Category: Blog

The Stock market fell badly
House prices are falling quickly
Bentley announced a three day week
New car sales are well down
Second hand car prices are low and falling
Property specialists are getting gloomier even after a 20% fall in commercial property values
The pound fell further
There are fewer jobs on offer

Some of my readers seem pleased that house prices are falling. Some still think we should be fighting inflation because the pound has fallen and imports are dearer. All the evidence is that the big problem now is the downturn. Inflation will fall rapidly next year. Fewer and fewer companies will have any pricing power. The Stock Market is waking up to the profits squeeze that will now follow the squeeze on family incomes.The government still refuses to cut back itself, intensifying the squeeze on the rest of us.

Some of my readers ask why keeping house prices up matters to politicians. It matters to them because it matters to most of their electors. Most people’s main asset is their home. They do not want it to fall in value. When it does it not only makes them feel worse off, but it limits what they can borrow to sustain their lifestyle. Of course rising house prices on the scale we have experienced in recent years is bad news – it creates a bubble which will burst. It would have been better to have controlled the economy so house prices rose gently. There is one thing worse than house prices rising too rapidly, and that is them tumbling. Many people will pay the price of that. It will mean lost jobs, shattered dreams, repossessions. Do not curse us to even bigger falls in house prices. It just means more economic misery ahead. It means people thrown out on the streets, and it means many others tightening their belts even more whilst big government spends on as if nothing had happened.

The last couple of weeks have seen confirmation of the downturn on both sides of the Atlantic. House prices continue to fall in the USA, and the UK. Latest figures show UK house prices market now down by 12.7% over the last year, with a big fall of 1.8% in August. UK Car sales fell by 18.6% in August, always a poor month for them anyway. Fears are growing of bad profits performance ahead in the US and the UK. Surveys of confidence and purchasing intentions are in negative territory.

None of this should have been news. My forecasts of falling house prices, slowing activity, poor confidence levels and squeezed profits were not out of line with many other commentators. It’s just the British government which refuses to give us sensible forecasts to help guide markets. Those Ministers who lecture the private sector on the need for transparency are unable to give us any themelves on these important economic matters.

There are two necessary conditions for a recovery. The first is a fall in oil and other commodity prices, to relieve the inflationary pressure. That should in due course enable Central banks outside the US to cut interest rates, and reduce the need for rises by the Fed. As predicted, this is now happening, with oil down substantially on its high.

The second is the creation of more liquidity in Western banking markets, as the banks recapitalise. Recent market events imply this has not yet happened sufficiently. Substantial sums have been put into banks by existing and new shareholders, but banks are now being very cautious and regulators are reinforcing the caution long after the inflationary credit bubble has burst.

Both the ECB and the Bank of England kept their interest rates up this week. They are still fighting inflation more than recession, which does not help bring forward recovery.

Over in Euroland the economy is sinking, shrinking in the second quarter GDP figures. Each main central Bank has now taken lower quality assets from banks as security for cash. Market participants are asking how much more of this can they do, and will they roll these facilities over? It reminds us there are now issues to work through in returning markets to normality, arising from the short term measures the authorities took when the crises were at their height and individual institutions were under threat.

It is still important to watch interest rates and banking liquidity. I am still more worried by prospects for the UK economy than for the US, in view of the large government deficit in the UK and the importance of house prices to the economy as a whole. When the government’s mini package was announced on housing many rightly said it was far more important to know how much liquidity would be supplied to mortgage banks, and how would the Bank of England handle its existing scheme?

The one bit of good news is even this government in the short term seems to realise the money is running out. There may be no additional special scheme to help people with their energy bills this winter, and no windfall tax on the energy companies at a time when we need them to invest more in future capacity. This will disappoint many of the government’s own supporters, but is a whiff of realism after many special increases in public spending. Even the housing scheme contained elements of juggling within existing budgets. Gaining control of public spending is crucial to recovery. Getting priorities right within it to cushion the impact on the most vulnerable should also be part of the government’s response to the economic downturn.

