Category: Blog

Our water pipes are leaking, our gas pipes often need replacing, our telephone cables need expanding and even our electricity wires may need fixing. Each time one of the utilities needs to do such work, they have to dig up the streets.

The government is aware of the frustration this causes. Its own highways legislation asked Councils to limit the time utilities have available to disrupt the streets, and requires them to penalise delayed works. It asked the bodies that often themselves do as much or more as the utilities to impede our progress to work, as Councils themselves have a fascination with rearranging the street furniture and with digging up and reshaping the roads.

Much of the problem could be solved over the longer term is we started to alter the way we arrange our utilities. Every time a builder puts in a new housing estate, a developer puts in a new business park, and every time major roadworks are carried out, it would be possible to alter the way we organise our utilities.

We could create concrete box tunnels under one of the pavements in urban areas, and by the side of the road in rural areas. These box tunnels should be large enough to take the water and sewage pipes, the power cables, telephone cables and the gas mains. No-one would dream of embedding all these features in the walls or concrete floors in new commercial buildings – they are placed in the space between floor and ceiling, and in the basement, allowing easy access to mend or improve. These new box tunnels should allow entrance to workmen to fix or change, without needing to dig up the road, and usually without even having to disrupt the pavement.

There would be more cost at the time the facilities were put in, but huge savings in time and effort subsequently. It is madness that we sit and watch as our roads are regularly wrecked, often just after they have been resurfaced at public expense, because the main utilities run down the middle of the road and are buried in the soil and hardcore.

This government’s policies have meant much reduced flows and capacity on many of our roads through traffic mismanagement schemes. They have created extra congestion and pollution by all red phases on traffic lights, by chicanes, lane removal and artificial narrowing. The very least they could do to help the flows and the busy commuters would be to start to cut the number of times the precious highway has to be coned off and dug up.

The government has come up with a sure fire winner for students this time.

Here is the A level you may not have to study for when it is snowing, or when the leaves are in fall.

Here is the A level you can take your time over at Christmas and the New Year.

Will it come in the heavily subsidised and in the much delayed versions?

You should be able to borrow to pay for it, and not have to put your loan on your personal balance sheet.

It sends the right signals and may even engineer you on the right track.

Commercial property has fallen by 10-15% as a result of the credit crunch in little more than three months. The Stock market has fallen, with property and housebuilding shares halving from the market peak. Yet central London property had a fabulous year of price rises throughout 2007, and still there is no sign of major price weakness. In a credit crunch you would expect the very inflated central London residential market to fall as well.

There are reasons to worry about these prices:

1. They have become very high in relation to UK earnings. The central district prices rose by as much as 30% last year alone.
2. Mortgage approvals are down 40% this month
3. There are fears of City lay offs and lower bonuses
4. Non doms and overseas visitors are facing the threat of paying more tax, which could persuade some of them to sell up and leave.

So why has the market so far stayed high?

It is noticeable that there is a shortage of property on estate agents’ books in central London, and the volume of transactions has fallen considerably. It appears to be the case that the market is being held up by a shortage of supply for the following reasons:

1. Stamp duty at 4% is a very large tax on moving home. Someone with a three bedroom flat in the better postcodes would have to pay around £50,000 to £60,000 in Stamp duty to move, along with other fees of say £30,000. People think twice before spending more than a year’s salary on the costs of a move.
2. Councils will often give permission for a basement addition, a new floor in the roof, or for more space by pushing out the back wall. That is a cheaper option than moving. The large number of builders skips around shows this is an attractive option.
3. Whilst the Non doms tax is rumoured, the final details have not been worked out. Maybe Non doms hope the worst will not materialise, or maybe their UK lawyers and accountants are telling them to wait as there may be a way round the rules.
4. City redundancies have not yet shown up in overall unemployment figures, and City bonuses are still being paid on last year’s earnings before the crunch.
5. Home Information Packs have put off speculative sellers from testing the market, as they do not want to incur the costs.

