Category: Blog

Yesterday was another bad day on the markets for the Euro. The European Central Bank withdrew longer term facilities from European banks, and triggered fears in the markets. The currency slid further.

The ill judged Euro experiment is doing considerable damage to Euroland economies. The southern states need to cut their wages substantially to compete with Germany and the Northern countries. They are being forced to cut public spending, whilst lacking the tools to generate a strong enough private sector led recovery to compensate. Shorn of the ability to devalue to sort out their relative cost base, the actions they have to take are deflationary. Unemployment is already very high.

When Germany adds her own belt tightening and the ECB seeks to take away liquidity it adds up to a bad prospect. The Eurozone needs more growth, but faces more obstacles to growth. Meanwhile the European politicians think it all needs another large dose of financial regulation to put it right!

Torquil Norman has sent me his book, “Kick the tyres, light the fires” for review on this website. He bought the Roundhouse with a charitable fund which he had established from his successful toy business, and renovated it for young people to use for performance and media. Around 6000 young people a year use it, often from difficult backgrounds. His determination raised £30 million for the charity.

His success as an entrepreneur, creating the Big yellow teapot and other subsequent good sellers, was followed by his success as charity fundraiser and inspirer of many a young person through his Roundhouse project. We need more people with such get up and go, willing to take their energy and their cash into the world of the uninspired and down on their lucks.

His book is dedicated to the following main proposition:

“Real freedom brings self reliance and independence of mind which releases unimaginable amounts of enegry. Willingness to fail and openness to change focuses that energy towards solid achievement. But equally, lack of freedom, over-control, too much management and too many rules leads to disinterest, apathy and failure”.

Exactly. The more government seeks to legislate against failure and tries to regulate to prescribe the perfect way to do things, the fewer people who feel they can work through or with the system. Entrepreneurs go on strike and charity workers seek state grants to pay for the Compliance officers they need.

He is very critical of the expensive and complex tax and benefits system, believing it has damaged incentives to work and left more people in poverty than a system which encouraged more self reliance. He favours a National Community service, asking people who have been out of work for longer than six months to carry out some worthwhile work in their community.

He wants to see prison reform, with much more emphasis on educating young people out of crime and helping them find worthwhile things to do. He is conscious of the need to tackle drug addiction and mental health problems which underly a large number of UK prison inmates.

He rightly welcomes the last government’s Total Place initiative to find out how much public money goes into each area and how it can be better spent. He favours much more local and community decision making, and more of the local and charitable initiatives that go in to the Big Society idea.

His book is a hectic, energetic and unruly one. Some of the big ideas are not thought through in detail, with round numbers that would not survive the scrutiny of the civil service. Nonetheless it is a welcome contribution to the debate from an energetic businessman and charity worker. He is someone with passion for reform and a strong social conscience. We have need of many more such people if we are going to turn the Uk round. He is right about the stifling impact of so much heavy handed centralised government.

The government needs to change its rhetoric about public sector cuts. It should not allow Labour the space to campaign against “deep and damaging” cuts by giving any credence to the idea that public spending is being cut by 25% or some such fictional figure. There will be hotheads in the Labour movement who wish to move on from falsely vilifying Tories for seeking and liking spending cuts, to organising protests and strikes against the cuts in particular services. When public spending overall is going to continue to rise in cash terms that would be needless and stupid.

Good management does not seek confrontation with Unions or workforce. Good management understands that leadership is about persuasion, carrying your workforce with you for the changes you need to put through. It is always best to demonstrate why necessary change for the organisation you lead is in the interests of the staff as well as the customers or taxpayers. The government should say they have approved cash increases for every year of this Parliament overall but the settlement is tighter than previous years. In order to serve the public well it will require new ways of doing things and much better cost control. Management wishes to work with staff to see how this can best be delivered. Be open minded about how you do it, but single minded about doing it.

Here Mr Clegg could play an important role from his central position in the Cabinet Office, the hub of the British civil service. The Liberal Democrats have good lines of communication with public service employees and a membership base oriented towards services paid for out of tax revenue. He could make a speech setting out a vision of streamlined and more effective public service, where improvements in quality and productivity go hand in hand with better employee management. The government is putting together the ingredients of such a strategy. They include:

1. A stated intention to use staff freezes to cut the number of back office and overhead posts as people leave, avoiding compulsory redundancies whereever possible
2. A pay freeze for two years to reduce the need for service cuts, ameliorated by pay rises for the lowest paid.
3. A willingness to ask the employees how they would suggest hitting the new tigher budgets, involving staff in the evolution of their own service.
4. A preparedness to consider new models of service delivery, inviting employee buy- outs, contracting out to former staff and other solutions
5. A new rigour over purchasing costs to cut the cost of bought in items
6. Cancelllation of heavy reliance on consultants and temporary labour

These methods of cost reduction mean that the core staff of the public sector gets a much better deal than private sector staff did in many companies forced into rapid cost reductions to survive in the recession. The government can say to its staff that they will have chances of accelerated promotion in a world where little external recuritment is allowed. Their jobs will become more interesting as the role of the external consultant is rolled back. The emphasis will be on adopting new methods to ensure better quality and service delivery , making up for the msising decade when productivity stood still in many parts of the public sector.