The contrast of McCain and Palin worked well for the Republicans. The Obama camp is driven back onto attacks and disparaging comments whilst McCain tells the world he wants to work with Democrats for the change America needs and Washington will have to accept.

I heard McCain speak at the Conservative Conference when he joined us there. His speech made me appreciate how good David Cameron is as a public speaker! Last night he performed so much more effectively. His quiet lack of oratory was persuasive, followed by a crescendo in his credo which stirred the audience to enthusiaism.

The problem with all moderrn politics is Who will deliver? So much money is raised and spent on judging and polling the public mood, that you would expect both sides to know what the public wants. Of course electors want change, because the economies of the world are weakening and people are getting hurt. Of course many electors want politicans who will stand up to big government, and tame it to work for us. Of course sensible people are against war, and want the West to win more friends to its causes without having to exchange bullets. Mc Cain captured all that, thanks to the great words he and Palin delivered. They can afford the best in speech writers – as can Obama. The issue for both camps is can they deliver the policies that will make them come true?

Obama’s early brilliant rhetoric of change is looking stale, as the reality of more spending, more laws and bigger government emerges from beneath the noble aspiraiton to improve the lot of the people. Palin’s language that she will help tame the Washington bureaucracy looks fresher, because she has just arrived on the scene. McCain promised last night to unleash Palin on Washington. He promised smaller government and lower taxes. Can they deliver?

The race is still close. Both sides show what you can achieve in politics if you research the mood well and use words well. People can become interested and enthused. Whoever wins then has a far more difficult task. How can they make modern bureaucracy bend to their will, to get more out of it for less cost? If the winner cannot do that, the public will feel let down all over again. Can either side make a difference to the Credit Crunch and the economic troubles? Neither has so far come up with a plan which makes any sense. At least McCain’s wish to curb spending and the public deficit would help.

Sarah Palin gave a great performance to the Republican faithful. I am not myself swayed to favour a candidate because they go hunting, have five children, are married to a Trade Union member or defend the citizen’s right to carry arms. But then I’m not an American and I do not have a vote in the Presidential election. I don’t think the behaviour of children is a more relevant considersation for a female candiate than for a male one. What matters is how the candidate would behave in office.

I do like brave interesting politicians who aim to curb the excesses of big government. Mrs Palin came over as a feisty and fresh face on the international stage who has been doing just that in Alaska. I liked the way she began the spending controls by selling the Governor’s plane and doing without the personal chef. I enjoyed her telling the audience that you just have to use the veto as Governor to stop less desirable spending. Her intention to go to Washington to serve the people rather than the “liberal” media commentators was a novel idea in this age of spin. Let’s hope it catches on.

It was even more fun hearing the hissy fits from Democrat women, still smarting from the rejection of Hilary. They came over as unpleasant, tearing into a member of their “sisterhood” because she dared to have popular views on putting government back into its place as servant of the people rather than as a life support machine for the elite, cutting back its size and arrogance. It seems some Democrat ladies only want the glass ceiling broken as long as the whole of the rest of the big rambling building of government remains intact and is voted more money by the winning women.

It is sad to read that in some places in the UK as well as in politics in the USA the glass ceiling still impedes talented women. I want them to break through by their efforts, as some have so successfully. I speak as someone whose best boss was a woman. Margaret Thatcher was a good boss because she listened, weighed your advice based on how well thought through it was and how well you defended your case. She was prepared to do difficult things that did not poll well if they were right for the country and right for the longer term. Her successors in office have not had that combination of longer term vision and impatience to get things done which she had. Even those who disagreed with some of the things she was doing admired her dedication and tenacity in doing them. Her worst critics in Labour have come to defend important parts of her new settlement of the Union and privatisation issues, as they have come to see how some of these reforms were crucial to advance people’s living standards.

In the USA the Republicans have done more to advance the cause of talented women in government in recent years. Miss Rice is, arguably, the second most powerful person in the world after the President. Now they have placed a female Governor on the ticket for the White House. As Mrs Palin hit out at Mr Obama, it was amusing to hear her remind the audience that she had much more executive experience just by being a small town Mayor than the Senator, let alone her experience as Governor. My advice to Mr Obama is “Don’t make experience an issue in this election”

The Bank of England meets this week to decide interest rates with its policy in tatters.