Will these factors continue to protect the market? It seems unlikely, as house prices are very expensive, and the credit crunch would normally have an impact. Foreign money is important to maintaining the strength of prices in the best districts, and it is true that there is still plenty of cash in Asia and the Middle east. That’s why watching the Non doms tax developments is especially important. If the Non doms think the tax regime is still OK here, then expect the prices outside the top districts to fall first, as redundancies, fewer mortgages and lower bonuses have an impact.

A year ago the luminaries, power brokers and business leaders at Davos were very optimistic. The discussion in private sessions ranged widely over ever larger bids based on heavy borrowings. We were at the peak of the rule of King leverage. The attendees foresaw a continuation of the securitisation bubble and thought it represented the new economic stability.

In other words, last year Davos did not predict Credit Crunch, securitisation meltdown or the coming slowdown. The world’s most powerful and best informed got it hopelessly wrong.

So why this year, when they are predicting recession and meltdown, should we think they are likely to be any more accurate? We should recognise that Davos is heavily oriented towards Western leaders and economies. To understand the current world economy you need to understand India, China, the Middle East and Russia, as well as the USA, EU and UK.

This year will see a sharp slowdown in the Western economies thanks to the boom and bust monetary policies the Fed and the Bank of England have been following. We will also see another year of good global growth, with the new power houses continuing to grow rapidly. This year is about three main issues:

1. How quickly will the Western banks recapitalise themselves? Will the Western monetary authorities – as the Fed is doing – accommodate to limit the downturn?

2. How quickly will the world financial system find ways to transfer the huge cash surpluses in the East and Middle East to the West to keep the wheels running well?

3. How big a shift in world economic power will there be this year? How much of the world running will now be made by domestic demand in the Asian and Middle Eastern economies?

There is a chance that the Fed’s actions coupled with efforts to sure up the Western banking system will be sufficient to prevent Western recession, whilst commodity prices tell us demand is alive and kicking elsewhere in the fast developing world.

So cheer up – the experts in Davis are probably wrong again. Soros has grabbed a topical headline but he may not be right.

The Chancellor has promised a statement next week to try to sort out the regulatory mess that characterised the Northern Rock debacle.

What he needs to do is the following:

1. Ensure the Bank of England is more than just a monthly tea party for a group of academic economists sitting round talking about interest rates. The Bank needs to be given the power to direct and deal in government debt (currently with the Treasury).

2.The Bank needs to be a hands on operator in the money markets, so it does not allow in future the markets to become as illiquid as they were in August and September 2007, nor as loose as they were a year or more earlier. The Monetary Policy Committee became entirely academic last year when market rates diverged from MPS rates by up to 100 basis points. If the Bank is to set interest rates, it has to have all the powers and knowledge to operate successfully in money markets, to enforce the rates the MPC recommends.

2. Transfer banking supervision from the FSA to the Bank to allow the bank to operate properly in markets.This would ensure the Bank saw the main positions of the big banks daily, and understood the minute by minute pressures in money markets better.

3. Press for amendment of the EU MAD Directive to allow the Bank to organise rescues for ailing financial institutions in private and rapidly if needed.

4. Renegotiate Basel II to strike a better balance between off balance sheet and on balance sheet items, and to avoid Basel II becoming a further tightening of the capital rules at a time when banks are already finding it difficult to lend through balance sheet pressures.

5. Announce that the UK will not support any more EU regulations of financial services – there are too many new ones that have not yet bedded down, and we need a period of reflection and implementation to see how they will work.Some will need amendment or repeal, as they are too proscriptive and will drive busienss offshore from the EU.

6. Review the operation of the Rating agencies with other overseas jurisdictions, to see if they can operate more cautiously in future.

The sub prime crisis, a run on a UK mortgage bank, and now the loss of $7 billion dollars through rogue trades at Soc Gen: and still they say regulation works!

I accept that financial services businesses can be different. Where they take money from people, on the promise they will repay it at some date in the future, people need reassurance that the promise will be kept. In most other businesses the business takes the risk and supplies the good and service before the customer pays.

