Category: Blog

Yesterdays vote and proceedings in the Commons show the grim reality that unless the Lib Dems honour their promise of a referendum there is no chance of us gaining one.

Yesterday was the Second Reading. The issue was simply ?? do you want this Bill and this Treaty at all? Conservatives and 19 Labour rebels voted against the Bill and Treaty in its entirely. Lib Dems and the rest of the Labour party voted for it, giving them a huge majority.

The Labour rebels put down a motion to deny the Bill a second reading because there was no referendum offered. This was not an amendment which could have led to a referendum ?? it was another way of saying Lets veto the whole bill. Their proposal was not called. Had Conservatives put our name to it as well, and had it been called, it would have ended up with the same outcome as we achieved by simply voting against Second Reading outright.

The opportunity to force a referendum comes later in Committee, when any MP can table a referendum amendment to the Bill, in the form that this Bill will only come into effect if there has been a referendum and if the public has voted Yes. The Conservatives will table such an amendment and vote for it, or support a Labour one if they table it first. We do not wish to see competing referendum amendments, and may prefer Labour to choose the words they want to maximise their support for it.

Either way we need the Lib Dems to vote en bloc for a referendum. Their slippery Leader finally this morning on the Today programme let slip he would vote against a referendum on the Treaty, tearing up their election promise. All those of us who want a referendum on this Treaty need to maximise pressure on these treacherous Lib Dems, as well as encouraging more Labour rebels, if we are to have any chance of stopping this juggernaut Treaty that the public does not want.

PS: The Conservatives have now tabled a suitable referendum amendment as New Clause 1.
<strong>Click <a href="http://www.johnredwoodsdiary.com/2008/01/22/john-redwood-speaks-in-eu-constitution-debate/">here </a>to read John Redwood’s contributions to the debate on the EU Treaty.</strong>

The collapse of Stock markets around the world should come as no surprise. As readers of this blog will know, the years of easy credit were decisively ended last August when the financial community woke up to the reality of the securitised loans crisis, aided by the Central Banks at last in tighten mode after years of sloppy credit.

A credit crunch means there is little new credit available at a time when too many people and companies are desperate to sell assets to raise the cash they need. Investors with cash suddenly decide they want to hold more cash. Investors who have been investing on borrowed money have to rein back their activities and pay down debt. Banks that were able to lend people money and then package the loan up as security to sell to someone else suddenly find there are no buyers for these packages. As a result asset prices crash.

A credit crunch ends when two conditions are met. The Authorities have to signal they want easier credit by lowering interest rates, so high borrowings become affordable again. Banks have to sort their balance sheets out so they have the capacity to lend more. It is this latter condition which may take some time to get right this time round, because so many banks have been involved in syndicated credits and in trying to put their loans off balance sheet in structured vehicles. The sooner the banks sort out what all these investments are worth, write them down, and raise the new capital they are going to need to be able to carry on their business, the better.

The weakness of banks is not solely a US phenomenon, and the so called sub prime crisis is not just a US or a property related difficulty. This is a crisis in the global banking system, where there are worries about the Bank of China as well as about the European and US commercial banks. They have to contract their balance sheets as they value their loans more realistically, and then many of them will need new capital ??whether by cutting dividend payments and keeping more of their profits, or raising new money directly by selling new shares to shareholders. Doubtless the worlds regulators, led no doubt by the UK authorities, will make it even more difficult to by tightening the rules on capital adequacy at exactly the wrong point of the cycle.

