Category: Blog

Yesterday I agreed to go onto Channel 4 7pm news to talk about the economic crisis and the problems with the run away deficit. Late in the afternoon they sounded me out on my views. They probed my thoughts on George Osborne more than on the economy. I told them I would want to move the interview on to the real issues quickly, as there was nothing more to say about George, who had made a good full statement earlier that day.

Shortly afterwards I was told I had been cancelled.

They are becoming like the BBC. They want to run unimportant and non stories, and do not want hard hitting analysis of the real crisis facing our country.

The government wants to increase spending, and therefore borrowing, to help us out of recession.

We need to distinguish between the several different ways in which borrowing will rise in the next few months. Some are inevitable and some are avoidable.

Borrowing will rise because:

1. The government is buying controlling interests and shareholdings in banks, and may do this in other types of company in due course.(it has already bought a railway company)
2. Revenues will fall as the private sector makes less profit, carries out fewer transactions and earns less money.
3. Expenditures will increase as more people need unemployment and related benefits.
4. The government may increase spending on projects to create jobs.
5. The government is increasing spending anyway, assuming the economy would grow.

Only items 2 and 3 are unavoidable.

Item One is so far the most expensive, boosting borrowing by more than £40 billion ( cost of shares so far in Rock and the latest 3 bank package), and the most contentious.

Item 4 could make sense if overall borrowing was under sensible control. It is more dangerous as a policy where borrowing is thought to be high, as total high borrowing may reduce market confidence causing problems with raising borrowing at sensible interest rates and adding to inflationary pressure through lower sterling.

Item 5 includes a big build up in administrative central government and quango staff entailing large increases in the public sector pension and pay bills. The increase in this should be stopped as the rate of growth in the economy has slumped.

The most worrying one is Item 2. The government needs to think hard about how much revenue it can collect in the next couple of years, and about the sustainable revenue for the future.

Taxes on property will be sharply down this year. There will be far fewer transactions, and prices are falling, slashing Stamp Duty and other transactions taxes.(CGT, VAT, Income Tax on these). The government should not assume a sudden bounce back in values and volumes in a year or so.

Taxes on corporate profits will fall sharply, reflecting lower profits, especially in the financial sector which has played such a large role in recent UK growth. Again, the government should not assume a sudden bounce back in banking and related profits in a year or so, especially if several banks are still nationalised.

Profits on oil and gas will fall from recent peak levels as energy prices have fallen so far. There is more possibility of a bounce back when the global economy recovers.

Taxes on high incomes will fall, as we have to assume that the high bonus culture of recent years will be adjusted downwards for the lean times ahead. Taxes on other incomes may not fall in cash terms, as there is still some pay growth, but the rate of increase will be much reduced by unemployment and slower pay increases.

VAT receipts will be damaged by fewer and cheaper transactions. This will recover when the economy picks up.

A prudent government would only borrow that portion of lost revenue which will pick up again when the economy moves back to some growth. There will be substantial permanently lost revenue. It would not be prudent to plan to spend that in future years.

Past Labour governments have ended with a sterling crisis and a borrowing headache. It looks as if this one wants history to repeat itself.

Today we are to be told that the government needs to spend and borrow more to help us out of recession. It is curious, when we are also told that we are in the current mess because we have borrowed too much. This crisis came about because the Western Central banks and regulators decided to call time on too much lending. It’s a topsy turvy world.

So let’s get this straight. The government wants the private sector to lend and borrow much less, because it has overdone it. Once the effects of reducing borrowing come through, the government will then borrow more on our behalf. They will use the cash they borrow to prop up private sector companies and banks that have suffered from withdrawing the private borrowing, and to replace the activity and jobs which the private sector used to provide, with public sector ones. Anyone left in a productive job or with savings will have to pay more in tax to pay the interest and meet the repayments on the much enlarged government debt.

In the meantime many people who had worked hard and saved a lot will see the value of their pension savings, their homes and their businesses smashed. Some will be changed from being independent and successful to being bankrupt or unemployed, and dependent on the state. No longer able to live off their work or their savings, they will live off benefits.

Can someone explain to me why this is progress?

Today economists have written to the Sunday Telegraph warning against an over borrowed government trying to spend our way out of recession. They are right to be concerned about the rapid build up of debt in the public sector, and the careless attitude towards more debt by the authorities.

