a matter for them to hammer out with their Directors. Now this bank has taken substantial sums from taxpayers who are co-owners, it becomes a matter for all of us.

I am not sure this was the kind of use for the cash the government had in mind when it put up new share capital. Did the government know this action was pending? Did they discover anything before they bought in, or did they studiously refuse to do any due diligence as they implied at the time? When I called for them to do proper due diligence, I had in mind not just the possibility that some of the loan books needed writing down more, but also the issue of any outstanding legal suits, claims, and other unusual liabilities.

I heard on the radio that the bank had made some provision for this potential loss, but even so the cash they need to pay the fine in one sense comes from the taxpayer. This is not the way I want my taxpayer pounds to be spent. We need to know from the government what questions they will be asking their bank, and what management action will follow over the people involved in creating and supervising the problem.

One of the worst features of the EU and the current UK government is the perpetual desire to monitor, control and watch us more and more. Today we learn that they want us to keep all emails for at least a year, just in case they need to inspect them. This snoopers charter is justified on the grounds that there are still some terrorists and serious criminals out there, so they need to know about all the emails everyone sends just in case.

Why? They have powers to go in and see the emails and computer behaviour of people if they suspect them of serious offences. They have rights to listen in and intercept where there are grounds in order to pursue an investigation.

They cannot conceivably read and monitor all our emails and conversations. That would not be a realistic way to try to find the tiny percentage of the population who harbour terorrist inclinations. Some say if you have nothing to hide, then why worry? That argument could be extended. If they propose curfews you could argue “As you normally sleep at home, why worry that you now have to?”, or if they proposed you need a permit to travel to certain places you could argue “Well you don’t need to go there very often, and its a small price to pay for security”. The overwhelming majority of us are neither terrorists nor criminals, but we have seen how anti terrorist legislation can be used for very different purposes, as with the heckler at a Labour conference, and the financial situation of an Icelandic bank.

The law abiding majority do feel too snooped on. We also resent having to pay ever more tax for clumsy security which targets the law abiding but does not effectively spot the real threats. We never wanted to live in a communist state where everything you did had to be acceptable to and cleared by the authorities. Our current masters are taking too many steps in this direction.

Isn’t it interesting that yesterday the President elect treated us to a huge statement on his economic policy, shortly after telling us that he cannot comment on the Israeli/Palestine conflict because you can only have one President at a time?

The one President at a time doctrine clearly only applies to tricky issues where the President elect does not wish to come off the fence. I find that disappointing. If he wishes to be fresh, honest and new, he should avoid such disingenuous explanations of why he is very selective in making Presidential announcements. He is going to have to tell us what he thinks of the Middle East crisis in a few days time, so why the delay? What is Mrs Clinton doing?

The content of the economic statement was no surprise, and builds on the Bush approach of excessive state spending and borrowing. It is a balanced package, in the sense that some of the money is borrowed to offer tax breaks which Republicans might favour, and some to increase spending that Democrats might favour. The Greens too do not get it all their own way. Whilst the package sensibly wishes to spend on improving the USA’s reliance on its own renewable energy sources to cut imported oil, it also favours road building.

Will it work? Yes it will create some new jobs, and in the short term the US government can probably raise the money at low rates of interest. No it will not of itself lift the economy out of recession. That rests on monetary policy and the state of the banking system.

I try to give credit where credit is due. The BBC this morning allowed me with Roger Bootle to give a good airing to differing approaches to the Credit Crunch. It was refreshing to be part of a discussion and interview where we were not subjected to the idiocies of spin and interruption at all stages, or prevented from developing an argument. I hope it worked for the audience, who could hear for themselves the range of arguments over how to mend banks, stimulate demand and balance savers against borrowers.

I see and hear in today’s media that “quantitative easing” is back on the agenda as a possibility “if all else fails”. I would urge all those about to broadcast or write on this subject to take the precaution of first reading the latest Bank of England Weekly statements. These show that quantitative easing is well underway. The Bank’s balance sheet has ballooned from well under £100 billion last September, to nearly £240 billion by the year end. Just picking up tittle tattle from “sources” can be very misleading.

Actual printing of bank notes has been more limited, but these are up over the year by more than 10%, well ahead of the fall in economic activity and price increases.