The worlds economies are in different conditions to meet this sudden lurch from easy money to tight money. The Italian and Spanish economies are going to be made to suffer for their membership of the Euro, with interest rates and money growth dictated from Frankfort leading to painful adjustments in their domestic economies. The US economy is so far mainly suffering in the real estate and banking sectors, with some signs of a good export led recovery emerging in other sectors from the lower dollar. The UK economy is badly placed, thanks to the very high public deficit and poor productivity performance of the much bloated public sector. The bungled approach to money markets and banking which uniquely gave London the only run on a bank does not help either. If the Chancellor follows this up by taxing the rich out of London then we will have a major residential property price collapse to add to the current woes. The Indian and Chinese economies may find exporting to the US and the West more difficult, but they have the cushion of rapidly growing domestic demand and China has the huge foreign exchange reserves its successful exporting has built up in recent years.

We have seen a sharp contraction in real estate in the US, in Spain, and in commercial property in the UK. We are now seeing a sharp fall in share prices, as investors adjust to the new reality that banks and property companies will find it difficult to maintain earnings, and as the growth rate of the worlds main economies slows.

There remains plenty to worry about. Some are still worrying about the price rises that are coming through this winter as a result of the years of easy money. Others are worried looking forward, fearing a recession in the US and elsewhere. I still think a full blown US recession unlikely, and do not see an inflation problem looking out a year, but recognise that these fears will remain real to many unless and until my two conditions are met for a recovery.

There will be growing pressure on the US, UK and European authorities to lower interest rates, and lower rates will help. There also needs to be a concerted drive to clean up banksbalance sheets and establish some kind of a market in all of these securitised loans that characterised the years of easy money. Once we can know what is left on banks balance sheets, markets can get on with the necessary task of recapitalising the banks so more normal credit conditions can be recreated.

PS: The Fed’s move today to cut interest rates by 75 basis points, taking them down in one go from 4.25% to 3.5% is a good start.

I am glad to have won the battle against Vince Cable to avoid nationalisation of Northern Rock. I am grateful to the Jeremy Vine programme and the Week In Westminster for giving airtime to the case against nationalisation. Their commonsense and fairness shows up the lamentable performance of the Today programme, the World at One and Pm who gave ample platforms to the pro nationalisation case but refused me the opportunity to explain why it was a bad idea, and to offer a more positive alternative.

In the arguments with editors I was told that my proposals were unlikely to be taken up, whereas nationalisation was the likely outcome. I explained that the government had to come up with something better than nationalisation because nationalisation would have wrecked the borrowing and spending figures. The BBCs flagship programmes as always remained wedded to an old fashioned state solution and to the Lib Dems, so their listeners were not made aware that there was a better way, and were in ignorance that the governments advisers were working on it.

I am pleased this morning that the government has decided to

1. Avoid nationalisation
2. Get some cash back more quickly by selling bonds to replace the loans
3. Seek a new private sector owner
4. Take an equity stake via warrants to give the taxpayer some profit if it recovers well.

What I want to see in addition is

1. Proper banking disciplines enforced to repay the borrowings. Northern Rock still needs an injection of tough banking controls to make it work.
2. A phased withdrawal of the guarantees ?? we dont just want the cash back, we also want to get the taxpayer off risk
3. A fair competition allowing in new bidders ?? as the basis for bidding is now very different from before Christmas. Otherwise there could be legal challenges.

The Lib Dems are playing games over the EU. They promised to vote for a referendum on the EU Constitutional Treaty in the last General Election, and like the Labour front bench are now walking away from their commitment. They say they now want an In-Out referendum instead, but cannot table one in the Commons as an amendment to the present Bill. Doubtless they realised this when they promised one! Never believe a Lib Dem promise. They are simply manoeuvring to get themselves out of the promise that should have mattered ?? a referendum on the Constitution – realising that as Eurofederalists in a Eurosceptic country they are in difficulties. All this wriggling will make it worse for them.

Euro Clegg should do the proper thing, and order his MPs to keep their word to the electors and vote for the Constitutional Treaty referendum as promised. The Lib Dems on this occasion matter, as it is very unlikely the Conservatives can win the vote for the referendum without support from all Lib Dem MPs. If he cannot bring himself to do this, then he should apologise to the British people and explain why he thinks the Constitutional treaty is a good thing. Voters can then get rid of these perfidious MPs at the next election.

