Category: Blog

On Monday the slide in sterling got faster, with the pound having its worst day since the collapse following sterling’s troubled times within the Exchange Rate Mechanism that the British establishment had favoured in the early 1990s. This need come as no surprise.

The Establishment’s latest wheeze of a so called independent Monetary Policy Committee turns out to be as ill judged as the ERM. The ERM led to inflation first, then recession, by forcing the country to take interest rates which were too low, followed by rates that were too high. The so called independent Monetary Policy Committee has done exactly the same thing, without the excuse that they are on autopilot determined by the value of the currency. They have resolutely steered the vehicle by looking in the rear view mirror. They are now about to make their third big error, of setting rates too low for the extent of government borrowing and the fears in the international community about the UK’s financial situation. They left lowering rates too late, pushing us into a bad recession. Now they are taking undue risks, because of the fiscal expansion. Fear of low rates is one of the factors behind the sterling collapse, because investors think the UK is still borrowing too much.

The truth is that both the UK and the US are following policies which will force a cut in living standards. For years both these economies have been living well beyond their means, thanks to easy access to credit from the strong exporting nations and commodity producers who were generating big surpluses. It has been possible for both the great Anglo Saxon democracies to run large balance of payments deficits, large government deficits and large deficits in the personal sector. People and governments have spent too much and borrowed to do so.

Now the world’s markets are saying enough is enough. Living standards in both the public and private sector are being brought down by a combination of government policy and market reaction. The private sector has to sell more abroad and consume less at home. The government sector has to get closer to just spending what it can collect in taxes.

Whilst the recession will force the private sector to contract, there is currently no mechanism to make the public sector take some of the pain. The outgoing President, Mr Bush, is a spendthrift who sees no need to rein in spending at the end of a long period of overspending. The incoming President, Mr Obama, was elected to spend more. The Prime Minister in the UK thinks spending and borrowing more is the right thing to do in the circumstances, and is busily trying to bail out chunks of the private sector which would otherwise have to adjust more quickly to the painful reality that we have been living beyond our means.

On both sides of the Atlantic the authorities have made the decision that most manufacturing will simply have to contract, shedding jobs, closing factories, putting people onto three or four day weeks to slash pay. Meanwhile they have perversely decided to feather bed the bankers, who are arguably more inefficient and much more highly paid than the manufacturers. Both administrations have poured money into banks which should have been told to raise their own capital by reining in their expenditures. The authorities should have given them temporary loans, not permanent capital. I see no reason why taxpayers should pay bankers bonuses in these conditions, when the finance industry needs to get its pay down quickly to sort itself out.Far from being fair or just, so far the pain is being concentrated on parts of the private sector, making the job losses there worse.
Reading the atrocious story of Baby P sums up so much of what has gone wrong in the UK public sector. There was no shortage of highly paid managers, auditors, box tickers and process controllers. The more of these we employ, the less well it seems the task is performed that they are meant to be doing. The UK public sector needs to deliver more for less. It needs its teachers, nurses, doctors and social workers, but it does not need such a colossal army of pen pushers, time servers, mock managers and reviewers, let alone its battalions of spin doctors and management consultants. If the government wishes to speed the end of recession, it needs to start to get the government to live within its means. That requires changes within every service, and a very different approach to inefficient banks paying their senior staff too much.

PS: What a disappointing article in the Mail! As any reader of this site will know I have gone blue in the face trying to get the government and the MPC to take the necessary action to limit the damage and to arrest the downturn. The last thing I want is a cut in living standards and a recession. It is a bit rich for them to criticise me for explaining what is happening and what will happen – which is a fall in many peole’s living standards as the job losses mount in the private sector, coupled with pay awards falling behind this year’s inflation, when I have opposed the very policies of this government which have landed us in this mess. Try again Labour – that one was wide of the mark. It is my caring about the poor outlook for so many British people that leads me to write this blog and to urge policy change to help more people more quickly than the current lethal policy mix will achieve.

The President elect, who wants to intensify the war in Afghanistan, has chosen a Republican as Defence Secretary to stress continuity from the Bush regime, and Hilary Clinton as Secretary of State, who voted for the Iraq war.

There’s not much change there then.

When you add to that the possible return of Bill Clinton, and the decision to carry on spending and borrowing just like Bush, it is difficult to see what favourable change the US has got after voting for change.

