Category: Blog

So that was what it was all about? All that well orchestrated hype, all those well honed briefings concerning the end of the recession, brought forth a mouse of a recovery, the smallest margin possible. Let’s hope the figures are not revised downwards. We know the economy struggled again in January, with a couple of weeks of snow bringing much of the country to a halt. The government must be hoping the next couple of months pick up speed, so the first quarter figures this year do not show an overall reduction again.

The bigger picture is alarming. The economy has fallen 6% from its peak, taking it back to levels of output in 2005. So this long Labour led Parliament has produced a standstill Britain, a UK going nowehere. To bring about this worst ever economic performance for a post war Parliament, the government has doubled the national debt and printed more money than any of its predecessors. Then they want us to say “Thank you” for spending all this money we have not earned, claiming it has made us stronger.

The Conservatives have rightly argued that if we do not start cutting the deficit now interest rates will be driven higher by the markets, and more damage done to the halting recovery of the private sector. They also need to point out that we have a two tier interest rate structure in the UK. Interest rates for small businesses and much of the private sector are already too high. It’s only the banks and the government that enjoy rates related to the notional 0.5% the MPC solemnly sets each month, and then only for very short term borrowing.

As Quantitative easing ends, so you would expect the government’s borrowing rate to rise further. Then the MPC has a simple question to answer. Does it wish to carry on with the fiction that 0.5% is the short term interest rate in the economy, so it can endow banks with a bigger windfall, or does it want to get its rate back in charge of market rates for the rest of the economy, in which case it has be higher.

When the Opposition says we need to cut the deficit to keep or get interest rates down, they are right. There remains the gross distortion of our current interest rate structure to sort out. It has been created by a government that wanted to offer sweetheart deals to the public sector and the banks at the expense of everyone else. They are running out of road for this policy, as the markets will extract a higher price for their excesses.

The global warming theorists have been in overdrive predicting extreme outcomes.

We have now heard or read:

1. The Arctic ice will all have melted within 5 to 7 years
2. The Himalayan glaciers will all have gone by 2035
3.Tropical storms are now the result of man made global warming
4. The UK will run out of water thanks to the dry hot summers
5. Champagne grapes will shrivel in France and will have to be grown further north in England
6 The sea level will rise drowning several large cities
7. The UK will have a barbeque summer in 2009 and a mild winter 2009-10

We are now witnessing some backtracking. The IPCC has apologised for the glaciers, admitting it was an error. Some global warmists were uncomfortable with Mr Gore’s Arctic ice prediction, as we will soon know how accurate it was. Apparently the settled science is not sure that tropical storms and other extreme weather events are all the result of man made global warming. The Uk weather forecasts are of course about weather and not climate, so they are mistakes that could happen to anyone in the meteorological business. We are assured that when the weather goes in the wrong direction, it is just weather and not climate.

From CEO
To Shareholders

I told you Conco were a busted flush. The latest market research shows people are not going for their nonsense that we need to stop spending and borrowing so much. Thank heavens they are so stupid. We can win the Board elections after all.

Enough of these minor matters. As your company’s grand strategist I have my mind on bigger things. I have good news to announce this week.

We are currently having a strategy conference with our Afghanistan subsidiary managers. During this I am going to launch my latest initiative to spend and borrow more. We have come up with the idea of offering cash back or incentive payments to all those Afghans who have been trying to damage our company in recent months.

I think you will agree with me that we can’t go on as we have been doing. Managers have been attacked, and some Afghans seek to undermine our brand. So why not offer them money to be part of our team? That way we can expand our spending and borrowing further, and cement a new bloc of customers to our Afghan operation. Pretty shrewd, don’t you think?

This builds on the success we are having with our never knowingly underbribed approach to key customer groups closer to home. Our ever popular cash back benefit offers now affect around half the population. The huge take-up of these offers led us directly to the idea of simply printing the money, cutting out the middlemen involved in borrowing it. I know we dressed it up as borrowing to buy back borrowing, but it was really printing it.