Its sole aim is to keep inflation down to 2% per annum. The reason behind that instruction is to uphold the purchasing power of our currency. Neglect has led to a big devaluation of the pound, meaning our purchasing power if we wish to buy goods and services from abroad has been slashed.
As overseas trade represents a susbtantial slice of our economy, this is a serious assault on our living standards. Indeed, many of the luxuries and extras are imported, leading people to feel much worse off when their prices rise on the back of a devaluation.

The Bank’s problem is there is no easy way for it to restore the value of the pound at home and abroad. Raising interest rates would be the traditional response to a sinking currency, but in these conditions that might be seen by the markets as short term, leading to a bigger decline in economic output and worse problems next year. Markets could take fright rather than buying pounds, as they would not see it as a sustainable policy.

Cutting rates in the way we need to stimulate activity could also deter people from buying sterling, for the obvious reason that it lowers the return you make from holding the currency.

Leaving things as they are, the likely decision of this week’s meeting, just delays sorting out the mess, and may not help either. It looks like dither.

So what should the Bank do? If it were serious about rebuilding confidence in our currency, and defending its value, it would send a public letter to the government demanding they take the action needed to restore confidence. If the government produce new sensible forecasts, takes action to rein in its wilder and less desirable expenditures, sorts out Northern Rock and did one or two other things to show it wanted to get on top of the financial crisis, then the Bank could cut rates.

When the US took concerted action to improve the US economy, Fed and Administration combined, the Fed was able to cut rates and the dollar rose. It is the weakness of the UK economy that is adding to the fall of the pound.

Yesterday saw a government fight back on the economy savaged by events.

The pound dropped to a new all time low against the Euro – a Euro is now worth more than 81p, 14% more than at launch.

The pound dropped again against the dollar. It has fallen from $2 to $1.77 in les than a month, making all items priced in dollars more than 10% dearer.

The latest report on the jobs market said there had been a sharp contraction in jobs on offer.

Many people said that the government’s encouragement to first time buyers to buy properties when house prices are still falling at around 1% a month was bad idea

The OECD came out with a surprising forecast that only the UK of the major economies would plunge into recession in the second half of 2008.

The fall in the pound and the changes in the job market matter more than the forecasts and statements. The devaluation has made us all a lot worse off. It’s time to think of cancelling the holiday in the USA if you were planning one. It means dearer oil and food. It means a bigger squeeze on our spending power generally.Now we are imprting inflation, it will put the Bank off action to cut interest rates quickly enough.

The fall in jobs is not all bad news. Wages are under reasonable control, as I have been forecasting. There is not going to be a wage inflation against such a gloomy jobs background. The fall in jobs also implies companies are taking action to avoid financial disaster. It means more companies will survive the downturn.

Even the government’s housing package was mercifully small, and included some spending that was already in budgets. Is that the first sign that the government realises there are limits to how much it can borrow?

Unfortunately the government has already committed itself to unrealistically high spending plans, and will not come clean on how much worse the deficit now is, thanks to sharp slowdown. It remains vulnerable to the mauling given it by the OECD forecasts, because its own forecasts are so obviously wrong. No-one believes the government’s figures. If they wish to reassert any kind of authority they should re forecast now.

And whilst they are about it why not recall Parliament to discuss the various rescue packages? I am sitting in my office this morning, but as always in September the place is a building site. Whilst most MPs are away from the place, they just carry on spending!

Yesterday evening I heard Gary Hoffman give a lecture on “Leadership and Reputation” at the Henley Management School. After 26 years at Barclays, Mr Hoffman leaves to become Chief Executive of Northern Rock at the end of this month.

He gave us an impressive talk about the importance of reputation and brand in banking. During the course of the lecture and questions it emerged there would likely be a need for more write offs and provisions at Northern Rock, as readers of this blog will be expecting. The £600 million of losses so far reported since becoming nationalised and the £3,000 million of new equity capital will not be the end of the taxpayers’ misery.