Maybe one day they will work out they cannot afford all these wars, as well as seeing that the so called war on terror is not working as planned. The world’s superpower will have to try diplomacy sometime.

Interest rates are the price of borrowing money. When the private sector was borrowing too much, the Bank kept the price too low, encouraging many more people to pay too much for houses, and alowing businesses to pay too much for commodities and raw materials.

Then they decided to end the party, bringing down prices, damaging the banks, and disrupting trade and jobs.

Now the government is going to borrow too much. It looks as if the Bank is going to cut the price of money further, to allow the government to borrow more than it should – all the time the markets still allow them to do that.

Before the last round of interest rate cuts I suggested that the Monetary Policy Committee wrote to the Chancellor and said they would only cut rates if the government agreed to keep its borrowing under reasonable control. There was no letter, but the Bank and the government did start telling us they saw the need to have a clear pathway set out to return government borrowing to more normal levels, from the £157 billion bulge this year. The government also decided to talk about £78 billion borrowing this year – leaving out the money to buy bank shares and pay for the bank losses.

The proposed pathway back to sensible public sector borrowing still leaves us too much in debt. The Monetary Policy Committee should have another go behind the scenes to get the government to see sense. If it cannot, it needs to leave interest rates higher to allow for the government excess.

The problem is the Monetary Policy Committee is acting out of fear, folllowing several years of getting it comprehensively wrong. They failed to see either the inflation or the recession they triggered. Now they are likely to misread the government debt problem.

Huge amounts of liquidity are being built up. In the short term this will not be inflationary overall , as the broken banks are not passing it on to the private sector. It remains inflationary in the public sector, which lives in an unreal world compared to the rest of us. The money is being passed on within the state, allowing many quangos, departments of the government and some Councils to be overmanned, and paying many very high salaries over £100,000 to people taking little risk and in some cases making little useful contribution. The public sector still has huge advertising and consultancy budgets, still has a massive army of officials looking for new ways to check up on us and persecute us, and still churns out the forms, compliance manuals, consultation documents and bossy boots instructions as if nothing had changed.

We certainly have two Britains. The government has split the country into the hard working compliance ridden tax paying private sector, shivering without cash and awaiting the call of the well heeled state Inspector, and the overbearing, camera wielding, humourless, play by the increasing number of rules politically correct Inspector state where any amount of borrowed money can be channelled into more nonsense. This is why the state can afford to prosecute us for parking in the wrong place, for offering a client a glass of wine or for using the wrong words to describe people, festivals or religious observance with no sense of proportion.

There is a growing sense of injustice amongst all those who run businesses and try to make a contribution through the private sector, and growing sense of unfairness between the towns and districts where people mainly work in the private sector, and the ones where a majority now draw their income from tax and public borrowing.

In the longer term the danger is that the government will want to use the printing presses to sort out its huge debt, which will be inflationary when the banks are working again.

I have been reading the Sunday papers about the economy and wonder why I bother to. Several of them rightly condemn the government for borrowing too much, but they all use Ministers’ own figures in the press releases and budget statement rather than reading the much larger and doubtless more accurate figures they had to put out in the small print of the budget book.

They tell us brrowing will reach 8% of National Income next year. Wakey,Wakey. The PBR book shows the government is already borrowing more than 10% of National Income this year. You can’t leave out all the borrowing to buy banks and bank shares, as the Chancellor did in his misleading presentation. The Chancellor said he would borrow a large £78 billion this year. His supporting book says it will be an eye watering £157 billion. Why can’t journalists report these simple and worrying facts?

If Economics editors and Business leader writers can’t be bothered to read the detailed 200 plus pages of the PBR they could at least read this website to avoid these howlers. They should know by now you cannot trust Ministerial figures.

Readers of this site will be hearing a lot more about this new “arm’s length, commercial” company “wholly owned by the government” (on behalf of you and me, the taxpayers, who are paying for it).

It has been set up to own our shares in RBS, LLoyds/TSB/HBOS, Northern Rock and Bradford and Bingley. It will own assets worth well in excess of the annual National Income of the country. It will be responsible for a major share of all bank loans and deposits in the UK, and will have large operations overseas as well.

