Category: Blog

Let me say a few words in praise of Germany.
I am glad Mrs Merkel has better things to do with her time than attend the grandstanding “Save the world” session with the UK and France today.
I am glad she has avoided mock reflation based on massive borrowing. The UK plan to borrow more to pay for a VAT cut has backfired badly. Maybe Mrs Merkel understands that if the money is borrowed from nationals, there is very little reflation. The extra savings made by individuals and companies to lend to the government cannot also be spent by the savers, so it offsets much of the benefit of the extra spending by the government. Clearly she understands that this year’s reflation on public borrowing is a future year’s tax increase when you have to start repaying the debts.
Germany has fought its way back from over borrowing to finance the reunification. It has maintained some very good engineering based industries, and built a large balance of payments surplus. Mr Brown’s strategy of treble deficits, where everything rests of borrowing, is not going to prove as robust a model as the German one. Germany’s reluctance to join the others today should be taken as an opportuntiy to rethink the UK strategy, which is taking far too much risk with the public accounts.

The banks are “persuaded” to borrow money from the government at 12% per annum through Preference shares.
The banks are then advised to lend it back to the governemnt, by buying gilts, yielding around 4%. The regulator sets capital ratios that “encourage” the banks to own more gilts.
So the banks lose 8% per annum on large slugs of money,and for once the taxpayer gains.
Unfortunately, the banks then make less profit or have bigger losses. The taxpayer owns lots of shares in several of them, so the taxpayer then loses money on the shares.
Meanwhile the banks have no more money to lend to families and businesses, because they have to lend to the government!
So the only winners in this round tripping are the advisers to the government and advisers to the banks who helped dream up this bizarre money go round.
It’s wonderful to have such talented people in charge of sorting out the banks.

Labour use the language of fairness all the time. They use the idea of fairness to justify all sorts of limitations on liberty and tax attacks on the many. One of the biggest disappointments and surprises is just how unfair they have turned out to be.

I feel a speech coming on like Neil Kinnock’s best one, adapted to modern conditions:

I warn you, do not be a saver under this government. They will slash your interest rate, undermine the value of your currency, and tax you on the meagre proceeds of your prudence.

I warn you, do not be a motorist under this government. They will try to regulate and tax you off the road, blaming you for all the environmental crimes of the planet.

I warn you, do not be a resident of the Home counties. They will tax you more to pay for the rest, and will build all over your remaining greenfields.

I warn you, do not be a small business owner creating jobs. They will hurl the regulatory book at you, undermine your market by bad economic policy and tax any success you may still have.

I warn you, do not seek to avoid dependence on the state to keep your independence. The Inspectors and Regulators will still come after you to capture your every personal detail and movement for their databases.

I warn you, do not think you live in a democracy with freedom of information. If you criticise the goverment and publish some government information, you may be hounded and harried.

I warn you, do not seek to have thoughts that are different from the government’s. The thought police will monitor your blogs, listen to your conversations, and charge you with thought crimes if you offend the politically correct nostra.

I warn you, do not own a TV under this government. If you do you will be expected to pay a Poll Tax and dutifully accept Labour propoganda put out by the BBC in so many of their editorial choices of questions, guests and story lines.

I warn you, do not be well educated under this government. To be have done well at school and university shows you are privileged, and part of the problem as the governent sees it.

I am all for more fairness for the disabled, the elderly, and those who cannot compete in this fast moving competitive world. That does not require a government which treats many of the prudent, responsible, independent people as the enemy. It just requires a government which runs the economy and public spending well enough for the active and successful so there is enough money at sensible tax rates to be generous to those in need.

This morning I wrote that I have been getting some of my better information on the state of our finances from official published Bank of England sources.

I am grateful to those who blogged in to point out that the government wants to use the Banking Bill to stop us finding out how much inflation or deflation the authorities are putting into the system on a week by week basis . Apparently they are trying to stop the weekly publication of the figures. Well, there’s a surprise!

What possible good reason could they have for that?