The fact that none of this is working as people hoped, and the big cut in interest rates has not yet worked, means one of two things. It means that the usual time lags have been forgotten. Because the authorities left it too late, they are now in panic mode because the response is predictably going to be later rather than sooner. Or it means the banks are so broken by the current regulatory system and their own bad lending in the past that they cannot respond in the usual way to a very strong monetary stimulus.

I return to the image of the person in the shower. They have now turned the shower up to hotter than it has ever run at before, by both very low interest rates and quantitative easing. If the shower is still working, after a delay we will get scalded. Alternatively it is possible the shower is broken, in which case twiddling the controls will make no difference. We need to mend the shower.

So please, government, call the banks, the FSA and the Bank of England in, and sit down to discuss what kind of banking package will get banks lending a bit more at sensible rates related to the current low base rate, whilst trying to ensure the taxpayer can afford it. At the moment the capital and liquidity requirements on the banks are pulling in the opposite direction to the monetary policy, creating a very bleak economic prospect for non banks without access to state funds. We need a resumption of sensible lending levels at reasonable rates. We also need to keep a strong bank deposit base, which means allowing a decent return to savers.

When the MPC meets this week it should remember just how dependent we are on imports, and just how far sterling has dropped in the last couple of months. If we take the fifth or so of our National Output represented by imported goods, and reckon that the prices of those goods will over the next few months rise by around one quarter as the full impact of lower sterling comes through, we can see there is an inflationary factor the MPC must take into account.

The MPC will douibless take into account Mr Darling’s apparent second thoughts on how long the recession will last. When the Chancellor produced his revised forecasts in the Pre Budget Statement, many of us queried his optimism that the recession would be relatively shallow and short lived, with an upturn commencing in July 2009. I read now that he thinks this may after all have been a tad optimstic. Unfortunately we are well past the point where a further cut in interest rates can miraculously turn the economy round this summer.

I have set out in the FT why I advise the Monetary Policy Committee to keep interest rates where they are this week. In summary, the problem is no longer the price of credit the Bank of England is recommending, but the availability of credit. Business groups and others lining up to urge a new cut, should ask themselves is it the base rate that still causes them anguish, or the scarcity of credit, or the failure of the banks to charge them a similar rate to base rate?
On reflection many business people might see it is the latter two issues that cause them most current concern.
If, as many of us fear, this is not a normal cycle, the action needed relates to the health of the banks rather than the level of base rate. I set out in the article how even lower interest rates could make restoring the banks even more difficult a task.
If the MPC does cut rates more, this does not mean that suddenly all lending rates will fall by the same amount as the MPC cut. It will mean the banks have to create a different structure of lending and deposit rates so they can still do some business and make some money.
Far from establishing the MPC’s wisdom and authority, a further cut would be evidence that it has lost the plot. It would mean a world where base rate was less important than the market rates banks have to set.
It would be a further bad blow to savers, at a time when we need more savings to correct private sector balance sheets. This crisis began when governments called time on too much private sector borrowing. It will not end through governments becoming the borrower of last resort themselves, but when banks, companies and private individuals have stronger balance sheets that can sustain new activity.

I have been criticised by some of you for daring to mention Mr Obama’s silence on the Midddle East. Let me hasten to remind you that this site was one of the first to identify Mr Obama as a very talented politician who was going places in the race for the White House. I admire his way with words, respect his intelligence and academic ability, and think he is a consumate spin politician. The point I am making is that if someone stands on a ticket for change he needs to be sure he can make changes when he gets into power. I would like him to prove that he not only talk the talk but he can walk the walk. That is what the next few months will reveal.

In the UK today David Cameron is offering real change – change from spending and borrowing too much to spending more wisely and borrowing less, change to lower taxes on earning and saving, change in the way we tackle our broken society, change to the way we try to mend the banks, change in the way we approach the EU.

I am still at a loss to know what changes to expect from Mr Obama. He looks very like Mr Bush with better spin. He said enough yesterday to let us infer he supports Mr Bush’s approach to the crisis in Gaza. We know he wishes to prosecute Bush’s war in Afghanistan more intensively, and will remove troops from Iraq much as Mr Bush is doing. We know he wants to spend and borrow more, as if Mr Bush was not already spending and borrowing collosal sums, and we know he supports Mr Bush’s approach to mending the banks. The two men do not disagree fundamentally about their response to the economic crisis.

Maybe the only difference is going to be that Mr Obama wants more taxes on energy use to be greener. I just wonder how far he will in practise go when the polls tell him just how unpopular such taxes are likely to prove. He may discover that Mr Bush’s idea of increasing rewards to finding and exploiting energy at home had its point after all.

