Category: Blog

The Conservatives had a great policy for cutting carbon outputs. It was called electricity privatisation. As soon as the industry was denationalised, it switched from building big coal power stations that were only around 35% fuel efficient, to building gas fired stations that were more than 50% fuel efficient. The dash for gas in our power industry ensured we could hit the Kyoto targets.

The present government has been unable to come up with a policy which has made a similar big impact on carbon output. They have dithered over nuclear, not put through enough renewables, and left open how they are to replace the old nuclear stations that soon have to be shut. They have failed to discipline the public sector, where the extra offices and staff burn ever more fuel to keep the bureaucracy turning. Ministers jet round the world, lecturing the rest of us on how we should travel less. At times they have adopted policies which seem to want to export fuel intensive activities to other countries, as if that helped cut world carbon output instead of merely shifting it to China or India.

However, they have now come up with a policy which is going to transform all that. It is called recession. It will cut our carbon output. The trouble is, it is going to cut a lot more as well, leading to a big increase in unemployment and a further weakening of our economy.

I am relieved that Barclays does not want to join the list of banks that ask the taxpayer to assume some or all of their risks. The taxpayer cannot afford all these banks.

The question to ask, is why did the Regulator chose this time to demand more capital from the banks? Why didn’t they ask for it last year when all the banks could have raised it easily in the Stock market from private shareholders? Asking for it now means worse terms to raise it, and of course the initial stories were bad for the share prices, making it more difficult and dearer to get the money from the market.

Mr nationalisation Cable is in a fury about Barclays, so it’s not all bad news!

The government is planning its Queens Speech programme of new legislation, to be announced on 3rd December at the State Opening.

I would welcome suggestions of authentic Labour legislation that the government might like to consider.

I have one suggestion which might be in the mood of their times.

A Bill to promote Childrens happiness.

The Bill would set a target that 90% of all children should be happy by 2050, with an intermediate target of 70% by 2020.
The Bill would impose a general duty on adults to consider childrens happiness in all their actions.
It would establish a National Childrens Happiness Council to police the targets and to advise the government on the regulations under the legislation.The Council would help draw up the happiness questionaires, lay down guidance on best practice to schools and parents and construct a system of box ticking audit to ensure compliance.
Enforcement would be through the National Childrens Happiness Enforcement Agency, who would appoint Childrens Happiness officers for each principal Council area in the country. They would have a duty to liaise with 5 a day officers and others involved in managing childrens lifestyles.
Both Agencies would have substantial budgets to allow regular surveys to be conducted to check on how happy children are. The Inspectorate would have powers to go into schools and family homes, to check on a sample basis that all involved with the care of children are meeting the required standards.

Mr Balls has joined the impressive list of bossy Ministers telling people how to lead their lives. He wants to stop the school lunchtime chip run, and approves of Councils preventing people setting up fast food outlets near a school.

We are told we need eat five portions of fruit and vegetables a day, but not apparently potatoes cooked in one way.

Before fulminating against the ever popular potato chip, did Mr Balls investigate the amount of fat in mashed potato compared to low fat chips? Should he now go on to ban mash as well? Has he examined how much fat there is in a salad covered with dressing? Perhaps all dressed lettuce leaves should also be banned within a quarter mile range of schools? Is he about to ban gravy for containing fat from cooked meat?

Chips are one of life’s simple pleasures. By all means encourage low fat ones, and by all means find other things to add variety to diets. But let’s not ostracise the chip. It will just make it more popular with adolescents who like its flavour, by giving it the added piquancy of adult disapproval.

First, Gordon Brown smashed the Bank of England’s ability to understand the money markets by removing their duty to regulate the day to day activities of the commercial banks, and by removing their task of raising the public debt.

Second, he set up a so called independent Monetary Policy Committee. Every member of it was either appointed by the Chancellor, or by someone appointed by him. We have not been told how they were selected, and why some were renewed and some were not. The Committee was given an easier target to hit in December 2003 at a time when they should have been putting interest rates up. They were effectively told to cut rates recently as part of a concerted international move, one day before they had undertaken their normal review of the economy to make a decision. Yesterday the Chancellor effectively instructed them to cut rates again, whilst intoning that they were still independent!