Yesterday the media discovered “quantitative easing” – a polite way of saying the Bank of England can inject lots of money directly into banks, and can go on to order more to be printed, to try to get things moving.

We were told that after a further round of interest rate cuts, if things were still not working, the authorities would consider this drastic step. Clearly the spinners were worried that the latest plunge in interest rates would not do the job, and they intended to head off any suggestion that the authorities were “running out of options” or had “used up all their firepower”. They all seem to forget that monetary action takes about a year to have a decent impact. That was why I wanted interest rate cuts a year ago, as about now we would be feeling the benefit, with far less of a downturn.

Let me hasten to say I don’t have a mole in the Bank of England, and I don’t receive brown envelopes with interesting papers. Instead I do try to read some of the published information even this government has to put out. That’s why yesterday when others were writing about how the Bank of England could inject more cash into the system after rate cuts, I wrote about how this is exactly what they have been doing on a grand scale for several weeks.

When the authorities foolishly stood by in the prelude to the run on Northern Rock, they triggered the need as they saw it to nationalise that institution. The Bank required the Treasury to take some of the strain of taking it over as the Bank of England was then far smaller than Northern Rock with a balance sheet (from memory) then around 40% of the Rock’s. Today the Bank of England’s balance sheet is two and half times the size of the Rock, so in other words the Bank of England’s balance sheet has expanded sixfold or so.

The actions of the monetary authorities are still like the driver of the car trying to steer by continuously looking in the rear view mirror. All the time the road looked clear behind, they kept speeding the vehicle up. When the heavy traffic of inflation started to appear in the rear mirror they slammed on the brakes. Now they have crashed into the brick wall of recession, they have seen the problem in the rear view mirror, as others pile into the crash. Their first reaction was to clam on the regulatory brakes after the crash, requiring huge increases in banking capital and less lending. Now they see the resulting pile up behind them, them are pressing the accelerator to the floor, but the car is not going anywhere as it has bricks stuck in the wheels. One of two outcomes is possible. The first is the bricks do shake free and we will then be accelerating at breakneck speed, still watching in the rear view mirror. The second possibility is the bricks do not shake free and we just damage the engine, until someone gets the bricks out.

How do we get the bricks out? The bricks are the broken banks. The government sometime soon needs to call them in for proper talks, not for the ritual lecture about lending more money. It needs to discuss how £450 billion of loans and guarantees it has said are available can best be used and help free the banks. The Regulator needs to revisit his capital demands, and come to a transitional compromise over how much capital is needed and on what conditions, so the regulations are not pulling in the opposite direction to the monetary policy. The government needs to protect taxpayers by taking proper security, and start to curb its own appetite for too much borrowing. Instead the authorities seem happy for bank capital to buy its government debt, and may soon be buying up government bonds itself to try to create a “bond bubble”. This would be a triumph of the short over the long term yet again.

For those who like metaphors, a City commentator (I think it was Lombard) compared the actions of the MPC and the Bank to the person in the shower who can never get the temperature right. Tiring of the cold start to the shower, they turn the thermostat to very hot. After a pause they are surpised to be scalded. They wrench the thermostat back to cold. Sometime later they are shivering from jets of cold water. They lurch the control back to very hot…

Please can our authorities learn to get the temperature right soon?

The Prime Minister may be in denial, but we have just lived through another week when many people’s living standards have been falling. The pound fell again, now trading at 87 pence to the Euro, and down at 136 yen. This has cut our purchasing power further for all those goods that are imported. There were large job losses announced. More companies put their employees onto three or four day working, or extended holiday closures. Pay rises remain below price increases.

The worrying thing was the immediate response to the 1% cut in the Bank’s base interest rate. The share market fell a little, when you would normally expect investors to see interest rate reductions as good news. Sterling fell, unlike the dollar when they slashed interest rates. International investors seemed to regard the monetary action in the US as good news, but here they are more concerned about a variety of issues, including the rapid build up of public borrowing.

