Category: Blog

We can all agree that Bank directos and CEOs who presided over too rapid a build up in loans to people and companies who may not be able to repay are to blame if their institutions then fail or need access to public funds. We all agree they should not have advanced so much money, and should have secured longer term credit to finance more of their business. They should have raised more capital from shareholders in the good days to help pay for the expansion. To the extent that this is just a number of banks that have got into trouble we can blame their bosses.

But this is more than that. This was a credit binge aided and encouraged by Central Banks and regulators. Governments often played a leading role in borrowing more and more, and led the innovatory ways of borrowing without showing it on their own balance sheets. The following are also guilty:

1. The Bank of England, the ECB and the Fed all got monetary policy wrong. They set the wrong interest rates, and ignored the warning signs. They allowed a big inflation to take off, busting the targets they had been set.
2. The Bank of England and the ECB are getting the downturn wrong, keeping interest rates far too high and making recession more likely. The Fed has done better into the downswing.
3. The UK government was wrong to change its inflation target as the boom was building up. Their change encouraged the Bank to keep interest rates lower than was wise.
4. The UK government was wrong to take important powers away from the Bank of England in 1997, making it more difficult for the Bank to understand and respond to the monetary crisis it helped trigger in September 2007.
5. The UK government was wrong to go on its own borrowing binge, through PFI, PPP and renationalisation as well as through conventional borrowing, at a time of big credit increases in the private sector and relatively good growth.
6. The Chancellor was wrong to give a lecture on moral hazard and telll us there would be no bail outs just before the run on the Rock.
7. The UK government was wrong to nationalise Northern Rock, removing a big mortgage bank form the mortgage market at a time when the supply of mortgages was falling rapidly anyway.
8. The US authorities were wrong to try to introduce a package that did not have the consent of the American people, and wrong to try to sell it to Congress by painting a very black picture of the situation. That damaged confidence further.
9. The UK authorities were wrong to starve markets of funds on August-September 2007 leading to the run on the Rock.
10. The UK authorities were wrong to think no deal could have been done to save the Rock owing to their interpretation of the Market Abuse Directive.

It is important to recognise that yesterday gave the lie to the idea that the financial collapse is just a US problem, or a global problem made only in the USA. The European Stock markets fell by around 5% again, revealing serious problems in European banks. These banks, like their American counterparts, have extended too many loans to people and companies who may not be able to meet the payments. They did so under European regulation, not US, and did so in response to low interest rates set by European Central Banks. All this happened before we learned of the vote in Congress.

The defeat of the Bush plan will force the US authorities to think up a better package. The next one should avoid the suggestion to American voters that Main Street is baling out Wall Street. The weakness of the world banking system and the freezing of the credit markets means we are in for a very serious economic downturn, which will make the position of the banks even weaker, as more people and companies find they cannot pay the bill for the interest on what they have borrowed. If the authorities allow too steep a downturn we will have a company borrowing crisis on top of the mortgage crisis.

There are many options that can be considered. There is the old Brady plan which entailed an element of federal insurance and the swap of assets to get banks through a collapse of confidence to buy them time. There is the possibility of changing temporarily from mark to market for banks assets – as there is no proper market in most of these assets – to an agreed way of calculating longer term value whilst we await a return of confidence in markets. There is a need for Regulators behind the scenes to work with many banks to get them to raise new capital urgently to reassure people banks will have enough cash and capital to do the job. The Central banks have to keep on supplying cash as lenders of last resort. The Bank of England and the European Bank need to cut interest rates to start to combat recession, rather late in the day. The Europeans need to stop thinking of this as a US problem and realise this is also a serious EU and UK problem that needs treatment here as well as in Congress.

I called for Parliament to meet in early September to discuss this and to seek some remedies from the government. The longer we leave it, the worse the problem becomes and the more difficult it is to find solutions big enough to work. The scrappy and late responses of the authorities to a big banking crisis means more lost jobs and bankrupt businesses. There is a price to be paid in lower pensions, damaged savings and lower earnings. The sooner the authorities on both sides of the Atlantic take more action that might restore confidence the better.