Management should show quiet determination to get more for less. It could start by tightening up on absence from work, and by turning down many more requests for temporary labour and consultancy assistance to do tasks. Management should talk softly, seek cooperative working to drive change, but leave staff in no doubt one way or another we do have to do a lot more for less. There is no need to have strikes. Strikes are not a sign of successful machismo, but unfortunate diversions from the task of improvement. If managements end up with one they have to win it, but it’s better not to go there in the first place.

The policy of printing pounds and running a huge public sector deficit under the last government led to a large slide in the value of the pound. This was the main force behind the rise in inflation, taking the RPI to a 5.3% annual rise at the worst.

It is early days, and so far the move is modest, but since the arrival of the Coalition government, and more especially since the budget plans became clearer, the pound has risen a little. Starting at 1.18 Euros to the pound, today it is at 1.23. Against the dollar the pound pushed on above $1.51 yesterday, compared to $1.48 on May 6th. This is the way to bring inflation down. It reflects the beginnings of control over public sector costs.

Only in the public sector is an increase a cut. The current debate over public spending is bogged down in the parade of the bleeding stumps, arguments over 25% cuts, and an argument over allowing the health budget to rise when most else is set to tumble.

So let’s try again. Total spending will go up by £68 billion over five years. That’s a much slower rate of growth than we have been experiencing in recent years. Some of that increase will be gobbled up in higher interest charges as the state continues to borrow on a large scale. It is not, however, the end of the world as we know it. There does not need to be a cut of 25% or anything like it in any public service which matters. It may require more than 25% cuts in spin doctors, bureaucracy, silly jobs, regional government and the rest.

The big question today should not be about allowing Health an increase in spending. Health is not going to do that much better than spending as a whole, and does face extra demand as the population gets older and as more treatments and drugs become available. The big question is why are there cuts when spendign is increasing? How do we do more for less in all areas, including health? How do we get the public sector to live in the real world, where modest cash increases are sufficient to do a good job and to keep everything that needs sustaining?

Technically running all the key public services for the £700 billion on offer should not be difficult. Politically it will be very difficult, as most of the public sector still thinks it needs to argue for more money at every turn and threaten the worst possible consequences if it does not have its way. The politicians have a duty to lead the debate with new language. They need to use the cash figures at every available opportunity, and get across that this is a tight but not a cruel or unrealistic settlement. They need to find public sector maangers with a “can do” rather than a “you must pay attitude”. They should conclude we need fewer public ector managers, and ones with a very different approach.

Yesterday I played cricket, sparing myself the painful experience of watching the English soccer team. My team won. It was a rare and glorious summer day. It was an unusual treat to feel warm.

We kept in touch with how the English team were faring. The icing on the cake for us was hearing that England won the Australia series 3-0. Let’s celebrate! Let’s fly the England flag for our cricketers.

The battle of Basel continues. At the G20 leaders will briefly consider some of the complex issues over how banks will be regulated after the Crash. Later in July there will another important meeting to seek global agreement on how to control banks and to avoid another banking disaster.

Basel I in the 1990s said that banks had to keep Tier One Capital – the money their shareholders had put up and their retained profits – at 4% of their “risk assets”, and to keep their wider capital at 8%. “Risk assets” meant all the loans and financial instruments they owned. These were weighted according to how risky they were thought to be. If a bank lent to an OECD government they did not have to include that in their loan total at all. If they lent to a private sector company they had to include all that loan in their total.

Basel II revised Basel I. They still required 8% capital, split 4% and 4%. For some banks, like Northern Rock, they ended up with more capital and less risky asset from the changes to the definitions and the way they did the sums. This came into effect in 2006, and helped stoke up the credit boom further, allowing some banks to lend even more near the top of the cycle. The Regulators meeting to agree Basel II wrongly thought the financial world had got better at managing risk and this could be reflected in a more lenient view of how to calculate assets and capital.

Basel III may come out near the bottom of this cycle unless it is further delayed. Many elements of it are still up in the air, but the likely outcome is to demand more cash and capital from banks than the previous regime, and in some cases more than they currently have. One analysis suggests that if they agree the proposed “Net stable funding ratio” banks may only have 85% of the capital they need to comply. There are many arguments still going on. Should deferred tax, software and intangible be included in Tier One capital? Should the Tier One capital ratio be raised from 4% to 6-8%? How can different parts of the world be made to value and report assets on the same basis? What are the appropriate risk weights that apply to each type of loan or asset a bank owns?

The politics are simple. Banks are generally unpopular – in many cases and countries even more unpopular than governments and politicians. As the cycle begins to improve, banks start to make much more money. Governments seek popular approval by taxing the banks more, in order to tax people directly less. This cuts banks capital from profits and means they have less money to lend. It also encourages banks to charge more, making them even more unpopular.

Governments are terrified there will be another banking disaster. They want people to believe the banks were solely to blame, that 2008-9 had nothing to do with weak or poor regulation. They may even believe this themselves. There is the constant sound of governments slamming doors long after the troubles have left. There is a penchant to impose much stricter controls on cash and capital than before. If they had imposed such controls in good time on the way up – in 2005-6 say – we would have avoided the worst of the Crash. Imposing such controls now will delay or damage recovery, as it too will mean less bank lending.