The Bank of England’s latest weekly publication shows that its balance sheet has ballooned to a massive £260 billion as it tries to stimulate banking activity. The Bank of England has share capital of just £14.6 million, provided by taxpayers. At the 2007 annual balance sheet it had share capital and reserves of £1.86 billion. It is interesting that at a time when the Regulator is making the commercial banks put up more capital to improve the ratio between their share capital/ reserves and their total commitments, the Bank of England is going dramatically in the other direction. Of course it is not a worry, as the taxpayer stands behind the Bank, and the Bank concentrates on buying high quality and short term assets. It shows just how hard the authorities are trying to get something to happen, that the central Bank now has a balance sheet around 130 times its core shareholders funds when commercial banks are being asked to get their balance sheets down to around 12 times their shareholders funds. Restrictions on commercial bank capital ratios help prevent more of the injection being passed on to new borrowers.

For the time being the large monetary infusions into the markets and the active approach of the Bank of England are not inflationary. The tight regulations on the commercial banks, the poor state of the wholesale markets and their new caution means this money does not get passed on through the banks and multiplied by their lending. The authorities will need to be vigilant to withdraw this large liquidity when things do start to work again, otherwise it will become inflationary.

Today’s chosen subject for debate by the political classes is why the full interest rate cut by the Central bank is not being passed on by all the commercial banks. It gives politicians a marvellous opportuntiy to feel useful, by demanding that the banks cut their rates. They should try to understand why this is happening. There are some obvious reasons why some of the banks will not pass on some of the cut to some of their borrowers:

1. Savers need a reasonable rate on their savings. Banks need to keep and increase the deposits they take from the public, as other sources of money for the banks have dried up.
2. Banks need to make more profit to meet the Regulators’ demands for more shareholders funds (which include retained profit) to maintain their existing level of lending, let alone increase it.
3. Some people have signed contracts to borrow at fixed rates, so they do not get the benefit.
4. Banks think lending to people is becoming more risky, as many more people are unfortunately likely to lose their jobs as the recession bites harder, so banks feel they need a better margin and more reserves to deal with future losses on bad debts.
5. State owned banks(N Rock, RBS) have been losing money in the first half year and presumably at some point will be required to make a profit for the new involuntary shareholders.

It is ghastly watching the speed and size of the collapse now going on in much of the private sector. If the government does not mend the banks quickly, the recession will deepen more. That is why they do need to revisit their £450 billion package of loans and gurantees to see how it can be better spent to get some health back into the commercial banks, and why they need to review the regulatory framework again as it is clearly reinforcing caution and parsimony by banks. I hold no brief for the banks, and understand their current unpopularity. I do think, however, when something is n’t working well those in power should consider how to change the signals and the framework to alter conduct as they wish, rather than engaging in a public slanging match.

The Leader of the House is both a partisan Cabinet Minister, and the voice of the minority parties in government. Successful Leaders of the House take the second role seriously, and speak up in government to ensure fair play for the minority, insisting on proper time for debate and examination of the Executive on things the Opposition is unhappy with or where it has a differing view.

I have not been a fan of Ms Harman in this role, as she has failed to allow the Opposition to use the Thursday so called topical debates to highlight the issues that we think are topical, she has failed to get many of her colleagues to make their statements to Parliament first, and in some cases has failed to get statements or debates at all. It is difficult to have much confidence in a Leader of the House who cannot ensure a proper debate on a large budget which is slipped out masquerading as a technical Statement.

Yesterday however I felt some sympathy for her. She was asked exactly the question a Cabinet Minister fears – do they have confidence in someone who is currently in the news? If she had given a ringing endorsement of the Speaker she would be concerned that the government was forced into giving a running commentary on the health of the Speaker’s position, which is not something many would welcome. Most of us want a Speaker who is above all that, and who is not beholden to the Executive for support. She was also conscious that there is going to be a debate on Monday about the Damian Green affair, where the House will hear a range of very different views. She seemed aware that she had to speak for the whole House, and the whole House has not yet spoken on this matter.