I have called both for lower interest rates and proper controls on the increase in public debt. The two go together. Just cutting the interest rates without taking action on public borrowing is likely to weaken the pound yet more. Doing nothing on interest rates and allowing the debts to mount up has triggered a very large devaluation in the last few weeks. The pound has fallen by almost a fifth against the yen in a few days.

These sharp falls in the currency will add to shop prices again, and mean we can afford even fewer imported goods. Just cutting rates and going on a rake’s progress will intensify the downward pressures on the pound, and cut living standards more quickly. It will also mean the Bank of England has to go easy on the interest rate cuts.

That is why we need urgent action to stop the build up of debt, beginning with a renegotiation of the banking support package in the light of recent falls in bank share prices. After all, Lloyds renegotiated its terms of take over of HBOS following an HBOS share price fall, so why can’t the government to protect the taxpayers interests?

We also need more progress in repaying debts incurred by the government to take over Northern Rock and the assets of Bradford and Bingley, and progress in returning those to the private sector, whilst there is still something worthwhile to return. So far all the government has been able to do is to run the Northern Rock business down thanks to competition law, at a time when we need more mortgage lenders to ply their trade, not less.

The longer the government delays in taking sensible advice, the more difficult it will prove to sort things out. The recent performance of sterling shows us that current high interest rates are not sufficient to protect the pound. It tells us something else is wrong. Markets are saying the government deficit is too large and the downturn will do too much further damage to the public accounts. That is why we need a lower deficit and lower interest rates, to help reduce the severity of the downturn.

The UK authorities combine blood curdling statements with inappropriate action to handle the financial and economic downturn. Mr Bean, deputy Bank Governor, has gone further than the Chancellor and the Governor with lurid language. Do these people not understand that markets are listening to their every word, and moving prices on the back of their statements? Can’t they learn to use language carefully? They should tell us the truth in a measured way, always pointing us to a better tomorrow by taking action likely to stabilise rather than destabilise.

The question this morning is how much more bad news is it going to take to get them to do something sensible? How far does the pound have to fall to get their attention? How far does the Stock market have to fall to persuade them that current policies are not working? How far do the prices of bank shares have to fall before even this government says the potential losses to taxpayers of the bank share deal are unacceptable? When will they stop concentrating on trying to avoid the next credit bubble by the kind of tough regulatory action they should have taken 2004-6, and see that their immediate problem is not a credit bubble but a credit collapse?

I am constantly being asked what could they do? Here is my present list, containing some familiar items to regular readers.

1. Cut interest rates. Convene an emergency meeting of the MPC if they want to persist with the fiction that they are in charge, and don’t let them out until they see sense and back Mr Blanchflower.
2. Revisit the banking share package. Tell Lloyds to raise its own money anyway it sees fit. The taxpayer should not finance the merger. Sort out with HBOS and RBS a package which is fairer and lighter on the taxpayer, making them raise more of their own capital and cash by cutting costs and expenses and conserving more of their own cashflow.
3. Start to get more control over public spending, and give us revised forecasts of public borrowing which are credible and show a wish to get on top of the government’s own growing debt mountain.
4. Sort out the statements of the UK authorities. They should be sober rather than apocalyptic, and should concentrate on what is being done to tackle the problems of banking liquidity and capital, overborrowing and government indebtedness.
5. Produce new forecasts of the economy so we have a better idea of what the authorities really think about the length and depth of the recession they are now calling.
6. Work with the banks to get maximum benefit from the £400 billion plus package of loans, guarantees and money market assistance. The money needs to be supplied however it does most good to get banking markets working again, with proper security for taxpayers.
7. Deliver on the promise to pay all government bills within 10 days.

The magnitude of the UK debt problem is large but it could be manageable. UK consumers and mortgage holders have borrowed around 100% of National Income. UK companies have been more restrained, borrowing maybe half National Income. The government owes somewhere between half and more than 100% of National Income depending on whether you include pension debts in the government total as they make the private sector do. If we take as a very rough figure total borrowings and liabilities of say £3.7 trillion, the interest burden is still manageable. At 5% interest it works out at around one eighth of income, and at 10% at a quarter. Lower interest rates enforced in the market would clearly ease the pressures.