Labour rebels today are moving a reasoned amendment to the Bill, asking to cancel it as there is no referendum. This is not the main vote on a referendum ?? that will come later during the Bills Parliamentary progress ?? when Conservatives will table a proposal to have the Bill enacting the Treaty with a ??Yes?? vote in a referendum as the essential trigger for the Bill to come into effect. We will of course be campaigning for a ??No?? vote should we get the referendum.

I would be happy to see the Bill killed at its first hurdle today, but as the Lib Dems will not be voting for the Labour rebel amendment there is no chance of that. What we need is for people to concentrate on persuading as many MPs as possible to vote for the referendum amendment which follows later. Anyone in the constituency of a Labour or Lib Dem MP should write to them demanding they keep their word. Conservatives will table the necessary amendment, argue the case and vote for it, but we need the votes of all the Lib Dems and some Labour rebels to finish the job.

The government needs to:

1. Get a grip on its lending to Northern Rock and set out how and when it will be getting money back from this bank.
2. Remove wasteful and unpopular public spending, like ID cards, regional government, extra contributions to the EU, too many spin doctors and consultancy contracts.
3. Start applying pressure to raise public sector productivity in those areas where we do need spending. Impose a staff freeze on the civil service.
4. Cancel the increase in CGT from 10% to 18%, and leave the new 18% rate in place of 40%.
5. Issue more index linked bonds to finance the remaining deficit, as inflation will come down after this winter’s fuel and food rises.
6.Create an employee ownership scheme for the Post Office and press ahead with its privatisation involving employees.
7. Open the water industry up to competition, to bring prices down and open up new supplies and new investment.
8. Get on with commissioning private sector investment in energy capacity by granting the necessary licenses and planning permission.
9. Introduce more private capital into railways, reuniting track and train in regional private companies.
10. Call a halt to the overregulation of financial services from Brussels, and put through deregulatory legislation which starts to lift the burdens on business.

This programme would at one and the same time

1.Lower prices by using competition to cut monopoly prices
2.Increase investment in infrastructure where we are short of capacity by harnessing private capital
3.Reduce public sepnding
4.Allow lower interest rates as a result of 1 and 3 above.

<p> The idea that Northern Rock loans will be packaged and sold to the private sector is not a solution to the crisis, especially as there will be a government guarantee on them. Instead, this represents a decision by the government to lengthen the period over which it is prepared to lend to Northern Rock.</p>
<p> It means that all interested bidders wanting to buy a share of the action in Northern should; be invited to rebid, as the terms on which they are bidding are now so much better than they were. It appears that a bidder now has the government as its bank manager, guaranteeing substantial lending, for a long time period. This is a much better proposition than the one they sought bids for before Christmas.</p>
<p> No-one writing up the story seems to grasp the importance of adopting the recommendations that readers of this blog know well, recommendations to the government and Bank of England to get a grip as Northerns most important bank managers.</p>
<p> Whether Northern is to be nationalised, sold to a private bidder or remain independent, the need is the same. It is high time the authorities toughened up the terms of their lending to Northern Rock, and set out a timetable for repayment that is demanding but realistic. It should be up to the management to decide if they can repay from trading profits and cash, or if they need to sell assets to meet the demands for money back by the taxpayers.</p>
<p> I find it almost unbelievable that Mr Darling and the Bank should make maybe £55 billion of loans and guarantees available to Northern Rock with no public statement of how long they can have the money for, how the asset cover has been secured, and when the money has to be repaid. All these things should be public because they have such a big impact on public spending, and so bidders can form a proper view of the value and the liquidity of the business. More worrying is the likelihood that there is no private agreement about how and when the loans will be repaid. What private sector banker would ever lend large sums to a distressed company without first asking and answering the questions How and When do I get my money back?</p>
<p> The governments decision to back the “solution” of selling bonds to the private sector to release cash to the government that it has lent to Northern would work well if there were no government guarantee, but the existence of the guarantee keeps the taxpayer on risk. At the very least if they wish to go this route they should look at time limiting the guarantee, or phasing it out.</p>
<p> This could prove to a dear way of avoiding the ruin of nationalisation. Maybe one day the Treasury will wake up and understand that they have a banking problem. The way out is by applying proper banking disciplines to this business, and making the shareholders and directors of Northern Rock confront the simple truth either they trade their way out of the borrowings, or they sell assets to repay the borrowings. Nationalisation, or lengthening the terms of the loans and guaranteeing them take the pressure off the management. A sensible bank manager with that much money at risk with a single client would want to hold their feet to the fire, not let them off in the way the latest proposal does.</p>

