Category: Blog

There are two tired and overworked phrases in this governments repertoire which we are about to hear concerning Northern Rock.

The first is ??We have learned the lessons?? of whatever catastrophe they are talking about.

The second is: ??We will make sure this will never happen again??.

Ministers usually recite these phrases instead of providing proper analysis of what went wrong, and in place of ensuring the people in whatever regulatory system they have are up to the job and empowered to make the right decisions in good time.

I remember when I was the DTI Minister responsible for financial regulation, in the days when the DTI regulated insurance and financial services itself, having to handle the occasional problem. Each time the cry would go up to change the law and regulation. I usually pointed out that what had happened was a breach of the law or regulation anyway. We werent short of laws even then and there are many more now. It was intelligent enforcement that had failed. I was also pressed to guarantee it would never happen again. I was usually careful to make no such guarantee, and to point out that in any field of human endeavour there will always be some mistakes and some lawbreakers.

This government is foolish to say there will never be another loss of data by the public sector, because there will be. They should claim instead it is much less likely. They do have to be able to say there will never be another run on a bank, as we know we can have a period of more than a hundred years without one. Something uniquely wrong has happened on their watch.

My concern with Northern Rock is that the government does not appear to have learned the lessons. It is usually wise to manage a crisis to a conclusion before attempting to learn all the lessons. This crisis is far from over. Where there is a need for earlier action ?? as there may be on a deposit guarantee scheme ?? it needs to be carried out as an interim response, not foreclosing other action to mend the regulatory system once the crisis has been resolved or is stable.

What are the lessons of Northern Rock?

It is unwise for a Chancellor and Bank Governor to lecture the banking system about the need to deal with their own banking mistakes without assistance from the authorities, just a few days before offering massive assistance on a scale never before seen in the UK. If the authorities know of an institution in trouble ?? as they did a month before the run on the Rock ?? they should avoid inflammatory statements that they might have to rescind.

It is unwise to keep the banking system starved of cash until a major institution is in deep difficulties, and then to provide money to the system after a run on a bank has begun. If money is going to be provided, it should be provided early.

A tripartite structure for responding to a banking crisis is too inflexible, and keeps the Bank starved of important hour by hour information on the state of banking markets. There should be a unified command under the Bank of England. The Bank should have to keep the Chancellor informed, and submit to his judgement if things become out of hand. The Bank needs to get back the management of government debt, and day to day banking supervision, as it had before the Brown reforms.

The Basel I capital rules did not work as intended, and Basel II may now make matters worse. The government should enter discussions with the international community about a sensible capital adequacy regime, which gives enough attention to liquidity, and which deals differently with off balance sheet items.

The world authorities should avoid seeking to increase the capital requirements rapidly at a time of banking risk aversion. Any necessary increase in banking capital requirements should be phased in, as the system stabilises and starts to function more aggressively. IT will make matters worse if we hear the sound of regulators slamming the doors on capital adequacy after the horse has bolted, against a background of damaged balance sheets and a reluctance to lend.

The government should consider changes to allow take-overs of banks in trouble to take place rapidly, with the negotiations happening in private. This may well entail changing or clarifying EU law. This should be carried out urgently.

The government has asked the private sector to come up with a better deposit guarantee scheme. This should be put into effect promptly. More importantly,. The government should work out how to climb down from its blanket guarantee of all bank deposits in the UK of any bank in trouble without triggering a further run, seeking to do this in parallel with the changes to the overall guarantee system.

Even the engineering works fail to run on time

The first thing people need from train travel is reliability. If there is a frequent train service with trains running to timetable, you can plan your day and your journey accordingly. If there are too few trains, or if the trains are late, the whole day can be disrupted. Busy people are then into cancelling meetings, failing to turn up for appointments, or for politicians letting down audiences who have sought their help to keep democratic debate alive in the UK.

The second thing regular users of trains need is affordability. The latest round of fare increases are in many cases swingeing, at a time of restrained earnings growth, higher taxes and mortgage payments, and a credit crunch. We are used to many of the things that are supplied by the competitive private sector becoming cheaper over the years, as the bargains in the January sales in the clothing and textile departments remind us, and as the ever better car offers on the forecourts confirm. The poor old train commuter is sandbagged again. He or she is being made to pay an ever heavier price for trying to rely on the railway.

So why are train travellers this week being made to pay through the nose, and why are they being told that there are still no trains on part of the West coast mainline near Birmingham?

The answer is partly the botched nationalisation of Network Rail by this government, partly the technology and partly the fixation of trying to get more speed out of the railway instead of concentrating on reliability and affordability, the things that matter most to passengers.