The danger for the government is that the interest burden on state borrowing will rise too quickly, both because the increase in the amount of debt is now so rapid, and because if they seek to borrow too much they will have to pay a higher rate. As this downturn began because the authorities decided they needed to reduce the total amount of private sector borrowing, and as it intensified when the authorities decided to tighten the squeeze by demanding banks hold more capital for a given level of lending, it would be odd to end up simply transferring the excessive borrowings from private to public sectors.

There was too much credit by 2007. The authorities have not shown a sure touch in deciding by how much they want to cut it and over what time period. In the meantime, instead of the public sector showing us how to restrain spending and borrowing, they are doing the opposite. That makes absolutely no sense unless your aim is to take more and more into state control.

Over the last few days sterling has fallen dramatically against the yen – from one pound buying 175 yen to only buying 141 yen. The Japanese base rate is 0.5% compared to the UK’s 4.5%.

International investors are leaving sterling. It all goes to show that relatively high interest rates do not necessarily keep a currency up. As someone who wants our interest rates down to help fight recession, I have also always stressed we need to get a better grip on our public finances to instill more confidence. That looks more and more like an obvious necessity from watching the markets.

Today’s market movements are more evidence that the UK authorities have to do more to reassure and to stabilise. The share prices of HBOS and RBS do not make good reading for taxpayers either. At current prices the taxpayer will lose £5 billion on buying the new shares in HBOS and RBS! Why, oh why?

Yesterday the BBC’s business correspondent Robert Peston drew attention to runs on countries that have borrowed too much. He pointed out that Iceland, Ukraine, Belarus, Hungary and Pakistan are already experiencing this, and wondered if South Korea might also fall into such a plight. He told us the first five countries have gone to the IMF to borrow because they can no longer borrow on the scale they would like on overseas markets at a sensible price. Just as media attention to a number of stories about British banks talking to the Treasury helped undermine confidence, so now there are media hints at problems ahead for the UK in raising all the money it needs to borrow.

None of this is very helpful when there is already a run on our currency. I have drawn attention before to the sharp falls in sterling that have etched themselves into the last three months. In the last few days sterling has fallen especially heavily against the yen, as well as falling against the dollar. Of course international investors are getting worried about heavily overborrowed countries, especially when their lead or dominant sector like the UK is going to go through a rough period of decline. The UK government is about to discover how dependent for revenue it has been on property, oil and financial services. All of them will yield far less in current conditions than they did in the heady days of the credit boom. This is one of the reasons why I have been suggesting to the authorities in the UK that they might like to reduce the amount of money the taxpayer needs to borrow to buy bank shares, finding other ways of buttressing bank balance sheets.

There has to be a limit to how much it is realistic for any government to borrow. The government does have to take into account how much the private sector has already borrowed in its country, as the overseas investor will look at the total debt and interest burden. It is the same people having to pay off both lots of debt. At the moment there is the danger in the UK that the taxpayer will borrow money to buy bank shares. The banks will then reinvest the money they receive for their new shares in government debt, creating a money go round. Overseas investors will not see it as a self cancelling transaction, as it puts the taxpayers on risk for all the difficult debts owned by the banks, and exposes taxpayers to more potential losses which means more borrowings to meet them.

Just as there has been a flight to quality in bond markets, with people fleeing from risky private sector paper in companies that might get into trouble in the financial crash or in the subsequent recession, so there could now be a flight into quality in the world of government paper. Investors will look to buy into the safest, most politically secure, least borrowed countries. Divorcing Prudence could prove an expensive option at such a time.

The big debt issues have started as the Treasury attempts to raise the huge sums needed to feed the banks and the public sector’s appetite for spending at a time of sharply reduced revenues in crucial areas. Oil taxes will be well down, Stamp duty and other property taxes will be badly hit, and tax on financial service and banking profits will fall sharply. Given this, the government needs to be careful with its overall spending, and needs to find ways to get its loans to banks back as quickly as possible. Nationalising banks was always going to be the dearest and longest term way of rescuing banks at risk. It was also always the way to damage the government’s own credit rating the fastest.

Today the government intends to give banking chiefs a strong tongue lashing on the need to lend more money to small business on sensible terms. This will be very popular with small business. It is all part of the government’s renewed spin offensive.