The more I see and hear of Northern Rock, the more I find it impossible to understand why Vince Cable is lauded for pressing for nationalisation, or why the government was foolish enough to do it.

As a result we have

The former biggest new lender in the market unable to make new loans at a time of mortgage famine
The need for other banks to refinance some of Northern’s mortgages, further reducing the flow of new mortgages
Redundancies to scale back the business
Large losses to be paid for by the taxpayer
The taxpayer effectively paying £15 million a year on top as a contribution to the local community
Taxpayers underwriting sponsorship of Newcastle football club

If instead the government had acted as intelligent bank manager to the Rock, it could have continued to write new loans and offer more attractive rates. It would not have lost as much or sacked as many.

The sooner what remains is sold to the private sector the better. It could either be sold as a going concern, or the assets sold to new managers and companies. Either would be a cheaper answer for the taxpayer, and would probably save more jobs in the long run.

The interesting question is what value does the Northern Rock brand now have? Mr Hoffman thinks there is strong brand loyalty to the Rock in the North East. I was pleased to hear his belief in the brand and the support he thinks it still enjoys. I would be interested in comments on how many North eastern savers would put their money with it if it did not have a government guarantee.

It was good to hear Mrs Blears wriggling when asked if she would recommend a young friend to buy a flat or house today, now there is to be no Stamp Duty on a property between £125,000 and £175,000 for a year.

It is the crucial question. If you can now recomment first time buyers should buy, the measure might help the market a little. If advisers and analysts still think there could another 5-10% fall in residential property prices, it would be better advice to the young person to wait a few months, as saving 1% to lose several times that is not good business.

I wonder where the government gets the £600 million of lost revenue figure from. Presumably it is left over from the out of date and inaccurate forecasts given at the time of the last Budget.That may be what is pencilled in at the moment for Stamp Duty on such properties, but it is highly unlikely they will collect that much anyway, given the very low level of mortage availability and the freezing of the residential property market generally.

One cheer for the government’s housing package – tax cuts are welcome. It was a pity they refused to tell us how the package will be paid for, or to change the government’s economic forecasts. As the OECD is now forecasting a recession in the UK – two down quarters this year – we need a counter forecast from the Treasury.

Readers of this blog will not be surprised by the fall of the pound. I wrote about our freefall currency on 16th August last. Today the front pages of the newspapers tell us what a big story it has become.

If we were still living in an era of fixed exchange rates, or managed ones, we would be deep in a huge crisis by now. The UK government would be borrowing abroad to buy pounds to try to stop the currency falling. The foreign money lenders would be demanding cuts in public borrowing and spending as part of a package of better economic management. Floating rates takes the immediate sting of such a crisis away from a Chancellor wishing to prolong his holidays away from London.

A little bit of devaluation, when you are running a big balance of payments deficit, is no bad thing. It helps your exporters become more competitive, so they can sell more. It puts people off buying a few luxury imports, so you spend less. The balance of payments start to correct. Just as Japan found a little bit of inflation was preferable to deflation, so a little bit of devaluation for the UK is fine in current circumstances.

The problem is, we are now getting a big bit of devaluation. There is a sense of carelessness, even of incompetence in the air, underwritten by the Chancellor’s foolishly pessimistic remarks from his Scottish holiday home. Overseas holders of sterling have got the message that the government does not seem to care about the value of the currency, and is taking none of the steps to run its own affairs prudently that you expect from a strong country wishing to have a strong currency.

This does now matter. Oil has fallen from around $145 a barrel to around $115, a fall of around a fifth. This started to bring welcome respite from inflation that was getting out of hand. Unfortunately in the last few weeks the UK has lost half of that advantage – oil has gone up by 10% in sterling terms thanks to the fall in the pound against the dollar. $145 a barrel oil at $2 to the £1 was costing us £72.50 a barrel. $115 a barrel oil at $1.80 to £1 is still costing us £64 a barrel, a much smaller fall than the fall in the dollar price. You will see the latest fall in the pound in the pump prices. The same is true of the thousands of commodities and products we import that are priced in dollars, or in Euros. The pound hit a new low against the Euro yesterday.