The government has been at its most prejudiced when it comes to transport. The bankruptcy of Railtrack turned a poor solution into a worse solution, leaving all the evils of monopoly in place when it comes to track provision, whilst removing the restrictions on overspending that applied to Railtrack but not to Network Rail. The answer is exactly what you would expect from a monopoly with effective recourse to the taxpayer to underwrite almost any level of spending it wishes to undertake on the existing network ?? an expensive but inefficient system where the passenger can be made to pay by both higher fares and more cancellations and delays, and where the taxpayer picks up a huge tab as well.

The governments answer to the growing cost of rail travel is to seek to make the main competitor, road travel, dearer as well. Because the private sector parts of road travel are becoming more efficient more quickly, the government has to intervene more and more to slow traffic down, to increase the costs of road fuel and to increase the costs of road use by adding specific road charges to the high motoring taxes. Despite all this, rail still only accounts for 6% of travel, because the railways in their current state simply cannot take the extra volume they would need to take if we were to effect any kind of modal shift from car to train.

The pursuit of higher speed for trains is the immediate cause of the delays on the West coast mainline. If you wish to allow trains to achieve speeds twice as fast as you think safe for road traffic, you need to change all the signals and to check the track very carefully. If you wish to sustain those speeds over any distance you need to lay new straight track for longer distances. The railway is not offering a competitive service for so many of us for so many of our journeys owing to too much political interference in priorities and the endless pursuit of the prestige project of super fast trains between large cities.

The railway under this government has become a great black hole, devouring huge amounts of taxpayer cash and taxpayer guarantees. They refuse to order their priorities in line with the public need for more and more reliable trains, not necessarily faster trains.

The railway Ministers should realise just how big a gap has opened up between rail and road transport. Standards of safety, fuel efficiency and passenger comfort have advanced much more rapidly on the roads than on the tracks. It is an offence to travel in a car without a seat and seat belt, yet you may still have to travel on a long distance fast train with no seat, let alone a seat belt. The interiors of modern cars are well padded in case of a crash, with no sharp or hard surfaces offering a threat to life or limb, whereas the train interior is full of hazards in a crash. The luggage in a car is placed in a separate compartment to the passengers, whereas on a train it is left in an overhead luggage rack with no restrains, so it can hurtle around the carriage in the event of derailment. Trains remain far too heavy. As a result they guzzle too much electricity or diesel, take long distances to stop, and are limited to very few trains an hour on any given stretch of track as a result.

The answers to the railway problem are not all difficult or too expensive. I do want to see the huge inherited network of great routes into our main cities and between our main cities taking more of our traffic, and I want them to do so in a way which is accessible to more people. I want to see more fuel efficient trains, lighter trains, and more frequent services ?? the three happen to go together.

My proposals are these:
1. Order new much lighter trains with better brakes, so we could go from running under 30 trains an hour on a typical piece of track, to 40 trains an hour
2. Spend the money on increasing capacity and reliability of what we have got, instead of concentrating on prestige projects for very fast trains using conventional train technology
3. Break Network Rails monopoly, reuniting track and train running and ensuring there is some competitive challenge in the network as a whole. Wherever possible there should be more than one company offering a service between major places.

If the rail providers had to compete for business they would not get their priorities so wrong, or let down their passengers so often. Nor would they be planning such a huge fare hike. The airport owner in London knows it has to compete with Paris and Amsterdam airports, so it does not close the main runways at Heathrow for engineering works over holiday periods when people want to travel. The shops do not close early in January because there are too many people wanting to sue them in the way we see tube stations closed at busy times. It is high time we had some new thinking, geared to the needs of us, the passengers.

The New Year began as the old one ended, with public transport struggling to cope with a great surge in demand in London by people wanting to get to and from the celebrations.

I understand the police problem, and they needed to act in a way which prevented so many people coming to harm through crowd surges.

MY criticism is of the transport authorities. The big shops manage to deal with crowd surges at the opening of their sales. Football grounds handle huge numbers of fans at popular matches. Can’t London Underground do some research and spend some money so that when large numbers of people wish to use a given station there is a better answer than closing the station completely? Of course there would need to be limits on how many people were allowed into the station at any given time, and that would mean queues with barriers outside the station. It could mean people being told that queues were too long at any station and not to wait there. But surely it would be better to move as many people as possible by tube when you have a big event like New Year?

Instead last night many people drove to the edge of the celebration zone, parked, and then all tried to drive home after the fireworks, with predictable chaos.

The news today that London Scottish Bank is being told by the FSA that it needs to raise additional capital is a grim reminder that the credit crunch of 2007 gives 2008 a grisly hangover. London Scottish itself is a small company, led by a new cautious CEO who wants to provide for difficult conditions in the lending markets and to meet the Regulator’s requirements for capital. Understandably he wishes to write off anything he has inherited which he does not like the look of, just to be sure. The provisions can always be put back at a later date into profits if conditions improve. The importance of this small case is that it setting a standard for how much write off and provision should be made against certain types of lending. The Regulators will use it as an example of how much capital a bank now needs in these straightened times. It could mean more write offs and more capital raising by the bigger banks.