Readers of this site will know I hold no brief for bankers who lent far too much in the good times. I too am also critical of poor client service and failure to back decent businesses in tougher times where these occur.

The government, however, says one thing and does another. The banking regulator has recently demanded that banks keep much more capital relative to the amount of lending they do. The two most obvious ways for banks to comply are to lend less, and to generate more profit from existing customers to retain more cash and profit to bolster the banks’ reserves.

It should therefore come as no surprise to the government that this is exactly what banks are now doing. Just as the regulator recently demanded, banks are now seeking to reduce their loans to a range of customers. They are looking for all sorts of ways to generate more profit and cash. They will charge more and higher fees for arranging and renewing loans and they will increase the interest rate they charge borrowers relative to the interest rate set by the Bank of England.

If the government wanted to maintain or increase the amount of lending to small business, mortgage holders or any other favoured group, it should have told the regulator now is not a good time to demand bigger banking reserves and more banking capital relative to the volume of lending. If the government does want to continue with its programme of sharply reducing the excess credit in the system, as the Bank and the regulator have been trying to do since August 2007, it should honestly say so and admit this means a further squeeze on the mortgage and business loan customers of banks.

I had the impression from the actions of the authorities they are trying to take at least £100 billion out of the total credit advanced to businesses and individuals in the good times, as they clearly wish to reduce the credit bubble they allowed to build up. That is the type of figure implied by the change of banking capital ratios and the high interest rates selected by the Bank. Their problem is that such a large withdrawal of credit causes problems for many borrowers, and helps trigger a recession. The recession then places more financial pressures on people and companies, who need more borrowing to tide them over difficult times. That is why I recently wrote the piece saying we cannot afford the recession.

It is never easy deflating a credit bubble. You can try to do it quickly and dramatically. That means a rush of property repossessions and company bankruptcies, a collapse of asset values as those inflated assets are put through a fire sale, and then recovery from a much lower base. You can try and do it at a much slower pace, seeking to avoid a collapse of asset values. You need to administer your interest rates and regulatory requirements for the longer haul, keeping borrowing growth down but allowing sensibly priced maintenance or refinancing of what has already been lent.
The authorities need to make up their minds which they are trying to do, make it clear to the rest of us, and then set interest rates and capital requirements at an appropriate level for their decision.

Grandstanding at the expense of the banks they are seeking to buy large shareholdings in is no substitute for getting interest rates and regulatory requirements right for the outcome they desire in the real world. Pretending they are suddenly regulating a deregulated industry will not stand up to scrutiny. This has always been a highly regulated industry. It has also always had a form of price control dictated by government through the authorities choice of interest rates, the main price a bank imposes on customers. The argument is not about whether it should be regulated or not, but about why the regulation of money markets and banks went so wrong in recent years.

Today we were meant to debate and vote on our abortion laws. I have had a number of emails from constituents who think this is an important issue, expressing their strong views on the subject. There are pro life MPs wanting to put down amendments, and pro choice MPs ready with their proposals.

We now learn that the government intends to use its majority to prevent these amendments being discussed and voted on. They say there is not enough time. Could that be because we go home at 7pm today instead of 10pm? Could it be because we are being offered such a long Christmas holiday? I would be happy to stay until 10 tonight or later to get the job done.

These amendments are not being abandoned because there is no time. It must be because the government does not want Parliament to debate them, and wants constituents wishes thwarted when they write to us for changes to the law. They should tell us why they are against this debate. It was, after all, a free vote issue. It is a pity Labour MPs will not vote against the timetable proposals so they could get their free vote.

I drew attention to the 12% devaluation of the pound from $2 earlier this year to around $1.75 as that occurred. In recent weeks the pound has been hovering around $1.71-$1.75 for much of the time. Suddenly, in the last two days, it collapsed to $1.62.

Market reports ascribe the sharp fall yesterday in part to the Governor of the Bank of England’s remarks. He told us the UK banking system had been on the edge of collapse before the government offered extra share capital to three banks. This was certainly not a helpful remark, and I think it was too pessimistic a view as well. It is true the banks were strapped for cash, but the Bank of England could have solved that problem earlier by offering the large amounts of cash they subsequently made available when they were first needed. It is true they did not trust each other’s paper, and a government guarantee for a price should help resolve that. That, after all, is a prime duty of a Central bank.