More political bickering about bail out just makes it worse. The deterioration has been fast and huge. Remedies that might have worked in early September are probably no longer sufficient. It now requires something dramatic to bring back confidence. That is what Paulson wanted to achieve, but he mishandled the politics, undermining confidence further. He also made both the US Presidential candidates look weak. They backed a plan which significant numbers of Congressmen and women voted against from their own parties. Their authority too was badly damaged by the vote on the Hill, and showed the growing gap between what the political establishment thinks and what the public thinks.

I am not suprised Congress rejected the Bush package. It was always a long shot. The President thought he could buy confidence in the banks with a bumper injection of $750 billion from taxpayers, without understanding the politics of it, let alone the economics. He then spent the next week inadvertently undermining confidence in the financial world to try to make the case that the package was needed – the last thing we wanted the most powerful man in the world to be doing.

Meanwhile US citizens fearing for their own jobs and under great pressure in their budgets rose up against the idea of big bail outs which might leach into Wall Street bonuses or other rewards for the very institutions that helped get us into this mess.

What we need is an alternative strategy which restores confidence in deposits and normal financial transactions but give no cent of taxpayers dollars to once rich and powerful institutions and people.We need Central Banks to lend money – not give it – to institutions needing cash, and we need what money is spent to be spent on insuring the small savers and depositors where the private sector has not done this. Better still is to agree schemes which do give proper support to depositors within the private sector. In the UK we need to improve the deposit protection system urgently. We need the Bank of England to lend against proper security where cash is needed, and we need orderly mergers and take overs where some institutions are too weak.

Many banks worldwide need to raise new capital. The sooner the better, as markets are not keen on financing banks in these conditions, and it is getting more difficult each day. Banks just have to swallow hard and sell shares at prices lower than they are used to, to get the shareholder money they need.

The US authorities should announce Plan B as quickly as possible. Presumably they have a contingency plan for failure to win the first vote. Can they win a vote after some amendment? Can they use executive powers to take some other action without needing a vote? The Fed clearly has wide ranging delegated powers, as its provision of money to markets illustrates.

Regulation has failed in the financial sector, so let’s have more regulation seems to be the popular cry. What we need is not more, but the right regulation that will tackle the issues that really matter – solvency and liquidity. In other words making sure financial institutions have enough assets and enough cash to do their jobs.

I am fed up with Labour’s pathetic attempts to play politics with the issue of the banking crisis. They want to suggest I was wrong and made the problem worse by saying the mortgage regulation Labour brought in should be scrapped. Their extra regulation clearly did not work. Never have mortgages been so regulated and never have we been in such a mess .I am astounded they think a single line recommendation in a long report which they did not implement can achieve anything! What sort of a world do they live in where a little read Report of advice is more important than the many deeds and misdeeds of government? Have they no idea about how they are responsible for the regulation of financial markets in London, have been so for more than 11 years, and should now tell us what they now think they did wrong.

The Report I helped produce said something much more important than the sentence Labour likes to quote. It said the Bank of England had been shorn of important responsibilities which meant it would not be able to cope with a banking problem when one came along. The Report pointed out how the Central Bank had left money far too loose in the good times, and how the next move was likely to be much more painful. We catalogued how the debt was getting out of control. In others words we warned in advance of this crisis and made proposals to start to correct it.

I am delighted that the Conservative party has now taken up the arguments in the Report to strengthen the Bank of England so it can control and help the banks. I am pleased they now wish to put in place ways of controlling the excessive public debt built up in recent years. Of course it all comes down to spending better and more wisely. There is just so much scope to do this after years of poor management. Let’s keep all the teachers, nurses, doctors, soldiers and sailors, and maybe add some more. But let’s get to grips with the rest, where we are overwhelmed by spin doctors, management consultants, unelected regional governments and people taking money off us and giving some of it back to us. Let’s have a simpler and fairer system, and start planning how to get people back to work after all the mounting redundancies of this summer and coming winter.

