Category: Blog

I went to a local shopping centre in an attractive town near my constituency yesterday. With just a few Saturdays to go before Christmas, the shops were practically empty. Sales assistants stood around talking to each other, and the tills were little used. One shop employee told me of the problems they were having with suppliers going bankrupt.It was a good reason for tax cuts, to put more money into people’s pockets so they might go and spend.

The cuts in interest rates will have some beneficial impact for those with tracker mortgages. Looking yesterday at the best buys in the money section of a leading paper, I saw that most of the mortgages on offer were for rates below 6%, whilst in the column of best savings rates most were above 6%. That dos not augur well for stronger and more profitable banks, and shows us just how damaged the banking sector remains. The truth behind the best buys is more sanguine. There are not many new mortgages on offer, and there are not many people who want to take one out.People are too worried about their job prospects and meeting all the other household bills.

Labour’s latest challenge to the Tories shows they still think attacking the Opposition is more important than governing well. They ask us if we would dare borrow to finance tax cuts, knowing that George Osborne has just made a good speech on the need to control borrowing. It is juvenile Labour nonsense, and the media are pathetic to go along with it as the story.

The answer is simple. Of course we need tax cuts to stimulate spending and help limit the downturn. Of course we also need more discipline on public borrowing, otherwise the strain on longer term interest rates and sterling will too great. The way you do both is to abandon Labour’s ruinously expensive bank nationalisation policy. Banks should be made to raise their own capital and get their own balance sheets into trim. Government should make cash,guarantees and if necessary short terms loans available to any bank in trouble, as of course no major bank should be allowed to go under.

The 1964 Labour government spent and borrowed too much, triggered a sterling crisis, had to devalue the currency in 1968 and then had to cut spending to get some confidence back. The 1974 Labour government spent and borrowed too much, and had to go to the IMF for a loan in 1976. The IMF made them cut spending. This Labour government when it came to power in 1997 seemed to have learned that lesson. It started by adopting cautious Conservative spending plans, and repaid some debt. Now it seems to have forgotten past disasters, and is throwing caution and Prudence to the wind.

Yes we need tax cuts. No this government cannot afford them. Yes we might afford them if they abandoned their crazy ideas of owning large Scottish banks. After all, the by election has now been won, so why not find another cheaper way to keep those banks going?

It’s great news that another group want second thoughts on this deal. Let’s hope they can come up with a persuasive enough proposal for more shareholders to vote for it.
It would be better if the government vetoed the merger on competition grounds. They should stand behind any bank as lender of last resort, but should not be buying shares and acting as midwives to mergers which cut competition, choice,and pressure for more efficient banks.

The G20 want to discuss how to bolt the stable doors – they should try looking for some horses first.

The putative agenda for the G20 is all about better regulation of the financial world to prevent a repeat bubble. I am all for that. The overblown regulatory industry of the last decade failed spectacularly to do one simple thing – keep lending and borrowing within prudent limits. Next time round we do not need more regulators, just regulators who use the powers they have to keep some overall size control on financial institutions balance sheets.

However, we are not in the luxurious position governments are spinning we are in. They want us to believe the banks have been saved by Gordon, Paulson and others, that money markets are gently returning to normal and all we need to worry about is some future credit binge. If only.

What we should be worrying about is recession. Last month 250,000 more Americans became unemployed. The car industry in Europe and the USA has fallen off a cliff, leading to financial distress amongst major companies, factory closures, and more job losses. Property related businesses in the USA, the UK, Spain and other distressed centres have seen a huge decline in the volume of business as well as a big fall in the value of any property assets they own. Steel makers now have to cut capacity. Retail staff hang around little used tills, worrying how much longer they will have jobs. This recession is finding its way into most nooks and crannies of the advanced economies. It will leave a trail of devastation in its wake – job losses, bankruptcies, broken dreams, damaged families, dislocated businesses.

Beneath the surface of their soundbites and their political games, the governments of the west are worrying about how to dig their economies out of the mire they have driven them into. There are now three main policy options being pursued, and two being considered.