There is always a danger that worldwide regulators will seek the lock the stable door after the horse called Prudence has well and truly bolted. If they do this on any scale, they are tackling last year’s problem of excess, not this year’s problem of too little lending and confidence which will delineate the opening months of 2008. Regulators will reason that they must learn the lessons of the period of too much credit, and now demand more cautious lending as well as insisting on banks having bigger reserves and more spare capital. This impulse will intensify the downturn in lending and keep money tight in banking markets. Inspired Regulators respond to the conditions that pertain today, looking ahead to tomorrow’s problems. Other Regulators look back to past problems and try to make sure they can never happen again. They will, of course, once the Regulators have been forced to respond to the next set of problems which are the opposite of those of the period of excess.

All this has been made much more difficult for the western economy by today’s adoption of Basel II, the new regulatory capital requirements. The natural temptation for the world’s regulators will be to use these new rules as an opportunity to revisit the money banks need, and to raise the standards, demanding more liquidity and more capital for any given volume of business. If this had been done a year or two ago it would have been a very good thing, and would have reduced the excess in lending and leverage which characterised the easy money era. Done too much today, and it will deepen the crisis, reducing the amount of money available for lending in the system still further, and pushing banks into more aggressive competition to raise the regulatory capital they need to sustain their current level of business.

Regulators are very important players in this credit crunch. As I argued yesterday, the regulatory requirement for Home Information packs is distorting the UK housing market, keeping homes off the market and delaying the price adjustment. Worldwide banking regulation could reinforce the boom bust lurch in credit markets if we are not careful. In the good times Central banks and other regulators turned a blind eye to the big build up of lending and the low levels of liquidity held by some institutions. Now they might go too far the other way, demanding standards of prudence that the damaged and constrained markets will struggle to provide at sensible levels of new lending.

All this is relatively bad news for the UK economy, where government indebtedness and the huge balance of payments deficit add to the unfortunate inheritance for 2008. There is talk of further tax rises to tackle the excessive government borrowing. There should instead be talk of controlling public spending better, as the last thing the UK economy needs right now is a set of further stealth tax increases. The government could begin by showing it now understands the need to control its spending, by getting a grip on how much it will lend to Northern Rock and when it intends to receive some repayments. It could cancel the hated ID cards spending, on a day when it is revealed that the UK has come to rank in the lowest grade of countries with respect to protecting citizens’ privacy. The Privacy International Think Tank just tells us based on comparative study what many of us have known intuitively for some time – we have lost a lot of liberty, and the government is sending us the bill for all the suurveillance and form filling. There will be an economic price to pay for all this in 2008 as well as the loss of liberty.

Today I heard on the radio that mortgage advances have fallen 44% compared with the same period last year. Its a fitting epitaph to this governments woeful misunderstanding of the housing market, and the folly of their current policy which will not succeed in tackling the problem of providing more people with better homes that they own.

The government have made access to home ownership in this country much more expensive by combining two policies:

1. Allowing a credit boom until last autumn, which drove house prices to new heights as banks and building societies took advantage of the low interest rates and easy money to lend more and more against individual properties. They also lent more and more as a proportion of peoples income.
2. Introducing Home Information Packs, which has deterred people from putting their homes on the market, reducing supply and delaying the price adjustment which would otherwise take place in response to the credit crunch.

The main reason for the current high property prices is the first one. The lurch from boom to bust conditions in UK money markets will put downward pressure on prices, as we are beginning to see, but the other two policies are delaying and reducing this adjustment.

The governments own analysis has been pathetic. They have said house prices are too high for first time buyers because too little housing is being built. They have steadfastly refused to answer my simple question,?? How far do they want house prices to fall so they are affordable again??? They have decided the answer to high house prices is to build more. They also allowed many more people to come to the Uk who need homes, seeing the problem as solely one of inadequate supply and not looking at either demand or the terms of finance for house purchase.

In the meantime they are presiding over a house-building industry in difficulties, now cutting back on the number of homes they will build even where they have land with planning permissions available.

The truth is the government will not be able to build itself out of high house prices, as the supply of new homes is a tiny fraction of the number of homes that come onto the market each year. The government should recognise that the main determinant of house prices and therefore of affordability is the supply of mortgage finance, and the terms of that finance. We have just seen a long period of rapidly rising house prices driven by boom credit, yet the government refused to understand that it was primarily a monetary phenomenon.

The government may also find out that falling house prices are even more unpopular than denying access to younger first time buyers by allowing ever higher prices.

