Category: Blog

Last night we were treated to a long piece from the UK, Shanghai and New York to tell us the recession was global and originated in the USA – which just happens to be the government’s line. We were shown the example of a waste paper business in the UK that could no longer sell at good prices to China, because China no longer needed to make so many cardboard boxes to send toys and other products to the USA.

There was no attempt to find out how much of the UK paper price decline was the result of Chinese as opposed to domestic reduction in demand, and no attempt to quantify the volume of cardboard boxes used for the US as opposed to all other markets in the world for Chinese manufacturers. A sensible analyst would discover that demand elsewhere has also dropped.

Worse still, viewers were left with the impression that all other industries must be similar . Why didn’t the BBC look, for example, at the collapse of housebuilding in the UK? That has nothing to do with US demand or with China.

UK regulators and the Bank of England presided over a huge surge in mortgage lending and house price inflation. They then decided to deflate that, leading to a property crash. As a result very few houses are now being built. Many builders are laid off and building companies are struggling. That is not the global Credit Crunch at work,. That is the Credit Crunch made in Britain.

Pity there is no balance in BBC reporting.

Normally this government is craven in front of the opinion polls. So why are they persisting in thinking there is a military solution in Afghanistan? Shouldn’t Mr Brown be telling Mr Obama he is wrong to want to intensify the war there? Isn’t it time that the politicians tried some talking in Afghanistan, so we can begin to disengage our troops?

The US motor industry faces three problems. Demand for all vehicles from all producers has fallen sharply owing to the Credit Crunch and the weakness of the banks, limiting the number of new car, van and truck loans available. It pays its employees and pension claimants more than global competitors pay theirs. It makes too many fuel hungry vehicles which are no longer so popular.

Two of these are structural problems which require radical changes to the business model. The Credit Crunch is cyclical, requiring short term loans whilst the companies adjust to lower volumes for the duration of the downturn.

On the other side of the world are car makers whose total unit labour costs are lower, and who make more types of smaller and therefore more fuel efficient vehicle. There is over capacity worldwide.

The US motor industry is just a small part of a much wider problem. The West has continued in the belief that we can pay ourselves much more than people are paid in the East, borrowing the money from the East through our banks and governments to sustain our higher living standards. We have decided in some cases that we can work less efficiently and for fewer hours than our Asian competitors. We have sometimes used the borrowed money to buy products made by dearer labour in the west, and sometimes have used the borrowed money to buy cheaper products from the East. Now the Western authorities through higher interest rates and tougher banking regulation have called time on the private sector borrowing which sustained this. So now there has to be a very painful adjustment.

Some of the adjustment will take place by devaluing Western currencies against Eastern ones. Stronger Japanese and Chinese currencies will correct some of the price and cost differentials in favour of the western product. Some of the adjustment will take place through the West adopting smarter ways of making things that requires less labour, and in buying materials and parts better. Fortunately in the case of cars assembly labour is not a large proportion of total cost – materials and bought in components matter much more.

That still leaves the US motor industry needing to help itself more. It will need to reduce capacity – there is simply too much capacity worldwide, and US vehicle demand is not going to magically pick up by enough in the new year. It will need to attack its costs yet again, as it has been doing year after year over the last decade. It will need to speed the design of new more fuel efficient vehicles, to give it the competitive product range it needs.

Should the US taxpayer stand treat? It is difficult to see why the taxpayer should become an equity investor in car companies. That might put off the necessary adjustments. The good news is that GM and the other majors are smaller than the banks the US government is seeking to refinance. GM has assets of just $110 billion, meaning it is smaller than Northern Rock, and an accumulated shareholder deficit of $60 billion. Royal Bank of Scotland’s balance sheet is 28 times bigger than GM’s. The US car makers together are talking of needing say $25 billion, small sums compared with the massive sums the banks have been negotiating.

Of course the US government should talk to the majors and see how they can help, as the bankruptcy of a car aseembler at the moment would not be a good idea. As the car companies themselves have said, they have lots of options for raising the cash they need for 2009. They can borrow in private markets. They can cut costs further. They can run down stocks and improve working capital control. They can sell assets. The government could examine if there are sensible ways it could help with the transitional costs from the present model ranges to more fuel efficient vehicles, given the stated intention of the incoming President to promote greater fuel efficiency and spend taxpayer dollars of new technologies for that purpose. If the banks cannot lend sufficient for short term adjustment, the state could see if it could take proper security for such a loan.

It would be a foolish course to embark on owning car companies, just as nationalising banks poses al sorts of undesirable problems for governments.

The European industry has not yet quantified its problem. Whilst it has produced more small and fuel efficient vehicles than the US as a proportion of its ranges, it too will face a very uncomfortable few months ahead. It also produces a lot of executive and luxury cars which are going to be in much less demand as the financial sector is hit. It too pays people far more than the Eastern low wage competitors, and has factories which in some cases are not up the most efficient standards the world now demands. It also has too much capacity. It would be quite wrong of the EU or the individual national governments in Europe to suspend normal competition laws and to subsidise the industry, just as it is wrong for European governments to buy bank shares. Both courses of action simply delay taking the necessary steps to get costs , services and products into line with global market realities. If governments try to subsidise too many industries, or big banks, governments themselves will run out of money.