The ominous news is the pain is spreading from the City to the High Street, from the property developer to the building site, from the estate agent to the small service business. Banks are having to call in loans, charge more for facilities, value assets downwards and take other unpopular steps to try to make some money to repair their damaged balance sheets. People who blog to say falling house prices are a good thing need to pause and think about how big falls in house prices happening too quickly lead to many other people losing their jobs. A lot of our prosperity in the good times depended on rising property prices and property transactions. A lot of grief will now follow from the drops.

The events of the last few days are spooky. Parliament remains on holiday. We learn from the BBC Business correspondent that the Bradford and Bingley share price has fallen a lot and they are looking at “solutions”. We hear that the PM has not ruled out nationalisation, and it is the last resort proposal. Then we learn that they will announce Bradford and Bingley’s nationalisation.

We are not told what the problem with B and B is. Many companies experience falling share prices, but that does not mean they have to be nationalised. A bank can carry on trading with little confidence in its shares and a low share price, if people remain happy with it as a deposit taking institution, as people have done with B and B. If B and B needs more share capital it can seek new shareholders or ask exisiting ones to put up some more. If it is short of cash it can ask the Bank of England as lender of last Resort to lend it some, failing other sources of borrowing in the market. It can sell assets or seek a deal with another larger bank or a more cash rich institution. The BBC told us there was no need for any B and B depositor to panic.

Even more curious, we hear this morning from the BBC that the government wants to keep the portfolio of mortgages, the assets, but not the branch network and the deposits from savers, the liabilities. So what form will the sale of the liability side of the bank take? What will the government offer instead of the mortgages to a buyer so they can repay the depositors when they want their money money back? Will this sale take place by open auction? How do taxpayers know they get good value?

And why should the taxpayer have to end up with a £50 billion mortgage portfolio on top of the huge Northern Rock one? Why is government better able to manage this than the private sector? Are there any limits to how much debt the government wants to own? Why do we need another mortgage bank unable to lend anything to anyone at a time when there are too few mortgages? This looks like another very poor decision for British taxpayers, and another bad blow for the mortgage and housing market. Fewer new mortgages means a bigger house price fall, which in turn means more losses on exisirting mortgage books. The taxpayer is in for more bad news.

We do not want them
We cannot afford them
They will not make us safer.

Providing cards for foreigners arriving in the UK is absurd. They need to have passports to come. We can record what details we need on their arrival. Why do we need to trailblaze ID cards through our visitors?

Whilst the PM says he will support any financial package in Washington before knowing the detail, back at home there is another reminder of that part of the Credit Crunch which is made in Britain. Talk on the BBC suggests some people are seriously considering another nationalisation.

Please give us a break. Taxpayers cannot afford the last bank they bought for us, and we certainly don’t want to go collecting them. Under EU rules any newly nationalised bank would have to stop new lending to avoid offering subsidised competition. It is bad enough to have lost Northern Rock’s lending to the market, without losing another one.

Nationalising is the worst option. It means sacking more staff, running down the business and sending taxpayers a large bill for all the losses. It means fewer mortgages, lower house prices, and more uncovered lending. It means deepening the crisis. It means debauching the government accounts. By all means strengthen deposit protection. By all means act behind the scenes to help a private sector solution, but do not promise to buy it or take it over.

The Freedom Association/Selsdon Group Fringe Meeting

Tuesday the 30th September, 10.00pm – Freedom from High Taxes

The Selsdon Group, in partnership with The Freedom Association, presents the Rt Hon John Redwood MP, chairman, Economic Competitiveness Policy Group, and Matthew Elliott, chief executive, TaxPayers’ Alliance. Chaired by Michael Fallon MP, the senior Conservative member of the Treasury Select Committee and Chairman of the Treasury Sub-Committee.