Things are bad enough without talking ourselves into recession.
Some banks and commentators have already called a recession in the USA, when the figures for the last quarter of 2007 show the US economy was still growing well. Here in the UK the retailers have added to the sense of gloom by concentrating on their sales figures on a ??like for like?? basis, leaving out all the sales in new shops.

The current position is both better than the pundits admit, and worse than the government will let on. The bad news is that the banking systems in both the USA and the UK are damaged by discovering that some of the lending they carried out in the heady days of low interest rates and easy money has been in their balance sheets at values that can no longer be sustained. We are living through a difficult time as banks adjust for the losses they have made, and rein in their lending as they are short of cash. In the UK commercial property values are falling fast, undermining the security for some of the loans. Residential property values are under attack from the UK government, who want housing to be more ??affordable??, but are being held up in part by the high Stamp duties and the imposition of Home Information Packs which is deterring people from selling their homes and buying a different one. There are too few homes coming onto the market at the moment to cause a crash in prices. The UK authorities have made the problem worse by their ham fisted approach to Northern Rock and by their failure to keep markets liquid enough during the last four months of 2007.

The good news is that many companies are still trading well. Profit margins are good in many cases, and on both sides of the Atlantic activity is higher overall today than it was when the Credit crunch first hit. Both the US and the UK have experienced a falling currency. As both economies need to divert much more activity into exports, or into import substitution, that will help. Both economies can export so much more to the rich parts of the world ?? China, India, Russia and the Middle East. Both economies now have to seek inward investment from these new giants that have built up huge cash surpluses at the same time as we have built up huge deficits by buying their oil and their manufactures. It is repayment time.

Few forecasters expect a downturn in the UK this year ?? just a sharp slowdown. Some commentators expect the US to get away with a slowdown rather than a recession. The US Fed is very keen to stop a slump, and is taking the right action by making cash available to banks and by cutting interest rates. Now the US President is also promising tax cuts, would boost activity as well. The US authorities recognised earlier than the UK that they had to shift from inflation fighting to recession fighting, and they have been bolder in their actions. They will probably succeed in avoiding recession.

The UKs position is weaker because the UK has increased public spending by too much, wasting too much of the money. At a time when other countries were reining in their public deficits and controlling their spending, the UK government went on a spending binge. This limits the UK governments scope to cut taxes and relieve the pressure on consumers. As consumption is the largest part of activity, this means we are going to experience a slowdown which consumers will feel badly. If the government really wanted to help us out of this change of fortune, it would get a better grip on its spending immediately, cancelling the needless parts like ID cards, computerisation schemes, regional government, and larger EU contributions as well as keeping wages down. Then it could follow the US example and cut taxes to help the hard pressed private sector.

Instead the UK is only going to tackle one of the twin deficits, the balance of payments one, through the mechanism of a cheap pound. Our best hope this year is that the strategy works and the private sector does shift a lot of activity into exports. That could be helped if the government would relent on its planned increases in small business tax and CGT. They need the goodwill of entrepreneurs to right the imbalances in this economy. Its a dangerous time for the government to be sandbagging the very people on whom they rely to recreate their much quoted ??economic stability??. Our economy at the moment is as stable as a row boat in a storm.