We will also be having another conference on how to regulate banking operations. As you know, now we own two of the largest banks in our main territory it is all so much more straightforward. We just tell them how much they need to lend to UK PLC and they stump up the cash. It takes the waiting out of wanting, I find. However, there are still unenlightened parts of the world where the main companies have not bought their own banking subsidiaries. We need to be at the table to discuss what to do about this.

I think the best course of action is to design more taxes and regulations for everyone else’s banks. That way we might be able to bring them down to the levels of performance of our own banking subsidiaries, which will make it easier for us in managing our huge conglomerate.

I have heard some people criticise us for having banking subsidiaries that are larger than the rest of the company. I used to think they were wrong, but now I have some sympathy. So I am now putting my thinking cap on to how we can accelerate the size of the non banking bits to catch up. The answer, of course, is to bring more customers in through our cash back benefit offers, and to borrow and print more to finance all our growing activities.

Our message boffins have been working on what we should call this new offer. After our ever popular “Tax a Tory toff today” campaign, they are thinking along the lines of “Treat a terrorist today”. Is it just too much alliteration to put it altogether as “Tax a Tory toff to treat a terrorist today”? That might put the wind up Conco! Let our spin doctors know what you think.

It’s coming on a treat. Yours in clover, welcoming my new Afghan friends,

The CEO

Let me make it clear at the outset before the spinners get to work. I think prison is the right place for anyone who represents a threat to the public. If people have committed acts of violence from terrorism to burglary with assault, they should go to prison for a good long time.

However, our cuts in spending need to be wide ranging. One good cut would be fewer criminals in prison. There are two big categories we need to look at.

The first is all those people who commit crimes by taking money or property that does not belong to them, ranging from the common thief to the fraudster. Surely it would be much better to prove to them that crime does not pay. They should be made to pay the costs of the police and judicial system in handling and prosecuting their case. They should make full restitution to any third party affected by their actions, including an element of compensation.

If someone stole my car, for example, I would like them to buy me a new replacement. I do not wish to pay for them to spend time in prison as well as being financially as worse off from the loss of my vehicle and the ensuing insurance claim. That’s a further punishment for me, the victim. The thief or fraudster would have to work harder and longer hours to meet the bills. Of course if the thief was unable and unwilling to work and refused to pay the bills then prison would be the last resort.

The second is the wide range of new crimes this government has dreamed up to pursue its political correctness and power of the state agenda. Many of these should never have attracted a possible prison sentence in the first place. Judicious changes to the penalty clauses – or outright repeal – would cut down the numbers of such offences.

Today we are asked if we should abolish the fixed age of retirement. The answer is “Yes” and “No”.

The answer is “Yes”, because people should not be made to retire at a fixed age against their wishes. If they and their employers want to carry on with the contract, or if they wish to carry on and they did not sign a limited life contract, they should be free to do so. When I advised on pensions policy in the 1980s I proposed a flexible “decade of retirement” (from 60 to 70 in those days- it would now be from say 63 to 73 given greater longevity) so both men and women could chose.

The answer is “No” when it comes to the terms of the State retirement pension scheme and public sector pension schemes. A pension scheme needs to have a stated age from which the pension will be paid. This can be the default or average age, with increases in pension if you work and contribute longer, or reductions in pension if you retire earlier.

Given the state of the public finances we need to raise the retirement age for pensions purposes. Those wanting to contribute for less time should receive smaller pensions.

I fail to see how anyone can claim that the Fed or the Bank of England have been well run in recent years. We have just lived through the biggest boom and bust in money policy we have ever seen. The two main Central Banks that caused the blow up and then supervised the collapse should take the blame.

I appreciate Mr Bernanke was not primarily responsible for the build up of excess credit, but he was responsible for the bust phase. He should be replaced with someone who forecast the recession and demanded earlier action to deal with it.

The President’s wish to split off hedge funds, proprietary trading and venture capital from utility banking on the High Street could be done. If he just tries to do it in one country, even a large and powerful country like the USA, the mega banks will simply shift their ownership of these areas elsewhere in the world. If the US claims extraterritorial jurisdiction, then the mega banks based in the US could switch their HQs to another overseas territory. If he still pursues them, they could split their capital structures.