There is likely to be an immediate price to be paid for this imported inflation. The Bank of England will feel it has to keep interest rates higher for longer than it would otherwise. The Bank, if it were truly independent, would tell the government we need lower interest rates badly, but can only afford them if the government takes other action to reassure foreign holders of sterling, sufficient to stop the collapse of the pound.

What should the government do to stop the slide? It needs to reassert itself in a way which breeds confidence in its actions and in the UK economy as a whole. That includes:

1. Changing the language. The government cannot carry on using the bland and out of touch complacent language it has been using prior to the Darling outburst, nor should it go over to Mr Darling’s own excessive gloom. It needs to find words which show it has understood the severity of the financial situation, but do not exaggerate the bad news. It needs to say there are limits to how much it can spend and borrow to “help” us in the squeeze.
2. Changing the forecasts. It will not do to carry on with the Budget forecasts, as no one in markets now believes them. Nor can we wait until the official Autumn forecast to see the revisions. The markets need answers to two simple questions immediately. What growth rate does the government think the UK economy will manage in 2008-9 and 2009-10? In the light of that, how much is the government planning to borrow in each of those years?
3. Getting in control of how much it is spending. Spending growth has been far too fast since the Budget, and borrowing will be boosted by the slower growth than forecast which cuts revenues and raises spending further. The government needs to cut out more waste and less desirable spending, and accept some discipline on how much it can afford to borrow and will be allowed to borrow by sceptical markets.
4. Stopping its own contribution to inflation, by freezing public sector prices, charges and taxes where it has a monopoly, and making their delivery more efficient instead.

Floating exchange rates are usually a good thing. They allow adjustments to be made in easier ways than fixed rates allow. If a government thinks they give it carte blanche to spend and borrow as much as it likes it can get away with it for quite a long time, but there comes a reckoning. The first thing to go is the currency. That is now happening to the UK. Later it might become difficult or too costly for the government to carry on borrowing at the level required. They need to get a grip now. That’s why we need the Chancellor full time in London, and we need Parliament back to put some pressure on them to take the necessary stabilising action.

The odd billion pounds for the residential property market is not going to turn it round – the sum is too small. Another billion on the deficit is a further increase in an already alarmingly large figure, and does not help restore confidence in the conduct of public finance.

Yesterday in seven badly chosen words Mr Darling announced the death of New Labour. To many of us it has been a slow and lingering death for some time, but Mr Darling put a stake through its heart.

New Labour was a spin story devised by Mr Blair and Mr Brown in the 1990s to make Labour electable. It said that New Labour would offer economic efficiency allied to social justice. At face value it was a good offer, attractive to many Conservatives. Who doesn’t want economic growth and prosperity, and who doesn’t want that to be used to help the less well off? it sought to banish memories of Labour’s previous economic mismanagements. Every previous Labour period of government had been short, including too much public spending and public borrowing, a balance of payments and a sterling crisis, a devaluation and cuts or slow growth in living standards.

The Conservative Opposition under David Cameron has been doing a good job showing that the social justice side of the offer has not been delivered. New Labour, like Old Labour, thought social justice could be created by taking more money off the richer half of the country to give to people living on benefit. It didn’t work in the 60s or 70s, so there was no reason why it should work in the noughties. Mr Brown thought that the problem in the past had been a shortage of money to do it on a big enough scale, so he simply threw even more money at it. The result was even more people living permanently on benefit. He thought that if he paid benefit to people in work as well as out of work it might tempt more into work, but underestimated how much had to be done to educate, train and motivate the 5 million plus still living on benefit as a way of life. Many people now know that the government has not delivered social justice. The left will urge Mr Brown to do more of the same – spend more money on those on benefits. He will do some of that and it will have the same result as before. He now does it when the puboic accounts are in a dreadful mess. He runs the risk of a government financing crisis to go with the sterling devaluation he has already triggered.The Blairites and modernisers will tell him to look at the detailed work of Iain Duncan Smith and others on how to mend a broken society. He will lift some of their soundbites and back a few pioneer projects, but not on a scale likely to have any impact.