There is no need to talk ourselves into recession ?? we can get through with a period of slow growth. To do so, the government needs to curb its own appetite for waste and be realistic about how much it can squeeze out of us in tax.

What price an ethical foreign policy?

Today sees Mr Brown in China trying to act as a super salesman for British business. It is a relatively harmless use of his time, forced upon him by the dire straits of the UK economy under his policies.

Mr Brown has debauched the strong economy he inherited. His first couple of years wisely continued Conservative spending plans and repaid public debt, but elsewhere the long march of this government to a malfunctioning socialist economy had begun. The undermining of the Bank of England proved to be a long fuse to the explosive Northern Rock crisis. The taxation of pension funds began the route march to most people no longer having the benefit of a final salary scheme, whilst burdening too many companies with large deficits to repay.

Worse followed after 2001 when Mr Brown embarked on an irresponsible twin track ?? easy money, and massive spending increases on public services. Because he wrongly saw all public spending as ??investment?? and felt large sums were proof of better service, he failed to ask the obvious question ??What am I buying for all this cash??? The answer turns out to be a whole load of extra civil servants, spin doctors, consultancy contracts, pay awards, quangos and regulators.

Ten years on the UK is one of the world leaders for twin deficits ?? a record balance of payments deficit, and a large government borrowing requirement. Alarmed by the record deficits on the balance of trade figures which he used to pour over to harry the Conservatives when in government, he decided on a trip to China. It is a sign of his desperation that he feels the need to act as pied piper to the British business community to sell more there, and to see the need to ask the Chinese government for more Chinese funds to be invested in the UK. He is right we require the money, to pay for our double deficits.

When the Labour government first came into office its then Foreign Secretary Robin Cook claimed they would run an ethical foreign policy. The phrase was chosen to imply that all previous UK foreign policies had been other than ethical. The Labour knight was to wear the purest white, and would charge into world Councils with morality as the billowing pennant on the lance.

Today that seems a very long time ago. We look back on the invasion of Iraq, the continuing fighting in Afghanistan, the lack of any action over Zimbabwe, the skirting round North Korea, the inconsistent approach to other countries gaining nuclear weapons and the erratic response to human rights abuses and have to ask what ethical or moral stance now lies behind these actions? Arent they all driven by media, by events, by US pressure, by EU argument, by a growing sense in the present Foreign Office that there are many obvious limits to British power?

Worse still, when many want Mr Brown to raise Chinas human rights record as the central issue whilst there is still a window of opportunity before the Olympics, many of us are embarrassed to say this when we look at the deteriorating record of human rights in our own country. Now the UK wants to have the western record for detention without trial or charge, seeks to stifle public opinion by ratting on the promise of a referendum, spends a fortune on clumsy physical ??security?? at so many places and events, treats travellers like suspects or criminals and intensifies the range of thought crimes that preoccupy the elite, we are no longer in a good position to lecture China even if we wanted to.

Mr Browns visit recognises the reality of the new world order. China is emerging as a superpower, with a fast growing economy, a large population, and a wish to project its power. When a country has more than $1 trillion in the bank it is difficult to argue with it, especially when our country has been newly impoverished by Mr Browns policies. He sold our gold holdings for a fraction of its current market value, ransacked our long term savings, failed to stop a run on a British bank and now needs to go cap in hand to China to seek inward investment to the UK. These are sorry times for our country. They have been brought on by incompetent stewardship of our money. It is humiliating to see our Prime Minister ask for sovereign wealth fund money from China to keep us afloat. If he really wanted to improve the UK economy he should have stayed at home, working on how to get more value from his public spending, and how he could curb spending so we do not need to borrow so much.

Yesterday I was invited to lunch in the House of Commons by the Thames Valley Economic Partnership.