What he should do instead is write a new letter to the Governor. It should say:

Dear Governor,

I realise the conduct of money and banking policy has gone badly wrong in recent years. On reflection, I think the Bank does need to regulate the commercial banks and to handle government debt issue, so it is hands on in the money markets as it used to be. I therefore intend to restore these powers as soon as possible. I believe Parliament will welcome this move. It was clear that in the good days the Bank did not see enough of the business to realise that the commercial banks were too liquid, and from August 2007 the Bank did not appreciate how starved of money markets had become. We need a strong Bank which is close to the needs and misdeeds of commercial banks, so that it can correct and adjust more rapidly.

I would like to continue with a more independent Monetary Policy Committee. This will require a more independent approach to appointments and renewals. I am considering giving the Treasury Select Committee of the Commons a role in this process. However, recent events have also shown that there is merit in the US system where the Fed has a clear duty to consider output levels as well as inflation, and where it is required to work in a way which is compatible with the Administration’s policy. Clearly it is not desirable if the government is using fiscal policy to expand the economy if the Bank is using interest rate policy to do the opposite. On the other hand if any government is seeking to pursue too reckless a fiscal policy then the Bank should be able to signal its concern. I will be consulting interested parties on how we can get this balance right. I have no wish to stifle the views of a genuinely independent MPC, but there may be occasions as when we agreed emergency rate cuts with other countries where the government does have to override. This should always be done in a transparent way, with reasons being given for the use of the reserve power.

It is perhaps too early to go into who is to blame for the sharp move from excess credit to credit crunch, as we need to manage the situation day by day at the moment. However, I do hope the MPC is asking itself how it came to set rates that were too low for too long, leading to inflation rising to 150% above the target rate. I also hope it will ask itself urgently whether rates are now too high for the deflationary situation we find ourselves in.

For my part I do accept the public sector cannot spend our way out of this recession given the state of the national finances. I fully understand that if we seek to borrow too much the strain will be taken on sterling and the longer term rate of interest. These market pressures will constrain me in my judgements about spending.

Yours etc

There is no end to the borrowing.

In the Budget the government forecast £43 billion of public borrowing this year. Most forecasters now expect this to be around £65 billion, given the extra commitments added and the decline in tax revenues.

We need to add to this the £37 billion they plan to spend on buying banks shares. We also need to add the £18 billion they are borrowing to finance the cash and guarantees they have given to Abbey Santander to get them to take the deposit liabilities of Bradford and Bingley. The government has put an extra £3 billion capital into Northern Rock.

This adds up to a huge £123 billion of extra borrowing this year. That’s £2050 each for every man woman and child in the country.

Starting borrowing requirement £43b
Extra spending and reduced revenue in year £22b
Bank shares purchase £37b
Bradford and Bingley £18b
Northern Rock extra capital £3b

When the Bradford and Bingley deal was reported we were told that Abbey Santander had bought the deposits and branch network for a positive sum. We were not told that in order to buy these deposit liabilities the taxpayer of course had to put up a lot of cash. On the HMT website the detail is revealed. It states:

“The Financial Services Compensation Scheme has paid out approx. £14 billion to enable retail deposits held in B and B and covered by the FSCS to be transferred to Abbey. The Treasury has made a payment to Abbey for retail deposits not covered by the FSCS, amounting to approx £4 billion.” The FSCS was granted a Bank of England loan to be replaced with a government loan. The government stands behind the FSCS.

It is unusual for legislation to have such immediate effect. The debate was scarce concluded on the Global warming legislation at Westminster, when the October snows started to fall. There’s a response for you.

The Prime Minister is strutting the world stage again. It is time to check your bank account.

He wishes to be the architect of a new Bretton Woods, a new set of institutions, regulations and government structures to ensure we never have a credit bubble again.

The sound of stable doors slamming after all the horses have gone resonates in our ears.