TPA/Global Vision Fringe Meeting

On Tuesday 30th September from 5.45pm to 7pm, the TPA will be hosting a fringe event with Global Vision entitled “What next for Britain and Europe?” with a great line-up of speakers. Here are the details:

Date/Time: 5.45-7.00pm, Tuesday, 30th September 2008
Location: Hall 10B of the ICC, not far from the Conference hall.

The speakers for the event include:

Chair: Andrew Allum, TPA Chairman
Panel: Martin Boon, Director of ICM Research
Martin Howe QC, constitutional lawyer
Ruth Lea, Director of Global Vision
Iain Martin, Head of Comment at the Daily Telegraph

So why not come and have some complimentary drinks, meet and talk to the Global Vision and the TaxPayers’ Alliance staff and put your questions to the leading commentators on Britain’s future relationship with the European Union!

– PLUS meet Ruth Lea, John Redwood and the TPA Team

Buddy, can you spare $700 billion? It’s going to Wall Street bankers who are a bit short of a few trillion. Apparently they’ve lent too much to people who might find it difficult to pay it all back. The taxpayer can have some of those loans in return.

We are waiting for details of the package from the USA. It is unlikely the politicians will veto all of it. A deal will probably be done, offering more control over the spending than the first proposals, and offering some help to the hard pressed borrowers to show it is for Main Street as well as for Wall Street. The President and his colleagues are trying to argue that a freefall Wall Street will be bad for everyone. They need to show as well the Treasury support will not leach into Wall Street bonuses and shareholder dividends. If there are any profits to be made, the taxpayer deserves them for running the risks. What is it about modern governments that they have the nationalising instinct?

It was always strange that the Treasury settled on a whopping $700 billion as the right sum. It is small beer beside the trillions of credit in the balance sheets of the highly geared banks and shadow banks. It is a very large sum even by US government standards for a single spending programme. If it is all to be spent before the year end and the change of Presidency it will be a quick fire purchase of many instruments that will be but poorly understood and hastily valued by the taxpayers representatives. It might just work. It might go wrong in either direction, offering too little to stabilise all the financial institutions, or offering too much for the assets bought for the taxpayers comfort.

The valuation problem is not the only one. How do you stop leakage of state cash into bonuses and dividends? How do you define which assets you are prepared to buy so the auction process can work smoothly and fairly? How do you do due diligence on the underlying loans in the debt packages? How do you allow foreign institutions to participate without allowing them to transfer dodgy debts from other places? If you limit it to US institutions, how does that stabilise Wall Street with all its foreign banks?

I am not suggesting there are easy answers, or that an armchair commentator 3000 miles away from the action has insights the real players do not have. We all want the US to get it right, and hope that this large sum if approved will make a difference. It is because it so important that the politicians in Washington are right to want to see the small print and right to want to know if there is an alternative. Meanwhile the rest of us have to watch the gripping drama played out in the markets and on the Hill.

Are there other options, or is the President right to say there is no alternative? Of course there are other options. Some say it would have been better to set up a well governed body to value and buy debt, and started it off with a more modest budget. They could see how well it worked by taking it more slowly.

I think it might be better to develop the Administration’s role as lender of last resort, taking collateral without having to buy the instruments. The system already has the power to lend where needed. It would be less contentious with an American public who rightly do not wish to see hard borrowed taxpayer dollars spent on the Wall Street rich. In the UK when the government foolishly decided to nationalise Northern Rock they ignored the better alternative of lending the Rock the cash it needed whilst taking charge of all the good assets they could secure against the lending. That would have limited taxpayer risk and concentrated the minds of management on the need to find a more permanent solution. Such a policy can be buttressed by a better scheme of deposit protection to reassure small savers.