1. Cutting interest rates. This is the best and in some ways the most important. It was high interest rates and tight money which triggered the collapse. Overborrowed countries, however, need to tread carefully.
2. Making more cash and short term borrowing available to banks, with guarantees to assist markets. If anything makes the money markets work again, this will. It is going to take time and unbelievable sums in cash to do so.
3. Buying shares in banks, to recapitalise them quickly. This is a foolish policy, as it puts the taxpayer on too much risk, and delays the cuts in costs and inefficiencies which the banks need to make to do better in the future. It limits the scope for interest rate cuts.
4. Bringing forward public spending on capital projects. This is being considered on both sides of the Atlantic. In practise it is slow to work, as projects take time to bring to contract stage. At the margin it is helpful, and shows “something is being done”, but cannot be done on the scale to power us out of the slump.
5. Tax cuts to give people more spending power, to encourage more demand. This too could be a useful contributor, and worked in the second quarter in the USA. It can only be done by countries with a sufficiently strong financial position to afford it.

What should be done?

I would do four out of the five policies above. Even the UK could afford some borrowing for short term tax cuts, if it stopped buying bank shares on the scale envisaged. I would also want the international meeting to address the wider issue of the big global imbalances.

China and the oil producers have too much in reserves and savings. The west has been overspending and borrowing too much. There needs to be short term transitional arrangements, and a longer term fix.

In the short term a combination of weaker western currencies and less demand at home should force more into export. The UK and the US have to start earning their higher living standards by selling more abroad and producing more at home. During the transition period the IMF needs to strengthen its reserves from the cash and reserve rich countries of the world, to relend to the strugglers. China needs to make more progress in freeing its currency, and in stimulating her internal demand to provide a market for the world to aim at. There need to be further relaxations of barriers to trade to encourage more export to the cash rich countries.

China and the Gulf states will probably carry on lending more money to the West, and buying shares in Western companies. We need their money to sustain our overborrowed lifestyle, and they have few other places to put their cash. We need to free capital and currency markets, and markets for goods and services, as much as possible to speed and facilitate the movements needed to right the imbalances. Now is exactly the wrong moment to impose new controls and to think protectionism is the answer. The answer for the West is not less world trade, but more world trade where we are selling rather than buying.

Western governments, instead of subsidising bankers bonuses, should be making heroes of the exporters. We need them now to right our accounts and help us wipe off the big deficits of the bubble years.

It is time to review the different approaches adopted to handle the banking crisis. Two months on from the deepening of the troubles and from the co-ordinated government responses, we still have largely frozen money markets and a credit seizure on our hands. Meanwhile the views of recession are worsening, with most forecasters rushing to catch up with reality and now estimating a longer and deeper downturn.

On both sides of the Atlantic governments rightly but belatedly concluded two things in September – that money markets and banks were starved of cash and liquidity by the authorities, and banks were short of capital at a time when they were revealing big losses on their assets.

The US and then the UK authorities set about solving this. Shortly afterwards the continental Europeans were also dragged in when several of their banks needed emergency capital injections. The US announced the $700 billion Paulson plan. The UK announced the $800 billion Brown plan, and the other Europeans also announced substantial increases in liquidity, loans and capital for their banks.

I supported the major injections of liquidity. The authorities in recent years lurched from too much money to too little with disastrous consequences. They are now creating huge amounts, realising very late that it is not currently inflationary and is much needed to try to kick start the banking system. Unfortunately, confidence is so low that much of it at the moment is a money go round. The authorities put it into the banks who lend it back to the governments. They need to keep on putting in as much as it takes, whilst always securing the taxpayers interest by lending relatively short against full security.

I did not support either the Paulson or the Brown plan for recapitalisation. I did not do so for two main reasons. The first is the banks are too big for the UK state, and even for the US state, to take them over and support them, without damaging the credit standing and the budgetary position of the two governments. The second is, the banks need to take some strong medicine of their own. They need to get fit rather than being put onto life support by the taxpayers.

The Paulson (Mark I and II) Plan reasoned that the banks had lent too much money to people and companies that would struggle to pay it back. This debt was overvalued in bank balance sheets, and could no longer be sold on to others to cut risks. If the government bought some of this debt from banks it would establish a value for it in the market and relieve some of the pressures on bank balance sheets.
There were three problems with this approach. Firstly, there was so much of this debt that the government could only buy up a fraction of it, leaving the banks damaged by the rest. Taxpayers might pay too much for what they bought, losing them money and creating an artificial market for a bit. The government might end up setting a price for the debt which would weaken bank balance sheets further as all the rest of the debt would have to written down to the new market level.