The trouble with this approach is obvious to anyone with any sense. We cannot yet know what parts of the pre 2007 system will still function. It appears that highly leveraged Investment banks on the US model have disappeared. It looks likely that there will be far fewer Credit default swaps and other derivatives. It seems likely the 125% mortgage and the highly borrowed hedge fund and private equity deals will be scaled back. We do not yet know how much more damage is going to be done, by Regulators and Central Banks reining in long after the bubble has burst. The authorities have not yet completed a proper analysis of what they and market participants got wrong in recent years.

It is foolhardy to seek to put in place new structures before you know why the old ones failed, or which ones have failed. It is asking for trouble to talk about how there will not be mistakes in the future, when you have not yet sorted out the mess created by recent regulatory and market errors.

All the attentions of the authorities should be concentrated on doing “whatever it takes” to limit the downturn and salvage what can and should be salvaged from the financial system of 2007. It is dangerous for governments to think they can plan a brighter tomorrow with better regulation, when they still have a massive task ahead in trying to get some normality back to money and banking markets. Banks still lend little to each other at rates well above the recommended rates. There is a dearth of lending on the High Street and to companies. In the UK, the US, Spain and other countries property prices are still falling, undermining security for more loans. Many more people are going to lose their jobs, factories will close, and much capital spending will be halted.

Creating a neat new architecture for global financial supervision is not going to change this. Appointing more expensive regulators will not make it any easier for the financial businesses they are regulating to raise the extra capital they need, or cut their costs to bring them back into line with the revenues they can now hope to earn on reduced business.

The Prime Minister should return home and do some detailed work with his Treasury team on the UK government budgets. In these hostile conditions the UK needs to show world markets that it has prudent government, recognising the need to keep its spending and borrowing under some control. We have seen how badly run countries soon face dramatic falls in their currencies, difficulty in borrowing for state purposes, trips to the IMF, emergency packages of cuts and higher interest rates to stem to outflow. The UK needs to show by taking strong and disciplined action that is well away from such a predicament. Thinking the state can take on all the bad debts and difficulties of the large banks that congregate in London is unrealistic. Support through providing liquidity, and ample funds through the Bank as lender of last resort is important. Everyone must understand there is no doubt that depositors will be paid out when they wish. Buying the equity is altogether more dangerous, as that means the state underwriting all the costs and obligations of the bank on top

It has come as a further shock to many of us that Licence fees levied on the poor and rich alike are spent on such huge salaries as that paid to Jonathan Ross, who then thinks it is entertaining to behave in the way he did recently.

The BBC still has enough power of the airwaves to make people famous by giving them prominence on their programmes. It is diffiicult to see why they need to pay such huge salaries to a select few, when they could make more talent quickly. It is even more difficult to know why we have to put up with the kind of behaviour we have just witnessed, when we have no choice but to pay for the service if we wish to own a TV at all.

It would be good to hear from the BBC. We need to know what they think is distinctive and worthwhile about public service broadcasting. It would also be interesting to hear how the antics of Mr Ross at such high cost fits into this view of the world.

The Bank of England’s Report makes gloomy reading. Why didn’t they foresee more of these problems a year or two ago when they could have taken better evasive action? Today we learn of possible future losses from banks, more difficulties for hedge funds and continuing trouble with derivatives.

If the Bank expects further losses from British based banks, it leads one to ask if the government factored this in properly when promising to buy shares in banks at stated prices. The market prices have fallen below the government price, so the taxpayer is facing an immediate loss of more than £5 billion if and when the deal goes ahead. The share subscriptions are of course subject to shareholder votes, and the HBOS/LLoyds deal has already been renegotiated once.

Some people think that the government is buying very valuable assets at very low prices. Evidence of past nationalisations tells us that all too many nationalised businesses do not run their assets well, and can end up losing substantial sums. Northern Rock lost two thirds of a billion pounds in the first half of this year, and needed another £3 billion of share capital from the taxpayer. This was to support a balance sheet of a mere £50 billion, plus the £50 billion funded off balance sheet. We need to remember that just one of these additional banks has a balance sheet of £1.9 trillion, or 38 times the on balance hseet assets of Northern Rock. That’s a lot of risk for the taxpayer.