It makes sense to have deposit protection, and it should make sense to have some additional checks and requirements to reduce the risk that a business will steal people’s money, or will fail to keep enough capital to pay for losses and mistakes and still be able to give people their money back when they want it or are entitled to it.

This proposition has led to a vast regulatory industry, where clever regulators try to interfere in ever more details of the banks’ lives in the belief that this will prevent mistakes being made. As the last few months have shown, it does not work.

We need to ask how did the world regulators get it all so wrong, and what changes do we need to reduce risks in the future?

The biggest problem is the so-called sub prime crisis, which is in practise a world crisis, not just a US one, and is not confined to mortgages alone. It is a securitisation and off balance sheet crisis – too many banks packaged up too many loans born of the easy money conditions the authorities encouraged, and spread them around the system. The Regulators through their Basel I requirements positively encouraged this, asking for less capital if you securitised your lending and pushed it off your own balance sheet. This crisis should be called the Basel regulatory crisis, rather than the sub prime crisis.

The solution is for monetary authorities to be more careful about making money too easy – not that this is an immediate problem in the middle of the Credit crunch! They also need to revise rules over capital requirements, without lurching to a position where too much banking capital is required, intensifying the Credit Crunch. The whole thing is complicated by the move to Basel II, which needs urgent review in the light of current circumstances.

The run on Northern Rock was an unfortunate event for London. I do not agree with the MPs who say the FSA got it all wrong. As I understand it, the FSA was warning about the problems of Northern Rock well before the run on the bank began. The failure was a system failure, which owed a lot to the failure of the monetary authorities to keep money markets liquid, and to the dithering of the Chancellor who was meant to hold the ring and make the decisions in areas of overlap between the Bank and the FSA.

The UK government should decide that in future the Bank of England will get back its old powers to regulate banks and to run the government’s debt financing programme, so it once again sees the whole range of business going through the money markets. The Bank should have prime responsibility for banking the commercial banks, ensuring adequate liquidity in markets and avoiding any future run on a bank. They always used to be able to do this before Brown’s botched reforms.

The Soc Gen debacle is difficult to believe. Most banks make dealers deal in open dealing rooms where colleagues can hear what they are up to. I thought most require two signatures on larger deals, most have real time reporting through a common system, and anyone needing cash to pay margin or settle transactions would need someone else to certify or check the requirement. As the trader apparently acted without other authority he must have found ways to circumvent the checks in the system. The regulator presumably was completely unaware that such a thing was happening.

I do not think Regulators can stop a Soc Gen event. Only better internal controls and procedures in a bank can do that. The fact that Regulators cannot should make more people suspicious of the cry that what we need is more regulation. In this case what we needed was better bank management.

No wonder people are cynical about many politicians.
The Home Secretary finishes a consultation where 90% of the respondents tell her they do not want to see any increase in the 28 day period of detention without charge or trial.
As a result, she concludes she must press ahead with legislation to allow detention for up to 42 days.
All the Consultation has done is to persuade her to use a softer tone of voice, and to dress it up as a contingent arrangement. The truth i sthat it still remains the same underlying proposal – to lock people up for up to a month and half when there is insufficient evidence to bring any case to court.
Just as the government is unable to understand "No" to regional government in England – which was shouted loudly enough when they lost a referendum by 80% to 20% – and unable to understand the passionate wish that they keep their word to hold a referndum on the latest EU Treaty, so the Home Secretary is unable to understand "No" to longer periods of detention without trial.
When I and my colleagues were on IRA death lists – and when 3 of my colleagues were murdered by terrorists
– we did not see the need to turn Parliament into a fortress or to extend detention without trial in Great Britian. It is now generally agreed that changing the rules in Northern Ireland did not help bring the troubles to an end.
Think again, Home Secretary. Many of us are scandalised that you can lock someone up for 28 days without charge or trial. We will never accept 42 days. We value our freedoms.

Over the last decade the UK has been marooned with a high standard rate of capital gains tax, whilst many other countries have decided to be friendlier to savers and entrepreneurs by slashing CGT rates.