The Brown plan (and parts of Paulson Mark III) reasoned that the banks were short of capital to pay the losses and accept the write downs on their dodgy assets. It would be cheaper to put capital in than try to buy the dodgy debt. If governments put in enough new capital banks could establish a new lower value for the debts and pay the losses from the taxpayer cash. There were several snags with this approach. It undermined the share prices of the fingered banks, making it more difficult for them to raise additional capital from the markets. It assumed that there was a once and for all loss to be admitted and paid for, whereas the worrying dynamic of this crisis is the further deterioration of the loans as the recession deepens and more become unable to pay. The plan failed to see just what huge sums were needed by the banks relative to tax revenue. It failed to acknowledge that if the government ended up nationalising some of the banks it had to take responsibility for potential very large losses, as well as getting into nightmare territory on how many staff to employ, how many branches to keep open, and who to continue lending to.

What other options are open to governments? There are three obvious ones that warrant discussion.

1. Allow weak banks to go bust, and let the market pick up the pieces. Do this as quickly as possible to get the damage out of the way as soon as possible. There will be a recession anyway. This might deepen and shorten it. The market would then finance the new banks and the banks in the system that are viable. The experience with Lehmans has spooked both markets and authorities, leading most of us to rule out this approach.

2. Support weak banks that we need to continue by government acting as their bank manager. They should be offered sufficient liquidity, short term loans and guarantees so no major bank fails, with a view to their sorting out their balance sheets as quickly as possible under cover of the temporary state banking support. They should pay a fair interest rate and other charges to taxpayers for this assistance.

3. Use regulatory means and the role as bank manager of last resort to banks to force them to raise their own game more rapidly. Banks pay too many employees too much money. They need to slim and cut higher pay. They use too much property and carry other high overheads. These need to be reduced. They have been paying too much out in dividend and bonus. These need to be squeezed. Most banks could pay for their own losses and capital problems if they kept more and spent less of the huge revenues they generate.They should be made to get themselves in shape by astute regulation fo their capital ratios.

A combination of 2 and 3 is recommended. This would force adjustment without major casualties. It would reassure markets that there would not be a sudden collapse, whilst forcing banks to own up to the their losses and to work their way to a stronger financial position. The banks are too large to sort it out by public subsidy. Resorting to public capital takes some of the pressure off banks, delaying them waking up to the new realities and running themselves sensibly.

The authorities should study the experience of Japan. There after the credit explosion of the late 1980s the authorities kept many of the damaged Japanese banks going without forcing them to recognise their losses and to sort out their balance sheets quickly. As a result the Japanese economy suffered from more than a decade of insufficient bank credit and deflation. The West must make the banks sort themselves out more promptly, whilst taking care to avoid system collapse through needless bankruptcies of larger institutions.

Meanwhile the sharp deterioration of the Western economies is ominous for the banks as well as for the rest of society. It means more loan losses ahead on lending to companies and individuals. The governments do need to arrest the nosedive in the economies. Savers will be unhappy about plunging interest rates, but they will be even more miserable if the recession gets out of control and more banks go the way of the Icelandic institutions. In the end savers can only get good returns if borrowers can afford the interest.

The 10% drop in the US Stock market in the two days following the election of the new President is a warning sign for him and his advisers. They cannot delay until January. They are right today to meet to discuss the economy. They need to come up with a plan for how they are going to stabilise the situation. Quietly dumping or modifying the Paulson plan would be a good start. It is too dear and it’s not working well enough. I don’t think Mr Bush will complain if the new team try to control the steering wheel.

The BBC are up to their usual games, seeking to undermine a top Tory.
Conservative supporters should ask themselves why Labour, Mr Mandelson and the BBC are so keen to foment the Osborne story.
It’s because George has a good political mind and is important to Project Cameron. Life would be a lot easier for Labour if they did destabilise George.
So, Conservatives, don’t let it happen.

The MPC should be changed, before it does any more damage.

In my New Year message at the end of 2007 I called again for lower interest rates. It was obvious that rates were too high, and they would bring many job losses and factory closures. Inflation would rise during 2008 owing to previous MPC mistakes, but would fall again in 2009.

As the MPC are intelligent economists, we must assume they could see that too. So why, now the magnitude of job losses and factory closures is becoming clearer, do they suddenly panic, and do what they should have done a year ago? Have they been pressurised by the government acting through the Bank of England?

I would normally welcome a major U turn by a group of powerful people who have got it wrong. However, on this occasion, they have missed another important change in the last few months. The government’s borrowing requirement has shot up from the £43 billion forecast in the Spring, to more than £120 billion.

The MPC should have written a letter to the Chancellor, saying that for inflation reasons they wanted to cut rates substantially, but they needed guidance on the likely size of the government deficit,given the impact this will have on the ability of the government to borrow enough money. They could have added, the more the government controls its deficit, the more they could cut interest rates.