The governments think they face a dilemma. Surely, they reason , we need to be tough on the banks for political reasons, and to prevent any chance of recurrence of trouble? Isn’t it a win win to make banks hold more cash and capital? But they also want those same banks to lend more to private sector companies to expand and create jobs. Those loans to private companies have always scored fully as risks for the banks, and will continue to do so. That means banks under a new tougher regime will lend less, at the very time governments are telling them to lend more.

Governments need to be brave rather than political. They need to say we have to allow the banks to lend more and make more profit, as we need them to finance the recovery.The best way to strengthen the banks is to allow an upswing, and then demand more cash and capital once the upturn is well established. Governments will also get more tax out of them if the economies the banks support start to grow more quickly. Some discussing Basel III say they want to be counter cyclical for a change. That means delaying demands for more cash and capital for a bit. The banks on the whole are much stronger than they were in 2008.

The best thing the governments can do to help is to make sure no government goes bust or rats on its debts. Having allowed or required banks to lend trillions to governments on the basis that this was risk free, it would be very damaging if it turns out to have been very risky.

Eric Pickles has been as good as his word in opposition. He is letting Councils out of jail. His blistering pace of reform includes scrapping Comprehensive Area Assessments, regional plans and top down housing targets.

Out goes all that box ticking, gold star and black mark awarding and all that national and regional bureaucracy. In comes more direct accountability of Councillors to electors. If the Council messes up or annoys you, it is the Councillors fault and not some regional quango or remote Minister pulling the strings. When we recommended sweeping away this bureaucracy in the Economic Policy Review it was a £2 billion overhead. It is doubtless much dearer today.

The question now, is will your Council flourish with the new freedoms? Are they happy to get out of jail, or do they secretly wish to have the Ministerial authority figure back in charge?

President Obama is in political trouble. He is not having a good war, nor has his handling of the Gulf oil spill done him any favours. His healthcare plans have proved very divisive as well as expensive. Sacking a General worked because he replaced him with a better General, but the underlying chatter revealed problems in the Obama High Command that go wider than one person.

David Cameron’s answer that he wants British troops out in less than five years could act as a useful stimulus to the conversation they need to have in private. They do need to be honest with each other about what can realistically be achieved in Afghanistan by Coalition forces. They need to inject some pace into the transfer of responsbility from our troops to Afghan forces. Mr Obama inherited Bush’s war and made it his own by the surge. He will want to show good progress and take troops out before he runs for re-election. Mr Cameron is wise not to make Mr Brown’s war his war. He needs to be privately realistic about the situation, whilst always offering strong public support for our troops as he has been doing all the time they are at risk in Afghanistan.

The President needs reminding in private that BP is an important US and international company making a crucial contribution to providing oil hungry USA with the fuel it needs. If the President has a better answer to capping the well he should tell us and do it. If he does not, he has to accept that and not raise expectations he cannot fulfil. He also needs to be told that controlling excessive public sector borrowings is essential to economic recovery, not part of the problem. The biggest threat to recovery is a worsening sovereign debt crisis. Actions to avoid default and allow states to meet their obligations are crucial to our future growth.

There is no need for the PM to agree with the President on all matters. This is a time for private truths to be told and new directions to be agreed. By all means smile and be friends in public. That may help both men, but not at any price.

This week we learned that one member of the Bank’s Monetary Committee wanted to put up interest rates last month. Mr Sentance was rightly concerned that inflation remains well above target, and dares to question the Bank’s orthodoxy that because there is such a large amount of spare capacity around that there should be no price increases to worry about. This site has been querying the whereabouts of all this spare capacity, and pointing to the inflationary threat, for many months.

Although Mr Sentance predictably lost his skirmish this month, he did some good. he reminded markets that the next move -whenever it is- in UK interest rates will be up. Coming in the same week that the government announced a substantial move towards lower borrowing, this was sufficient to put the pound up a bit more against the dollar, on top of its recent rise against the Euro.

Much of the current inflation has come from the big fall in the pound in the year or so prior to the Election. A rise in the pound will soon relieve inflationary pressures on imported commodities, raw materials and finished goods, and will likely be visible to us all at the petrol pumps.

Today the Bank decided to warn us all that banks are still weak thanks to the weakness of the Euro area in general and the threats to government bonds in particular. Their remedy is yet more cash and capital to be held by the banks. That is code for saying they want the banks to lend even less to the private sector, at a time when credit is already too scarce.

Think again, Bank. We need counter cyclical regulation of the banks. This is somewhere near the low of the cycle. That means allowing banks to lend more, not forcing them to lend less. The main banks have stronger balance sheets than in 2007-9, balance sheets strong enough to allow some more lending. UK banks are not too exposed to Greek debt. Behind the scenes the Bank should be working with other European authorities to ensure no EU state does renege on its debts. The Regulators made the commercial banks buy loads of state bonds. They should now help ensure the banks are not damaged by doing as they were told to do.