The Bank’s gloomy words ,as it justifies its change of tack on interest rates, had a predictable impact this morning on the value of the pound. Making sensible and credible forecasts is one thing. Overdoing the gloom is another which may prove self fulfilling.

How much more damage do they wish to do? Don’t they want to sell more government bonds to foreigners?

Yesterday was Black Tuesday for job losses. There are going to be many more days like that this winter.

Menwhile, the MPC still driving firmly by looking in the rear view mirror has at last caught sight of the downturn. Its Report is likely to bring us more gloom and doom as it seeks to justify its late lurch from high to lower interest rates. Because it has got it all so hopelessly wrong, it will now have to spread more doom to justify its actions. It is still far from helpful.

The story about Banco Santander and the UK’s taxpayers £18 billion still has not made it into the press. It just shows you the power of Labour spin, and the cleverness of their media manipulation. The story is there on the Treasury website, hidden but clear to anyone who wants to read it.

We were told by the government and the media that the deposits of Bradford and Bingley along with their branches had been sold to Banco Santander for a positive sum. This was never very likely, as deposits are liabilities. You have to pay someone to take them away.

Indeed, that is what has happened. The UK taxpayer is borrowing £18 billion to send £18 billion in cash to a Spanish bank to take the deposits over. The questions that flow from this include:

Did UK based banks have the chance to bid for these deposits with the cash that went with them?
How did they determine the amount of the cash to send?
Why is £14 billion of it being routed through the Financial Services Compensation Fund, which has been offered a government guarantee and a promise of government refinancing of the £14 billion?
Wouldn’t it have been easier and cheaper just to make it all a straight Treasury payment from Day One, as £4 billion is?
Why didn’t the government tell us it was spending another £18 billion of our money in this way? How much of this does it expect to get back eventually from the mortgage book it has kept?
Did the government know when it chose Santander that Santander had poorer capital ratios than the stronger UK banks and was likely to need to raise new capital? It has recently announced that it is raising E7billion in new share capital to improve its Tier One Ratio from 6.3% to 7%.

Shareholders in Bradford and Bingley still await the detailed terms of any compensation for them. B and B is not offering any new mortgages, so like Northern Rock once nationalised it is efectively in run off. Why is the taxpayer having to take the risk and pay all the bills for two mortgage banks who are unable to help the housing and mortgage market by making new advances?

This summer I ran a series of articles on this site about crumbling Britain. I challenged the government to bring forward the permits and the plans to allow private sector investment in electricity, gas, oil, water, and transport systems. Today we learn that a combination of government dithering and EU regulation will close down coal power stations just as we have to close nuclear stations reaching the end of their design life. It will leave us short of power, with a threat that the lights will literally go out in a few years time.

It would be a fitting finale to this government, long on rhetoric and short on action. If only they would listen and act, instead of listening and copying people’s rhetoric, we might get somewhere. Now is a good time to bring forward privately financed infrastructure projects, especially if the nationalised banks have any money to lend! I see no sign of it. There may be more announcements – like the much heralded Crossrail, announced before every general Election but not so far built. I see no sign of contracts ready to be issued to make sure we are not all buying candles in 2016.

The USA has been sent a fiscal wake up call – I.O.U.S.A. It chronicles the rapid escalation of the public debt and warns America of the dangers.

We need to make the research here on the huge stock of debt and other public liabilities more accessible for all, and to warn more strongly about the rapid build up of debt now the government is moving into its irresponsible phase. In Phase one of this government we were happily married to Prudence, in Phase two there were some loosely observed fiscal rules which provided some modest protection from excess debt , and in the latest Phase three there is only one rule – spend and borrow as much as possible. Even in Phase One we only stayed married thanks to a huge tax hit on the pension funds and the raid on the telephone companies. Throughout the whole eleven years there has been massive public sector recruitment of administrators and regulators and large bills for consultants, ad agencies and other advisers.

A stock of debt and pension liabilities of £1800 billion is now increasing with borrowing likely to be north of £120 billion this year alone.

Labour’s new lie to anyone who questions so much money being spent on bank shares is the say that they want the banks to go bust. This will doubtless become the new BBC standard line to take, but it is a further attempt to stop all rational debate about an important subject. There are so many other ways of adding capital and improving banking ratios than the taxpayer having to stand treat. John Mc Fall parroted this nonsense against me on Newsnight last night.