We now have monetary policy at variance with fiscal policy. The Chancellor should take urgent action, to avoid the imbalance doing damage to his plans.

Just to show you how abnormal the economic world now is, a few hours after the large interest rate cut sterling is stronger and Uk share prices are down!

It’s time for all men and women of good will to defend the market.

It’s currently fashionable to say that the state has to do more, and the market less. It’s is conventional wisdom that “markets have failed” so we need to try more regulation, nationalisation and state direction. The left are on the march, telling us that markets are cruel and immoral, forcing people into low pay or no pay, delivering boom and bust.

I am a democrat. I believe in democracy. It is the least bad way of organising government. At its best it allows political choice, defends the rights of all, protects minorities from abuse and offers a peaceful way of settling differences and changing course.

The market is democracy in action in the worlds of business and consumption. The market is more democratic than political democracy. In the latter you get a chance every four or five years to express your view and change the government. In the market you have a minute by minute opportunity to express your view and exercise your choice. In democratic government there is the danger of a single decision by a small group of people messing everything up. In a market for everyone deciding to do something there is someone else deciding to do the opposite. They will not all be wrong.

Markets are n either cruel nor immoral. They are amoral – they are a stage for your drama, a platform for your train, an opportunity for your future. They are more likely to be the source of new employment than the cause of the loss of your job. They allow you to buy the daily bread to stay alive, and to visit the weekly circuses to enjoy yourself. We should be grateful for their myriad successes, as well as rightly worrying over their troubles and failures.

My youth was disfigured by the cruel experiment in the Soviet bloc. They thought that comprehensive nationalisation, direction of labour, state planning and the denial of the market would cut out the waste of competitive capitalism and the injustices of the markets. Their experiment ended in ignominious failure. Their people were much poorer as well as much less free than we in the west. Their technology was years behind, they were starved of fridges, cars and washing machines, they diverted too much production to weapons and privilege for the political bosses. There was not much moral or just about the Zil lanes and the special education for the favoured few.

No sensible defender of the market believes in an absence of law or a lawless state of anarchy. We seek a legal freedom, with sensible rules laid down by democratic assemblies. You cannot have a successful market without a law of contract and a law of property. You need a strongly enforced competition law to prevent monopoly abuse. You need to enact a minimum income ( wider than a minimum wage) and generous treatment for those who cannot compete in the market for a job. You need a strong Central Bank which upholds the value of a monopoly currency, and polices the solvency and liquidity of the commercial banks well.

It would be wrong to go from a position where the state has failed to carry out its side of the bargain to one where the state nationalises banks and other companies, seeks to regulate individual transactions and activities, and seeks to influence what we make and what we buy and sell. That way is the way back towards the failures of state socialism, which will be worse than failures of the market.

This recession is a failure of a regulated market. The regulators must carry much of the blame, for stoking the fires of credit too high, and then tipping too much water over the fire in one go. There is one thing worse than too much credit, and that is too little. Many people will pay with their jobs and businesses for these mistakes. Yes, the bankers got it wrong. The bosses should pay for their mistakes. But so too did the regulators, whose main task should be to prevent such excess. Today the Regulators main task should be to get the banking system going again. They are still too tempted to put out the fires when the economies are now shivering to death.

Wall Street slumped by more than 5% on the back of Mr Obama’s victory. The morning after the great result, reality set in.

We need change in policy. We need the right sort of change.

Changing to a more protectionist stance would be damaging. Markets are now hoping there is one breath of life and hope left in the outgoing Bush Administration. They are looking to the incumbent to chair a successful G20 on November 15th, and to bring together a trade deal. Mr Obama’s rhetoric in this area has scared them.

Changing from the state borrowing too much to the state borrowing even more would also be unhelpful. Mr Obama seeks a targeted stimulus, but it will all have to be borrowed, on top of the huge borrowings the Bush regime has inaugurated to cover the expenditure on the banks, mortgage companies and AIG.

So what change do we need?

We need a government which understands you cannot solve a private sector debt crisis by turning it into a public sector debt crisis.
We need a government which ditches the Bush/Paulson plan. It is too expensive for the taxpayer, and not big enough to solve the banking problem.
We need an Administration which seeks to return nationalised financial companies to the private sector, whilst supplying enough liquidity and offering sufficient transitional guarantees to maintain confidence in the system.