In housing policy there is no substitute for a government managing conditions in money and credit markets competently, so that house prices are relatively stable. This government made the problem of housing affordability far worse by the boom credit conditions of the last few years, and is now going to do the opposite for a bit with the credit crunch. Falling house prices put people off becoming first time buyers, and credit crunches drive out of the market the people who most need credit to be able to buy a house.

The government not only needs to stabilise credit conditions, but also should abolish Home Information Packs. It was a stupid time to introduce them, when the market is going through such convulsions, as the Northern Rock crisis unfolds.

2008 message

Today we are promised from Jack Straw that the government will do better in 2008, whilst the Prime Minister tells us he can carry through the changes the UK needs. Both senior politicians are long on words to meet the public mood, but short on ideas to sort out the mess Gordon Browns government has created.

This government is stuck in the mud of the old politics of the ??New?? Labour era. They believe politics is about raising large sums of money, spending it on ever more detailed opinion research, and then playing back carefully controlled messages to the public, based on what the public believe and what they want to hear. They spend a disproportionate amount of time monitoring the Opposition and seeking to distort or exploit any different nuance from any Opposition speech or spokesman. If they had their way there would be no debate, and the media would only receive the carefully honed messages of the central spin machines.

If they want to tackle the problems which 2007 will bequeathe to the new year, the first thing they need to do is to tear up this old model of politics. They need to limit the amount they can raise in individual donations, cut the amount they spend on opinion research and spin doctoring, and spend more time in their government offices seeking advice on how to solve the very pressing problems this country faces. Here are some suggestions:

1. The Credit Crunch. The government has to make room for more interest rate cuts and more private lending, by cutting its own demand for borrowing. It needs to cut back on inessential or undesirable spending ?? by cancelling the ID computer scheme, cutting out unwanted regional government, placing a staff freeze on more administrators for the civil service and the quango world, cutting regulation and removing unnecessary layers of government in the quango world.
2. Northern Rock. The government needs to work with the Bank of England to impose the disciplines on Northern Rock needed to limit the amount of extra lending the taxpayer has to do, and to set out how and when taxpayers will get their money back.
3. Flooding. Instead of crowing about how well he handled the floods in the summer, the Prime Minister should understand that six months on some people are still not back in their own homes thanks to the damage, and many homes remain at risk in this country. The government should change its planning policies, to make it clear there will be no more building on flood plain without proper water handling and containment measures being put in place. It should change the management of the Environment Agency, demanding of the new management that more of the money and effort goes into flood prevention schemes, and insisting on higher standards of maintenance of flood facilities.
4. Inflation. The government should see that its easy credit policies of recent years has left an inflation problem this winter. It should tell people it will cut petrol tax to a level which maintains the estimated amount of revenue from the tax in the budget, instead of persisting with the higher rates of tax imposed this autumn and threatened for next year, as petrol is one of the main items causing the price rise. It should redouble its efforts to reform the Common Agricultural Policy and to allow better access to our markets from developing countries, both to help the developing world and to provide some more countervailing pressure against the current big rises in food prices.
5. Transport. The government should start to match its rhetoric about increasing transport capacity with some action to show it is doing so. The pathetic level of railway service over this public holiday has reminded people just how limited the public transport option can be for many people, whilst the government has still not done the obvious things to increase the capacity and improve the flow of our existing highway network. This would be a green policy as well as a commonsense one, to ease the artificial restrictions on movement.
6. Cleaner hospitals. In 2008 the government should show it has made good progress in cutting hospital acquired infections and in cleaning up our hospitals, so people need not worry about going into a hospital for treatment.
7. Restoring faith in democracy. The government should start by offering a referendum on the EU Constitutional Treaty in line with their promise to electors in 2005. They could replace their distorting and gimmicky policy about petitions in local government with greater powers for local Councils to make decisions in areas like planning that matter most to people. The government could change its way of speaking to us, admitting the problems and setting out what it is doing about them,instead of playing silly politics with everything and refusing to answer most of the important questions.
8. The Post office. The government should be radical, granting shares in the Post office to its employees, and putting in a management that delegated power so the asset base could be properly managed and the revenues increased. We need to get away from cut after cut, and the negative approach coming down from the top.
9. Taxation. The government should revisit its CGT tax plans, keeping the 18% rate but also keeping a 10% rate for those who have invested in their own businesses or have bought employee shares.
10. Foreign Policy. The government needs to understand the power of the Anglosphere, and the need for the UK to strengthen its good links with India, Australia, and New Zealand to reflect the shift in world economic power to Asia away from Europe.

If they did some of these things the public would notice and the governments ratings would start to improve. If they did all of them they could become a very good government. They have a long way to go even to start reverse their recent plunge in popularity, because they are spinning too much and governing too little.