In the debate on the economy yesterday I asked Ministers two important questions. Firstly, when will they do some due diligence on all the assets and liabilites of the banks they are taking over? If Lloyds can renegotiate its HBOS deal, why can’t the taxpayer? Are they sure there will be no further losses on the loan books that have not already been provided for? Do they realise how much taxpayers might lose if they get it wrong? I was told they did not have time to do any proper analysis! They just want to spend £37 billion without asking what they are getting for it.

I asked now much private sector debt reduction they wanted?Their regulators have raised the amount of capital any bank needs for a given volume of loans. That implies they want banks to lend less. It is a simple calculation – I reckon its around £200 billion of debt reduction or substantial capital increases to offset. Did they bother to do the figures when they raised the stakes by regulatory action? Did they understand that banks could make the adjustment by lending less rather than by raising mroe money? Is that what they wanted? It appears it is, as their own wholly owned Northern Rock is in the mortgage reduction business, lending £14 billion less than last year.

Ministers simply could not answer that. It appeared it had never occurred to them that requiring a better capital ratio might result in less lending!

In the heat of the Presidential battle people concentrate on the differences. What struck me about the US Presidential race was how similar the main participants were on the big issues.

Mr Bush and Mr Obama both believe in spending and borrowing too much in the public sector.

They both believe in nationalising the main mortgage companies, and part nationalising the main banks.

They both believe in intensifying the war in Afghanistan as part of their wider war against terror.

They both probably will agree to find a way of offering subsidy or more capital to the US auto industry.

Both are currently happy – Mr Bush because he is about to lose the burdens of office that have come to haunt him, and Mr Obama because he has just won but does not yet feel the full burdens on his shoulders.

Mr Obama will feel rightly proud and excited by the thought of living in the White House. Mr Bush may now be looking forward to living in a home of his own without the constant comings and goings of staffers making demands upon his every waking minute.

I would expect them to get on well. It will be different when Mr Obama’s team starts brieifng against the former President, when they are seeking someone to blame for problems they encoutner.

We learn that the government is planning to borrow more money to cut taxes. Apparently it now wishes to limit the depth and length of the downturn.

Yet it was the authorities who brought about this downturn. The MPC late in the day called time on too much borrowing in the private sector by hoisting interest rates to make borrowing dearer. The Bank of England starved the money markets of funds to prevent banks lending more, forcing Northern Rock and a couple of other banks into trouble. In 2007 we had lectures from the Chancellor and the Governor that people had borrowed too much and banks had lent too much. They were told they wrong to have lent so much , and they had to sort it out as best they could without public subsidy or intervention. The authorities followed up the sharp slowdown by demanding each bank held more capital, and leaked the story in a way which damaged bank share prices and their capital raising ability.

Now the Authorities have what they said they wanted – a collapse of private sector lending and borrowing – they are in a panic. They turned banks from profitable lending machines into unprofitable damaged institutions. They now realise they have overdone applying the brakes, just as surely as they overdid encouraging the fast build up of credit through the accelerators of easy regulation of capital and low interest rates before. So now they decide to borrow more in the public sector, to offset the lack of borrowing in the private sector. If an economy borrows too little, too many people are out of work and too many businesses go under. If it borrows too much there will be inflation, and too many strains on the people, governments and companies that overborrow and on the banks that lend them the money.

The good news is they have realised that borrowing to cut taxes is more likely to yield the results they want more quickly than a programme of public works. Big public capital projects take time to get off the drawing board. When people are starved of income and paying too much of it to the government, quite a lot of the tax relief is more likely to find its way into spending. However, with individuals and small businesses under the cosh of needing to repay loans, and worried about their own economic prospects, the government should expect some of the tax cuts to be saved. The government wanted the private sector to cut its borrowings rapidly, in a damaging way. Some of any tax cut will go towards this , but will at least speed the process up and bring forward the day when more can be spent.

The bad news for the UK is the government is already borrowing too much. The taxpayer is now being asked to be the banker of first resort and the consumer of first resort. The strains on the UK public sector will be huge. This week-end in the press there were alarming figures about how much tax revenue the government is losing from the big fall in activity in the property market (Stamp duty and CGT), from the sharp fall in financial sector profits (Corporation tax), from the big decline in high income jobs in the City (Income Tax) and from the halving of the oil price (Duty, VAT, Corporation Tax). Now the government is going to add more cuts in revenue from tax cutting proposals.

Time after time this government sets up the next leg of the crisis by the way it tackles the last one. Easy money created an inflation problem. Tight money to control the inflation created a banking crisis. Bank nationalisation to solve the banking crisis is setting up a government borrowing and debt problem. Tax cuts on borrowed money to solve the deflation will add to the questions over state credit.

We need authorities who can manage things with reasonable stability. Stability requires sensible amounts of credit and borrowing in both public and private sectors. Lurching from too much to too little borrowing in the private sector was crazy. Compounding the error by now lurching to much borrowing in the public sector is not a good idea. The government’s approach is “Let’s halve interest rates and double the amount of debt we have to sell at those interest rates”. They still do not seem to understand money markets, and the price of money.