Freed of the burden of carrying the financial sector with state equity and subsidy, then the President could cut taxes on the lower paid, to provide a needed stimulus to consumption. We are going to need more jobs worldwide. They have to come from individuals wanting to buy more goods and services. At the moment US families cannot afford them, as they are too much in debt, and new debt is too scarce to come by. If the US state could cut its own appetite for debt, it could leave US taxpayers with more of their own money, which would start to arrest the decline.

My worry about Mr Obama is not that he represents change, but that he will not implement major changes quickly enough. It is tough on him because he inherits a mess. It is now his mess, and the sooner he turns up at economic meetings and starts to assert himself the better. There is no time for partying and choosing the curtains. The very financial foundations of the house are being questioned, so it’s time for change, time to get rebuilding.

He should also quietly dump his idea of escalating the war in Afghanistan. The US needs to conserve her military strength, and concentrate on rebuilding her economic strength.

Congratulations to Mr Obama. It is a great achievement. He has reached a new level in organising a grass roots campaign, in raising money from the many and articulating the message for change. Change is much needed on both sides of the Atlantic.

John Mc Cain was right to hail his opponents achievement. I am glad he did not make race an ugly issue in the election, and trust that now Mr Obama has been elected the USA can put the long and divisive issue of race behind it. Mc Cain showed a grace and fluency in defeat which was becoming. When you lose an election you need to show it is still your country and that you understand that the wishes of the majority prevail.

Mr Obama was right to reach out well beyond his jubilant supporters, It was good to hear him say that Republicans, in seeking freedom and responsibility for more people, were seeking something worthwhile and patriotic. He was right to say he would need their support for many of the things he has to do, and wise to say he woudl listen to them when they disagree with him. If he lives up to those fine words in office he could become a successful President.

The natural instincts of partisans after a scrap is to continue the battle after the hustings has been dismounted. Party activitists on the winning side want to revel in their triumph over the opponent. Activists on the losing side want to be told they were right all along and will get their revenge. Such instincts have to be discouraged by their leaders. Both last night rose magnficently to that challenge.

There is a tendency of the left in Brtain not to accept that those of us who usually speak for more freedom and less government do so for the best of motives. We believe that will improve the lot of the people. If Mr Obama continues to remember that such a position is honourable, and deserves at least to be considered on any issue where government is thinking of intervening, he will make better decisions and have more chance of uniting his country.

The Republicans now need to become a loyal opposition. They should not oppose for its own sake, or try to make it more difficult to mend the mess. They should be strong and clear in their remedies, and in their criticisms when they think their new President elect is taking a wrong turning for their great nation.

Democracy is the stronger for yesterday’s events. For those of us who believe in it, our faith is renewed. For those who are uncertain or cycnical, they may be more persuaded to vote and participate in future.

Readers will know I have wanted cuts in interest rates to stave off recession for many months. I have gone hoarse telling the MPC they have got it wrong again, lurching from too easy to too tight.

This week, instead of having their normal MPC meeting wasting time reaching the obvious conclusion that rates have been too high for too long and the economy is nosediving into recession and deflation, they should instead ask themselves what will the impact of the rate cuts we need be on the massive public debt the government needs to raise?

The Governor and his committee should spend a day penning letter to the Chancellor. It should say:

“Dear Chancellor,
We accept that we need much lower interest rates than currently, to lessen the depth and length of the recession and to relieve some of the mounting pressure on borrowers. We accept this is disappointing for savers, but we wish to avoid a situation where banks and the authorities are offering interest rates higher than the market can sustain. Iceland should be a warning to us all, where high savers rates helped push the institutions into difficulties.

However, we are concerned that as the government is now planning to borrow at least £120 billion this year compared with the Budget forecast borrowing of £43 billion, it will prove difficult to fund all this at low interest rates. We recommend immediate action to cut the borrowing volume by the government, to give us more scope to cut interest rates.

We think the Bank of England needs to be given control once again over raising government debt so we can co-ordinate our interest rate decisions with the issue of government bonds, to improve our chances of successful sales. We wish to avoid too much downward pressure on sterling allied to a reluctance by foreign investors to help fund the government deficit.

We appreciate that the elected government is responsible for the overall conduct of economic policy and must remain so. We do feel it necessary, however, to point out that if we proceed with big interest rate cuts in the absence of better fiscal discipline by the government, other problems could emerge which may be painful for both the government and the economy.

We await your guidance, as we do not wish to see monetary and fiscal policy undermining each other, which is the current danger.

Yours etc

When I first called for lower interest rates the government was not planning to increase borrowing by £55 billion to buy bank shares. This makes a huge difference to the wisdom of the policy.