The Speaker himself has shown wisdom in granting the Opposition a debate on the Budget that pretended not to be a budget, and granting a debate on the important issue of Damian Green. Both he and Ms Harman have to give the Opposition its days in court on the big issues of our time. When they do this with a good grace they will draw strength from having cross party support.

I learnt two important things yesterday in the debate on the Queen’s Speech. The Prime Minister is an up to date reader of this blog. Unfortunately he does not seem to understand it.

I ask my other readers to allow me to make just a few things clear to our PM thirsting for knowledge from the wonderful world of the web.

1. The main point of most of the posts on this site for the last couple of years has been to advocate more freedom and higher living standards for the UK.
2. The last thing I want is lower living standards or a downturn.My posts explaining that we are now living through a sharp downturn in living standards is describing the results of the PM’s economic policy and banking crisis, not describing what I want or what would have happened if he had taken better advice.
3. In 2007 I offered advice which if taken could have avoided the run on the Rock. I then offered advice after the run which could have avoided the need for nationalised ownership and the big cuts in the business which followed.
4. A year ago I offered advice to cut interest rates substantially, which if followed could have avoided some of the severity of the downturn we are now entering.
5. My advice- offered by others as well – on more liquidity to money and banking markets was taken too late, and my advice on interest rates was followed months too late.

My advice now, just to remind him is:

1. Don’t cut VAT. It gives very poor value for all the borrowing.
2. Start selling assets off from the nationalised banks, to reduce taxpayer risk and to cut borrowing.
3. Then cut interest rates further.

The offer of the bosses of the main car companies in the US to work for $1 a year in return for federal assistance shows great political wisdom that has been sadly lacking amongst top bankers. It also shows a grasp of economic reality still sadly lacking in the financial sector.

The US car majors realise that they are paying too many people too much money to make too many of the wrong kind of cars. They need to cut the cost of each car they make, to stimulate sales by lower prices, and to match the competitive products coming from abroad. They need also to recognise the shift in customer choices and produce a new range of models more suited to modern American requirements in the age of sometimes scarce and dear enegry.

The bosses will deserve their $1 if they can pull off this transformation. Indeed, they would then deserve a bonus as well, geared to results and to getting out of federal support. If they cannot find a way to cut their costs and change their models at the same time – and it will be very difficult- even $1 could prove excessive. These companies now need great leadership capable of redefining them as leaders in the modern marketplace, and capable of delivering high quality goods at realistic prices. Politicians on the Hill were right to demand they sell their corporate jets and cut their executive remuneration before considering their request for support. It is just a pity the US and UK authorities did not take the same line with the top bankers who came seekng state aid in order to sustain their unrealistic levels of remuneration and comfortable corporate lifestyle. Instead the authorities in the Uk both forced them to raise equity capital more urgently than was needed, and then made it available to them without demanding the cost cutting you would expect in the circumstances.

A year ago I called for much lower rates of interest to ward off mass redundancies and bankruptcies. The Monetary Policy Committee decided to keep rates high, leading unavoidably to recession.

Now we are getting the bankruptcies and job losses that were the inevitable consequence of their decision, they strangely panic and slash interest rates. This would usually be the right course of action, but in the meantime the government has decided to increase the amount of borrowing it needs to do by a huge amount.

This means the government needs people to save more to send the money to the government through National Savings, direct bond purchases and investment in bonds through unit trusts and pension funds. The governemnt also wants foreigners to buy its bonds, which means it needs to worry about the continuous fall in sterling which will put off foreign investors.

The government seems to believe borrowing an extra £16 billion to make up for lost VAT receipts is reflationary. If that money is saved by other UK people, they will spend less, so it has less reflationary effect than they think. In the meantime, if they are serious about borrowing such large sums, they need to offer the saver a reasonable deal. If the MPC carries on slashing rates from here without a thought for the huge deficit the government has foolishly decided to run, there could be trouble ahead. It’s even worse now we own RBS, as the deficit will swell if they lose more money. If they lose just 1% on their assets that’s another £20 billion the state needs to borrow.