The newspapers are right this morning to mourn the passing of the Wedgwood company. It is another sad casualty of this vicious Credit Crunch.

Josiah Wedgwood has long been a hero of mine. As an industrialist I often looked to him for inspiration. He seemed to have it all. He was an innovator, developing new glazes, better furnace controls and better factory organisation. He was a great marketer, realising the value of celebrity endorsement and the need to engage the thought and taste leaders of the day with his products. He was a pioneer of better transport and logistics for access and exit from his factory at Etruria, favouring the then modern canal. He provided employee housing, recognising the need for a settled and motivated workforce, capable of high quality workmanship. He knew how to raise efficiencies through smarter working. Above all he understood the power of beautiful design and decoration, turning to classical designs. In his later years he was determined to produce a copy of the Portland Vase.

He was famous for the royal patronage of Queen Charlotte, which led to Queen’s ware, and to the interest of the Empress Catherine of Russia in his work. His blue Jasperware is still being sold to this day, from his use of barium sulphate in the firing. His black basalt range was another classic which has survived 250 years. This year we will remember him as well for the work of Charles Darwin, whose money came in part from his links to the Wedgwood family, which made possible his researches.

The modern Wedgwood company still has title to the fabulous designs and glazes that Josiah pioneered. I do not believe they are all without value. Something should be rescued from the collapse. I realise the last Wedgwood product I bought was sometime ago, when they produced a reproduction Clarice Cliff vase. I thought the originals were too expensive for me. I wanted to keep flowers in mine, so a fresh modern version of the original style was just what I needed. They then ceased to make any more reproductions from the amazing Clarice Cliff range, where they hold the title to the designs. Perhaps someone else can if and when they buy that part of the business. it seemed like a missed opportunity.

A modern Wedgwood should move with the times, responding to the different needs of people. Some in the press imply it was bound to die because it makes old fashioned dinner and tea services people no longer need. We live in a country with a rising population, who all need to eat food off plates and drink out of mugs or cups. The new owners of Wedgwood need to blend the best of the old and new as Josiah himself did. Josiah sold 2000 year old styles in sets that matched contemporary needs. Today we need a Wedgwood owner that loves the best of the inherited designs, glazes and shapes, and adds to them the magic of modern marketing that can capture the market that is there for good ceramics, and the best of modern design.

Meanwhile, this is another casualty of the recession. The business model clearly needed improvement, but the Credit Crunch has claimed yet another iconic victim. It shows just how deep and dangerous this crunch has become.

All those primarily concerned about the loss of life in the Gaza strip as a result of the Israeli mililtary action will be dismayed by Mr Obama’s silence. All those who see the Hamas rockets as the main issue will be disappointed that Mr Obama has not recently condemned those either, leaving that task to Mr Bush.

I do not offer a better way forward with this problem as I have insufficient knowledge of all the complications. I have never visited Gaza. I just mention the silence of Mr Obama, as his views and approach generally is so important to us all. It is difficult to sustain his claim to usher in an age of change, when on this collosal issue where the USA is the most important power apart from the protagonists in the conflict, he remains silent. In effect he is backing the Bush strategy, but lacks the courage or the conviction to say so. He is certainly not offering a different one.

The government has a strange idea that you solve a problem brought about by borrowing too much, by borrowing more. The Prime Minister yesterday went out of his way to stress he wanted the private sector to borrow more from the banks. He has made it well known that he wants to take the public debt to unheard of peaks.

The main reason his strategy will not work well is that it is fundamentally flawed, muddled over what the origins of the crisis were and even more muddled over what the solution might be.

The government and monetary authorities made two mistakes, not one. Their first mistake is well known and understood now, late in the day. They kept interest rates too low for too long, and set regulatory rules which allowed or encouraged banks to balloon their balance sheets, taking on too much risk by lending to people who would find it difficult to pay back, and playing financial games with each other through the derivatives and futures markets. When this had gone to extreme levels the authorities decided to call time on it.

They then made their second mistake, too little understood or acknowledged. They raised interest rates too high, and changed the capital and other regulatory requirements on banks too abruptly, causing the opposite problem. They brought on a sharp deceleration of credit, as they were forcing a sharp contraction in bank balance sheets. I see this as an even worse mistake than the credit expansion. Yes they needed to deflate the bubble. No they did not need to do it so sharply and to such an extreme extent.