Now Mr Darling has demolished the more important half of the New Labour offer, the promise of economic stability and efficiency. Labour won 3 elections on a few soundbites. Readers of this site will know what I have thought throughout of the spin that Labour made the Bank of England independent and that guaranteed economic stability. Any lingering doubts people had about my analysis must have been cast aside by the convulsions in markets since last August. The bigger soundbite from the point of view of popular impact was the often repeated mantra “There will be no more boom and bust”.

“No more boom and bust” was the most effective of all the New Labour songs. It was audacious and all encompassing. It was audacious because it reminded people of the mistakes of the Tory years in 1992-3 when the Exchange Rate Mechanism fell apart, the only Tory economic policy Labour had ever supported and had urged on the then government! Any sensible critic would accept that had Labour been in office then they would have inflicted exactly the same misery on the British public. As one of the few MP critics of the ERM throughout, it was a lonely business when the main Opposition party would not help us expose and fight against it. It was effective, because people wanted assurances that interest rates and house prices would be stable, or not go down.

The soundbite worked brilliantly in 1997, as part of the reason for change. What change did people most want? “No more boom and bust”. It worked well again in 2001. After all, leaving aside the disgraceful tax raid on the pension funds and the sale of the gold holdings, most of the period 1997-2001 was characterised by prudent management of public finances and produced a reasonable economic performance. That added some credibility to the slogan. Labour still allowed boom and bust in manufacturing, but that was disguised by the strength of services in general and London’s service sector in particular which helped the national figures considerably.

By 2005 it should have been apparent to more commentators that we were back in boom and bust, but because we were enjoying the boom part of the policy too many people were still prepared to ignore the obvious signs. I highlighted the excess and waste in public spending, the build up of far too much public borrowing, and the change in inflation targets to keep interest rates lower than desirable. I also highlighted wrong headed mortgage regulation and the Basel I banking regulations, which became an important part of the disaster.

Mr Darling has told us it cannot work again. Even if his new forecast is too pessimistic, as many private sector commentators imply by their forecasts, we all now know that we have lurched from too much borrowing, too much price inflation, too much house price inflation, to too little growth and to a Credit Crunch. In Mr Darling’s words we have lurched from pretty good economic conditions to the “worst in 60 years”.

Perhaps he did this with the full knowledge of the Prime Minister, with both men thinking that lowering expectations drastically was the best way to create a new start and to get an audience for whatever actions they will take next. Polls must tell them people did not believe the old spin line about how well placed the UK economy was to weather the US sub prime crisis, as if people would not see the other crisis made here in the UK.If he did, the PM is now offside, and others are at work to undermine the Chancellor in favour of Mr Balls. Perhaps he did it to cut loose from a Prime Minister on the slide, telling us that he the Chancellor recognises that his inheritance from his boss was not all it was cracked up to be at the time.

Either way, it transforms British politics. It now allows us a more honest debate about what went wrong and what needs to be done to put it right, if only the media will start to listen to those voices that have dissented throughout from the nonsensical spin that has prevented proper economic analysis. It will anyway confirm the public view that New Labour is dead – it has delivered neither economic efficiency nor social justice- whatever the media now do.

We do need both social justice and economic efficiency. To achieve them we first need a government which can get a grip on public spending and borrowing, and reform our monetary and banking arrangements, so they will deliver prudence and low inflationary growth in the future. That was what we tried to set out in the Economic Policy Review last autumn, published just before the Rock crisis, written in the expectation that the monetary mismanagement we were witnessing would end in tears.

The idea that the treasury should guarantee and underwrite £40 billion of housing values is absurd. Have they learnt nothing from nationalising Northern Rock? The more they spend on such ventures, the more they waste, and the more confidence drains away. IT IS TIME TO STOP DREAMING UP NEW SPENDING PLANS, TIME TO GET A GRIP ON THE STATE BUDGET.There are limits to how much the state can borrow. They are well into the danger zone already.