Its success or failure will determine what kind of economic future we will all enjoy. Any sensible person wishes it well, as it is too big for it be comfortable if it fails. In a way what it does is now more important than what most Ministers do, as its reach extends into a major portion of all business and private transactions, and its stance on the availability of credit and cash will determine how long and deep the recssion is going to be. As someone who opposed the nationalisations which underlie its establishment, I now earnestly hope it can do what they say they want it to do, to protect the taxpayer and ease the credit crunch. If it loses around 1% of the assets it takes on it will lose us the annual defence budget. If it loses us around 3% it has lost us a year’s NHS budget. If it is too tough on customers, it could lose us thousands of jobs as businesses go into bankruptcy.

The Treasury is currently advertising for Non Executive Directors. We are told they are to “protect and create value for the taxpayer as shareholder with due regard to the maintenance of financial stability and to act in a way which promotes competition”. That will require very talented people, who understand the complex political and economic forces which will play on this very public leviathan, and who can see a way of balancing the need to make a profit with the requirement to lend more to people and businesses currently in distress. They are looking for people with experience of fund management, retail or wholesale banking. That makes sense, but they will also need to see the wider picture and to appreciate the pressures on this unique holding company to perform in non commercial as well as commmercial ways.

Are the three objectives compatible and possible? Only with great dfficulty. To create more financial stability at the moment requires more to be lent to a range of businesses who will find meeting the interest bills difficult during the worst of the recession. Being fair to competitors means that state supported banks must not offer concessionary lending using access to cheap money from the taxpayer that other banks cannot obtain. The investments in the government portfolio might need more to be written off their balance sheets, but large write offs at the outset coulld be anti competitive, giving the state banks the edge from access to public support to allow large write offs.

I will be commenting on what they do do and what they should do as this story evolves. All those watching the day by day exchange of soundbites in the Westminster village need to keep an eye on this new collosus, as it will in no small measure determine what happens next to our housing market, our small businesses and much of the economy.

I was pleased to see David Cameron speaking out in the News of the World today concerning the defence of our liberties through Parliament. The silence of the Prime Minister is eerie. I seem to remember him telling us he wished to re-estabish Parliament at the centre of our political life. We all looked forward to that after the damage to our democracy perpetrated in the Blair years. Here, Prime Minister is your chance. Make a statement about Parliamentry privilege and the role of Opposition as soon as we are back next week. Otherwise David Cameron will have to develop in the Commons what he has had to start in the newspapers, as once again this government has packed Parliament off on its holidays.

I hear this morning he is drawing up a list of companies that the government would need to assist if they get into financial difficulties.
PLEASE DON’T. Such a list could only be damaging. If it got out it could start a run on the share prices of certain companies. It will divide the business world into the elect to be saved and the reprobate to fail. The last thing we need is such a division, and such back handed help.
Please also remember that now the governemnt owns RBS it is very overstretched financially itself. There are limits to how many commercial companies can be bailed out by a government planning to borrow over £150 billion this year already.

A democracy needs a strong Parliamentary Opposition to flourish. Democratic governments should seek to defeat their Opposition in open debate, and by following policies which are demonstrably in the interests of the majority. They should not seek to prevent, stifle or subvert the Opposition by undemocratic means.

Most of us want to live in a plural society where we can enjoy free speech. The three central rules of democracy are:

1. Everyone lives under the law, including the lawmakers and government officials.
2. We settle our many disagreements by argument and discussion, where possible finding an answer which does the most good to the many and the least harm to the few. The one privilege Ministers enjoy is they can change the law for the future as they see fit, subject to Parliamentary support.
3. Where we cannot reach agreement, we settle differences by votes in Parliament, periodically asking the people to vote on who should carry out this task for them. Sensible governments respect minorities and seek to grant them freedom to disagree wherever possible.

The majority is happy with this system because they can have their way. The minority will be happy with it if they see that the law is fairly and fearlessly applied to all, and if there is a chance that they can through democratic means persuade people and MPs in the majority to come round to their way of thinking. This system allows evolution of policy through changes in public opinion, and allows peaceful development through a fiesty but fist free exchange of views. Change can occur by influencing the government, or by changing it in an election. There is no need for revolution or violent overthrow of those in authority.

This government is not popular. It would be wise to recognise that people want more freedom of information, more challenge to the executive, more lively debate, not less. That is why the arrest of Damian Green shocked people. When I was a Minister I offered civil service briefs to my Labour Shadows so we could have better informed debates. I asked them how much time they wanted to disagree with the main things I was proposing and let them have that. I was proud of what I was trying to do and happy to debate it. I thought they had every right to disagree, and to try to persuade people otherwise. It is a great pity that on so many occasions this government lacks the confidence to take its case to the public through Parliament, and is constantly looking for ways to close the debate down. It will be one of the reasons why people tire of it and throw it out.