It is also true that confidence in banks can be increased by persuading them to raise more capital and hold more reserves. However, the authorities unilateral decision to demand more capital for a given volume of lending, and then the decision by someone to leak details of the negotiations to Stock markets, was a move which undermined confidence further and weakened the position of the banks needlessly. The Governor also shared with us his belief that the UK will go into recession, the first time someone in an official position has made such a forecast.

The Governor – and others in authority – have to recognise how the UK is viewed by external investors. To some overseas analysts the UK is a large international financial services industry and centre married to a medium size slow growth economy which has borrowed too much. Once doubts are placed on the performance and strength of the most vibrant lead sector, financial services, which has fuelled the respectable overall growth of recent years, it puts some overseas investors off holding sterling.

My critics on this website have argued against a UK interest rate cut because they say it will lead to a fall in the pound. What we now can see is we are getting a fall in the pound with much higher interest rates than the USA, whilst the dollar with low interest rates is powering ahead. Why should this be?

Investors today would rather put their money into an economy where the authorities are using every weapon including interest rates to fight recession. They see this in the USA. They are worried that the failure of the UK authorities to take enough action to fight recession early enough will produce yet more bad debts and loan loasses in the banking system, eating up the new capital that is being provided. They worry that the very rapid debt reduction the authorities are wanting to bring about will bring further tensions within other parts of the financial system which will cause more losses. The long shadow of the Lehman collapse hangs over current proceedings. There are other non bank institutions which could cause problems ahead.

Yesterday also saw the debt Management Office in active mode, as they need to be to fund the mushrooming government deficit. They announced a £4.75 billion 2011 issue, a £1 billion 2032 issue and a £4billion 2016 issue of debt, and made up to £47.8 billion of government debt available at the Bank’s dicsount window for banks to borrow. There will be concerns about the size of public borrowing, reflecting the worries expressed recently about difficulty the Debt Management Office might start to experience at getting each issue away at the chosen price.

The National Institute has also come out with a forecast of recession next year. They sensibly re ran their forecast to see what would happen if interest rates were cut by 2.5% (250 basis points) immediately. Their model, similar to the Treasury one, predicts that we would have 0.25% more growth or an extra £4 billion of income and activity. That would be helpful. The only thing that seems to be stopping the cut in interest rates is the Monetary Policy Committee. Having resolutely got it wrong on the way up, with interest rates that were too low, they are clearly determined to get it wrong on the way down with interest rates that are far too high for too long.

In a democracy comment and criticism of the monetary authorites has to be part of the debate, especially when their actions are so important to our economic future and have had such an impact on our immediate economic past. Why doesn’t the MPC meet more often during the crisis? They clearly were not predicting all the extraordinary events we have seen in the last few weeks, so shouldn’t they earn their salaries by turning up for a few extraordinary meetings to get up to speed in the new circumstances? (Amended text after minutes of MPC published) We learn from the minutes that the MPC was summoned to a short extraordinary meeting instead of the usual two day affair. They were given a briefing by the Governor of the plan to have co-ordinated interest rate cuts, and given an update on the state of the eocnomy by the Bank in much more gloomy terms than their previous judgement. They then voted for the cut which the authorities clearly wished to co-ordinate with other governments. Whilst the government can claim the “independence” of the MPC has been shielded, this does not sound like a truly independent body coming to its own conclusions. Rather, it sounds like a body which had got it badly wrong was asked to start to make amends to fall into line with intergovernmental and inter Central bank thinking. If they were independent they would have stuck to their original timetable, or asked for a special meeting themselves and presented their own views on the economy.
Lower sterling makes us all worse off. It means higher prices of imports, which in current conditions means we buy less of them. Fortunately for commodities and energy the fall in the dollar prices still means prices are dropping in sterling terms. In order to rebuild confidence in our currency the government has to take more action to limit the downturn and to improve its own financial position. Yesterday’s debate on the troubles facing bsuienss going into the downturn was long on analysis but short on action commensurate with the problem. The Minister on duty talked about the odd million here and the odd million there on public spending. As the authorities seem to be seeking to withdraw more than £100 billion from private sector borrowing through their revised views on capital and prudence, these sums are tiny in comparison. The Credit Crunch began by troubling the banks. They will now pass the problem on to their customers, running down the lending and demanding repayment in some cases.