It was the kind of invitation I usually decline, as I do not approve of lunches at the public expense for public servants. I went because the rules of the game to get approval and money for important transport projects in my constituency require that I express agreement with other MPs, Councils and quangos over the needs of the ??region?? in order to persuade the Minister to consider our case. The Minister came to the lunch. I did not wish to let the side down, and have to accept the rules of the game as designed by this present government.

The lunch began with a speech telling us
??We have all the stakeholders and all the people that matter in transport in the Thames Valley around this table??. The list comprised 6 local government officials, 1 Councillor, 6 MPs, 4 representing the Thames Valley partnership, 5 from central government and its quangos and 16 others mainly from private sector companies. Local and national government officials were well represented.

I bit my lip ?? surely the most important people are the passengers who use the transport system, and surely there are more than a handful of companies involved in delivering the complex transport services of our large region? Are these not important ??stakeholders??? I restrained myself from shouting out ??Lese-majeste to the voters??, or even ??These lunching emperors have no clothes??.

The Partnership explained to the Minister of State, Transport, that the region had three agreed priorities ?? more capacity on the M4, better north-south links and western access to Heathrow by train. All the assembled ??stakeholders?? agreed or kept their silence. Few of us had actually agreed to these ??priorities?? but it would have been pointless as well as churlish to complain again about these things being done in our name by unelected officials after the previous private rows about it all. Some of what they wanted made sense and it was our one chance this year to make the points to the Minister in such a forum.

The Minister told us that usually regions fail to reach an agreement about what they want. They also often fail to get all their Councils to speak from the same script. She had to overcome her surprise and see we were apparently united in seeking stated improvements to the woefully inadequate infrastructure of the Thames valley. Clearly these meetings normally end with the Minister giving the ??region?? a lecture on the need for regional harmony and unity, no doubt all part of the indoctrination programme to get people thinking of themselves as part of an artificial regional set up. Such a happy state of affairs from the Ministers point of view puts off all decisions for an other year or so and gives the government the luxury of blaming everyone else for the transport chaos.

The whole performance summed up admirably what has gone wrong with modern government. A large number of people drawing generous salaries from the state sit round endless discussing a problem which has obvious solutions. We are short of transport capacity so we need to provide more. As a result of this meeting it is unlikely the government will make any decision.

I pressed the Minister to tell us what she would do about the lack of capacity on the M4 . She asked all of us what our ideas were. I pointed out the M4 is a central government road. The Minister on our behalf owns it, regulates it, manages it and has all the power she needs to vote money to improve it and to change the law and regulations affecting it. Her colleague decides planning cases concerning it.

As I explained to her, the private sector will respond with technical solutions and with private money if she wants to make improvements, but it is her job to make some decisions so she can harness the private sector. If she wants new tolled capacity then the private sector can design and create it. If she wants a more traditional public sector scheme there will be plenty of bidders. If she wishes to use new technology to improve traffic flows and management there are plenty of systems to choose from. What she not expect the private sector to so is to waste a lot of their time and money on working out several different schemes and solutions without any guidance from government about what they want and what their time scale for action might be.

My betting is that next year there will need to be another meeting, and the most that will come out of this is more work for consultants to do some more feasibility studies. No wonder we are short of transport capacity, and no wonder public budgets dont go very far. If every time people agree on the need for some extra capacity the private sector is expected to juggle toll lanes, toll roads, design build and operate, private finance and traditional options without any clue from the government on what they want and without a Minister capable of making a decision we are going nowhere fast.

It is pathetic. Government is at a standstill. I proposed a scheme for redeveloping Wokingham Station and creating a transport interchange on the Network Rail land there early in the life of this government. It could have been paid for largely or wholly out of development gain on the public land. We are still waiting, because no Minister is capable of getting things to happen, and Network Rail clearly does not wish to exploit its property assets properly in places like Wokingham. We just have to put up with a slum station and inadequate parking at the site.