If the Prime Minister is a democrat he will see the danger of the course of action unfolding concerning Mr Green. He will be worried that anti terror laws (which were imposed in partisan style aginst the wishes of many of us) are being used against a range of people who are in no sense terrorists or credible terror suspects. He will take a day off from the economic crisis and discuss with his Home Secretary how these anti terror laws are damaging the civil liberties of many law abiding people, and propose changes.

When I was a partisan Shadow Cabinet member whose duty was to try to make one departmental group of Ministers accountable on a day by day basis, I was aware that some of my opponents did not think I had the right to do such things and were looking for ways to use the law to close me down. It was not a pleasant feeling, but it was important for democracy to carry on behaving like a proper Opposition anyway.

Long may he continue to do his job as Shadow spokesman, telling the truth as he sees it.
He has my full support.

In recent days governments around the world have come up with proposals for large reflationary packages of extra spending and lower taxes. At the same time we have heard about an additional potential $800 billion of support for the US banking sector, as the Paulson plan morphs for the fourth time. Governments are making it quite clear they will use every weapon in their armoury to try to lift the recession. We should expect more interest rate cuts, more financial support for banks and more adjustments of general economic policy.

The actions being taken are large and extreme. Markets remain very volatile, but still gripped by more fear than greed. Pessimists point to the continuing sales of shares from redemptions of hedge funds and other collective investment vehicles. They rightly warn us of more losses, dividend cuts and bankruptcies ahead. Commodity prices are well and truly punctured, and the private sector is generally slashing capital spending, seeking to conserve what cash they have. The western banks are still reluctant to lend.

There are limited reasons for some optimism. It now seems clear no more major banks will be allowed to go bust. Markets usually start to rise well before the bad news of the recession is over, discounting a year or so ahead of any upturn. Inflation is falling rapidly as predicted, interest rates will come down more, whilst the Asian economies will carry on growing regardless.

There are at least three possible scenarios from here.

The first is the official view of the UK and US authorities. They state that the recession will be short and relatively shallow. They assume the banks will soon start lending again, thanks to the extra capital and lower interest rates, the injections of liquidity and the supply of money. They expect inflation to undershoot, and then for the main economies to emerge with growth within their natural capacities.

The second is the pessimistic view that because the banking problems are not yet resolved, the recession is going to be much longer and deeper than the authorities claim. It is worrying that so far none of the conventional weapons of lower rates, more capital, more liquidity and government support have worked. The UK banking sector is still withdrawing facilities and putting up the price of credit. Partly this is because the regulators have demanded higher capital ratios, forcing banks to rein in their lending. Partly it is because bankers are now themselves frightened by the outlook and being understandably cautious about prospects for businesses and individuals. We could go into an era like Japan post 1990 where banking weakness negates many of the reflationary benefits of higher public spending, low interest rates and extra liquidity.

The third scenario is that at some point all the reflationary medicine will start to work, in a way which could trigger a new inflation. There are always lags between changing interest rates and an economy responding. The UK and US authorities were around a year late in cutting rates, as wI warned at the time. It will take several more months before you would expect much response. Because both US and UK banks were so weak, it takes time for those banks to repair their balance sheets and regain confidence to lend, but on this analysis it will happen in due course. If the banks did start to work properly again, there are huge amounts of liquidity out there which could start to pump through the system. Meanwhile Indian and Chinese demand for commodities of all kinds will continue to rise, exerting upward pressure on raw material prices. Both the UK and US authorities, so heavily encumbered by new debt, will have an interest in inflating their way out of some of it.

It is difficult to be sure which of these latter two will happen. The government scenario is the least likely of the three. What we can say with some certainty is the UK is running too much risk, and the authorities are making too many mistakes to be sure of a happy outcome. Their decision to demand more banking capital long after the problem had changed to shortage of lending from over lending, the delays in interest rates cuts, the massive overborrowing by the public sector and the poor decision to cut VAT instead of boosting people’s incomes all point in the direction of a worse outcome than the government forecasts, by a large margin. We could end up both with a deeper recession, and the makings of an inflation once we come out.