Maybe changing accounting rules from mark to market (part of the problem when there is no effective market in many of these instruments) to valuation based on estimates of repayments in due course would be an important part of a solution. Some say this would be quite wrong, as only the true doctrine of mark to market gives you reliable accounts. I would normally take that view myself, but what can we make of accounts based on market values that reflect the absence of any kind of buying owing to the squeeze? The banks cannot sell all this debt at the very low market prices being proposed for the accounts anyway – there is no market price if they are to sell lots more of it. Maybe we need an interim solution of a value based on sensible, even on pessimistic estimates of how much of the lending will be repaid over the next five or so years, which would be higher than mark to market in current conditions for some of this debt.

The whole crisis has been made more dramatic by the intervention of the electoral politics of the US Presidential contest. John Mc Cain, struggling behind Obama in recent polls, sought to turn the tables on his rival by demanding a bi partisan approach to the crisis. It looked like one of those unsettling moves Mc Cain has enlivened his campaign with. It broke the rhythm of the Obama machine and left Obama looking more defensive. However, it has two big weaknesses. It has reminded people of Mc Cain’s connections with the Bush Administration. If it results in Mc Cain support for a large Wall Street package it will upset much of Middle America who do like the idea of so much cash going to bankers. Mc Cain would not be wise to duck the Presidential debate. Obama’s best jibe when it was suggested the debate would be cancelled was that a President had to be able to handle more than one thing at a time.

Whilst the politicians for once raise good questions and seek to negotiate a settlement in response to the Treasury Secretary’s challenge, banks on both sides of the Atlantic have become even more safety conscious and interbank lending rates have risen. Interest rates charged to lenders are on the rise, whatever the Bank of England and the Fed may want. Banks are desperate to make more profit to increase their reserves, and keen to cut their lending. They will soon become even more unpopular, as this communicates to the real economy as less available for company and individual borrowing at a higher price. That is why this Credit crunch is also deflationary and recessionary.

Banks need massive capital injections. To persuade investors they need to be more profitable, and to bolster their capital they need to make more profit. They have reported big profits in recent years, but we now know this was at the expense of their balance sheets. There are going to be further big write offs from balance sheets, as banks acknowledge that what they thought was very profitable business was loss making business because not all the loans will be repaid.

If the US package brings relief, and markets rise, that will limit the downturn. It’s not going to stop it. Enough damage has been done already. Even after $700 billion of purchases of assets banks still need to raise lots of capital, and need to retrench on the lending.

Meanwhile the German Finance Minister thinks this would be a good time to demand that banks hold even more capital relative to their loans than they have been asked to do by regulators so far. This is not a case of bolting the stable door after the horse has gone. It is a case of shooting the horses that have bolted after they have been recaptured. Or changing the metaphor, this is the ultimate scorched earth approach, that would turn a downturn into a depression. I assume the Fed and the Bank of England are not up for that. His numerical suggestion of capital required would greatly increase the amount of money banks needed to raise simply to sustain their existing loan base. It is not helpful to hear EU politicians crying “We told you so” when EU banks have been under pressure just as American ones have been. Northern Rock, after all, was a UK/EU regulated bank lending money to people in the UK that had nothing whatsoever to do with US sub prime or the US regulators.

This is a global problem. It needs global solutions. Failing international agreement, it needs intelligent central banking on both sides of the Atlantic. Intelligent central banking entails making difficult day to day judgements about how much liquidity to supply, careful behind the scenes work to help the private sector repair ailing banks, and sensible use of the lender of last resort power. There was never just 5 days to save the world banking system, and never a single policy that would sort out all the problems. If the US is to go the route of buying up the debts they need to answer the detailed questions about how it would work. It might be better to stick to doing what Central Banks should do – regulating banks and organising orderly money markets. They are going to have to do that anyway, and not just for a few days. Buying up the debts of course will give a boost, that will last until the money runs out. Only if it is enough to restore banks confidence in banks will it have worked as intended. Maybe we are going to find out.

The departure of Ruth Kelly has been delayed, owing to the wrong kind of political rows on the line. According to some newspapers her departure is bad news for Gordon Brown, more evidence that the Labour government is falling to bits. For once I am prepared to believe what Ruth Kelly tells us – she is finding the demands of the Transport job too much to combine with her family commitments.