Now they are in panic mode. They are worried about a self feeding slump/credit crunch. Banks unable to lend more have to withdraw money from companies that need it to stay afloat. Low asset valuations in asset markets starved of money means as companies go into liquidation banks will not get back all they lent to them as the assets are sold off. Banks then lose more money, and in turn have to lend even less as the losses erode their capital. Meanwhile the authorities slashing interest rates too far mean the banks again struggle to make any money on lending, so delaying the day when they will have more capital which they can use to lend more. The government is now trying to be the main borrower and lender, owning banks, borrowing colossal sums of money, seeking to reflate the general economy and to prop asset markets. It is trying to do too much with too much.

So what should it do? It should go back to ask itself why the authorities thought they had to deflate the bubble in the first place. They did so because the three UK deficits were getting out of control, and were beginning to create inflationary pressures.

The UK was simultaneously running a very large private sector deficit, as banks and companies borrowed too much, a large public deficit as the government borrowed too much, and a large balance of payments deficit as the public and private sectors imported goods and services which the UK economy was too stretched to provide, paid for with the borrowed money.

The government is tackling these three deficits in very different ways. The private sector deficit is being brought down by tough measures forcing individuals and companies to rein in their spending and to save more, because there is no longer the credit available. Many individuals face job loss or wage cuts. Many companies face falling turnover, plunging profits or a trip to the Receiver.

The balance of payments deficit is being tackled partly by the squeeze on demand, slashing demand for imports, and partly by a huge fall in the currency. A cheap pound will make it easier to sell our goods and services abroad, and will prevent us buying so much from overseas, as the prices of imported goods and foreign holidays rise by around one quarter.

Meanwhile the government debt is being doubled, as the government tries to limit the damage done to private sector incomes and prospects from the first two adjustments.

All this is very unhealthy. I am glad to hear the Conservatives say they want to do it differently. They see the need for the public sector to make a contribution to the country getting back to living within its means. If the public sector is cushioned from any of the downwards adjustment, it just means bigger job losses and a bigger income squeeze in the private sector. In order to share the pain, the public sector has to rein in its wilder and more wasteful spending, to concentrate on the basics of good health, education and defence. The public sector needs to control its borrowing, which means being much more careful about the money it tips into banks. It could agree a more gentle timetable to get the banks balance sheets into a more prudent position, avoiding the need for extra state capital. It can ensure they carry on trading by the Bank of England acting as lender of last resort against proper security.

What makes no sense is for the PM to say banks must lend more, at the same time as carrying on with his regulatory policy of making them run more prudent balance sheets. The two policies pull in opposite directions, and in this climate the regulatory imperative will win and the banks will stay cautious.

We do need to correct the balance of payments deficit, the overstretch of bank balance sheets and now the over borrowing of the state. We need to do so at a measured and sensible pace, not in this hectic extreme way.

The mood of the times is to save a bit more and borrow a bit less, to lend moderately to people and companies who can afford to repay it, and to consume less to live closer to your means. The government needs to understand this has to apply to it as well.

I don’t mind people earning big sums in a competitive private sector company which is thriving. After all, we as consumers can decide whether we want to spend our money with that company, knowing that some of it goes to the high pay of the executves, or not. We have choice.The CEOs of successful companies drive down total costs per unit of output, innovate to create better products and services and offer us good deals.

I do mind people in the public sector “earning” salaries well into six figures when we have no choice, and when their jobs are not comparable to the risk taking revenue seeking jobs in the private sector.If we decline to pay them we go to prison for failure to pay a tax or public sector sector charge.

Today we read in the Sunday Times that so-called Chief Executives of Councils get high pay in part because a company wholly controlled by the Society of Local Authority Chief Executives and Senior Managers sells advice on how much to pay to Councils! Apparently Chief Executive pay in Councils has risen by a stunning 34% in just 4 years, compared to 16% in the private sector.

I have written before about how so called Chief Executives in Councils are not CEOs in the private sector sense. They have no responsibility for winning revenue, the difficult task most private sector CEOs have to concentrate on, and they make a very poor hash in most cases of controlling costs and raising efficiency, preferring instead to recommend Council tax rises every year. They have not heard of the need for cost down which has dominated private industry for the last decade, because unlike the private sector there are no Chinese competitors to Councils. No wonder many of us are fed up with the high salaries of Council CEOs when they serve us so badly and just push up the Council Tax remorselessly.