I welcome Mr Darlings decision to cut the wholly uncompetitive 40% UK rate to 18%, a rate closer to the norm amongst advanced nations. It is exactly what he should be doing.

Unfortunately Mr Darling could not resist a sideswipe against enterprise, with his wish to hike capital gains tax on investors in businesses by 80%. This has understandably caused a massive furore, and has lost the government much support in the business community. It has undermined the good work of his general CGT reform.

Today I am pleased to hear that Mr Darling intends to change his mind on gains up to ?750,000. It is a small step in the right direction. It is unusual in this government for a Minister to listen and to amend. He now needs to listen more, as his proposals are still damaging.

It is one of the ironies of Mr Darlings troubled times at the Treasury, that he should choose to assault the one tax change his predecessor Mr Brown had brought in which had won universal acclaim from business. The 10% CGT rate was compelling and competitive. It succeeded in attracting large amounts of new business to London, and underpinned a large pool of venture capital and private equity activity. Last year as this government and some in the media always do, it was time to slate people for their success and to cast envious eyes on their rewards. Against this backdrop the Chancellor foolishly saw a pot of gold he could tax. He did not seem to understand how footloose that money and skill is, and how much other centres in the world want it.

In todays difficult climate for enterprise the government should expect redoubled competitive attacks from other countries, who will want that accumulation of capital and that financial talent. Our competitors were thrilled when Darlings politics of envy started his move against private equity and against non doms. His partial climb down today is welcome, but not sufficient to ensure all the money and talent will stay here. In a world fighting recession fears, jealousy and government greed are dangerous bedfellows. They are the enemies of enterprise, and the progenitors of lower growth and less prosperity. The UK has a lead as a world financial centre, but New York is about to benefit from the next round of Bush tax ciuts, whilst Mumbai, Shanghai, Dubai and many others are all out to take whatever London carelessly fails to look after.

Three cheers for the Fed. One cheer for each 25 basis point cuts in interest rates announced as an emergency measure yesterday. It did the trick, limiting the savage market decline, and turning round the Asian markets which had been in freefall the previous day.

The US authorities have made it clear to the markets that they are going to stop a recession if it is in their power to do so. They have made aggressive moves in reducing interest rates. This will help a great deal. It means that many mortgage holders and companies in debt will now be able to afford their interest payments and repayments, improving the quality of the loan assets on the balance sheets of the banks and those held in securitised form. It means that all those financial companies that have borrowed so much to sustain the easy credit of earlier years will also have some relief on the amounts they have to pay in interest. The whole financial structure in the US is a little less unstable as a result of this development.

As I argued yesterday, two conditions need to be fulfilled for recovery to get underway. The first is lower interest rates. The second is the recapitalisation of the banks, so they have the stronger balance sheets they are going to need to lend people and companies more money again. This process can happen by the passage of time, as they trade profitably. It can be speeded up by cutting or cancelling dividend payments, or by raising new money from shareholders.

The gyrations of world markets in the last few days shows that the Indian, Chinese and Japanese markets are still very influenced by perceptions of the state of the US economy. All three are important exporters to the USA and are influenced to some extent by US conditions. The internal strength of the Indian and Chinese economies is becoming more obvious, but it is not thought sufficient to offset the full blown US recession which some market participants feared.

The Governor of the Bank of Englands remarks showed how far behind the plot the UK now is. The worse circumstances of the UK economy as a result of recent policy are now dragging it down relative to the US and the Asian giants. As the Governor pointed out, we have a bad inflation problem this winter. The governments own borrowing requirement was far too large before Northern Rock hit, only to be made far worse by the Northern Rock debacle. The big build up in UK public spending and borrowing, and the poor productivity of the enlarged public sector, all limit the UKs room for manoeuvre, at a time when the UK too needs lower interest rates to relive pressure on its financial system. The government is trying to control public spending at last by clumsy interventions on public sector pay, but still lacks a grip on large projects and staff numbers.

A recession can be averted in the US. The UK will experience a sharp slowdown, which will be made worse if the Chancellor presses on with plans to increase capital gains tax on entrepreneurs and with damaging plans to tax non doms too much.

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