Some staffer may have briefed that Number 10 wanted to get rid of a Blairite and she is going before she was pushed. That just shows you how much damage staffers can do, and how you need fewer of them of higher quality to run an orderly government. Prime Ministers should only share their inner thoughts on who they want in their government with a few people who can be completely trusted. Prime Ministers should never tell the media before they tell the Minister what is going to happen to them, but all too many have done just that and created more rancour as a result.

What is more interesting about the departure of Ruth Kelly is the state of British transport and her failure, like her predecessdsors, to make any of the big decisions the UK needs to have a twenty first century system. We are short of train capacity, airport capacity and road capacity. It is very difficult to undertake the simplest of journeys, or even to travel efficiently on the most popular of routes. There are very few trains from my constituency, 37 miles west of London, into the capital when you need them, owing to lack of track. There is also a shortage of good motorway capacity. Despite requiring a large number of new homes to be built to to the west of London, this government has made no additions to the track and road space going west out of London.

On Monday I had to attend a meeting in Paris. My heart sank at the thought of the travel, even though Paris is not that far from Southern England. It meant writing off the day for a single meeting.

I checked out the trains, the government’s preferred way for me to travel. I discovered I needed to be at St Pancras to catch a 5.25 train to get to Gare du Nord by 8.50, to leave me a sporting chance of making a meeting around 10 elsewhere in central Paris. I worked out that I would need to take two trains to get to London, two tube trains to get to St Pancras, one train to get across the Channel, and two metro trains in Paris. I began to worry. Was it likely that all seven trains would work and be on time, allowing me to make the meeting? I also had to allow twenty minutes to walk to the station.

I soon realised that all meant there was no train option for me. I needed a train from my local station before 4 am to be sure of getting to St Pancras on time. There is no such train. I turned to the government’s worst form of travel, going by air. I found I could catch a 6.35 flight which meant leaving home by car at 5 am. It meant cutting down on the risks of delays and cancellations if I did two car journeys and one flight. Despite a delay on landing at Charles de Gaulle which cost me half an hour thanks to the lack of proper terminal capacity for the home carrier Air France I just made the meeting on time. Coming home there was another delay taking off from Paris but the rest worked quite well. It was not a good experience, because the Western European transport system is at stretching point and cannot be trusted. The total journey took four and half hours, even though the flight itself was under an hour. I always knew that hoping to do the journey in four and half hours was leaving me at risk of not making it, but leaving home earlier could not solve that problem as there was no earlier flight.

No wonder people find it difficult doing more with the continent when such a crucial link as London-Paris is so poor. Unless you live on top of St Pancras or are prepared to go out the day before you cannot use the train to have a normal morning meeting in Paris. On both sides of the Channel it is difficult getting to main train stations to join trains and difficult getting from main airports to central city destinations, owing to a lack of capacity on main networks. Ruth Kelly, like her predecessors, has failed to take decisions to expand network capacity.

One of the problems with Ministers in this government is they do not allocate the time that should be given to doing the job of being a Minister. There is a lot of reading to do, to be up to speed on all the issues and laws Ministers are responsbile for in their own department. There are many cases to consider, letters to amend and sign, meetings to chair with officials as well as with outside interest groups and affected individuals. I do not think Ruth Kelly is unique in this government in finding the time pressures diffficult to handle, but she is one of the few honest ones who has concluded she cannot spend enough time on the job of being a Minister.

All too often in the Commons we hear Ministers who have not read or understood the brief they have been given, who clearly have not engaged in the details of the policy they are presenting and who do not have control of the regulation or law they are introducing. In many cases it is because they have not spent the time on preparatory reading and meetings to master the detail. No wonder things work so badly, and no wonder they find it impossible to get the things done that they say they want done.

If a government that rightly wants more railway travel cannot even find a way to allow many commuters to get to work in a civilised way by train or get to a morning meeting in Paris, it should be no surprise we need yet another transport Minister.