If all the main banking jurisdictions of the world agree some new Basel accord on the subject it is likely the big banks would get the message. They could sell off their private equity, trading and hedge fund arms as separate companies, or they could split themselves into investment banks containing the “naughty” business as defined by the President, and utility banks.

All this implies two things that I do not agree with. The first is, it implies the three specified areas were the ones that caused the problems, whereas in many cases this is not true. Secondly it implies that future bail outs of utility banks is acceptable. Surely we ought to be seeking a world where bail outs are not needed? Why does the taxpayer have to face more pain for banking incompetence and Central bank idiocy?

What we ought to be discussing is how to regulate cash and capital by banks in a way which makes failure less likely. We need to discuss why the main Central Banks got it so wrong, why they kept interest rates too low for too long to create the bubble, then held them too high for too long to create the slump. We need to understand they ran a boom and bust policy, and both phases were wrong. We need to find people to run the Central Banks who don’t drive by looking in the rear view mirror, but who can think ahead.

If we stick with the regulation of commercial banks, the Regulator could make it clear their guarantees only extended to the utility bank subsidiary in their jurisdiction, and that such businesses could be separately accounted so in the event of a crisis that could remain solvent and independent if the rest of the Group went down. Alternatively, we could just strengthen deposit insurance so all who we wish to protect in a crash have the reassurance that their money is safe and there is no need for a run on the bank to add to its other troubles.

In the UK we need to split up RBS and Lloyds whilst they still have large public stakes. If the minority shareholders do not like it then they must arrange for buyers to take all the government’s shares at a profit for the taxpayer to allow them to call the shots. We need to strengthen our competition policy, by explaining to our Competition authority that the aim of policy is to get much more competition into High Street banking in the UK, supporting the policy of splitting RBS and Lloyds.

Which leaves us with the need to regulate cash and capital. I still favour this, though there is no evidence from the recent past that the Regulators knew how to do it. We should try again. All banks and financial businesses taking positions on their balance sheets and offering to pay people their money back at some point in the future should be expected to keep minimum levels of cash and capital. These levels should normally be higher than they were in 2007. In the short term they should be lower, as we need to generate more loans and financial activity to help the recovery.

Soemtime we need to come off quantitative easing and very low official interest rates. This is just a money go round to let the government spend too much, and to allow the banks to earn easy money. It does not help the rest of the economy, still struggling with too little credit at too high a price as a result.

I have been asked what I think of Mr Obama’s comments on bank regulation. I think they are good modern politics. For Mr Obama, it was bash or be bashed.

The US public – like the UK public – were not happy that so much of their money was tossed into propping up banks, or put at risk underwriting them. They became livid when those same banks, a year later, were busy paying their top executives mega bucks in bonuses as if nothing had gone wrong, as if they had earned the money by their own great talents.

Mr Obama has just had a very bruising encounter with the US electors. Both the winning and losing candidates in Massachusetts stated that the big issue was Obama’s very own unpopular health care plan. Mr Obama says he is quietly parking or delaying the offending big idea. Now he needs to change the topic and find people and institutions more unpopular than himself. Enter the bankers.

Like many modern politicians Mr Obama is good at moods and soundbites. He ought to be, as no doubt they spend a fortune tapping the mood and polling the words. So far he has proved useless when it comes to executive action, unable to develop honed policy and put it through. Closing Guantanamo was a great soundbite, but a year on it hasn’t happened. Changing the approach to the Middle East with a new kind of foreign policy sounded good, but the intensified Afghan war looks like Bush mark two. Offering healthcare to those who could not afford it sounded heroic. Instead many middle Americans feel threatened with higher cost health care and higher taxes.

So what is Mr Obama offering for his new banking policy? We do not know. There were two short paragraphs, designed to send a single message – he welcomes a fight with Wall Street. It worked with the tabloids, but it is scarcely a considered policy towards banking regulation.

He also implied that some banks were too big, without defining how big a bank should be and without naming the ones he had in mind. He wants big banks to get out of hedge fund activity, proprietary trading and private equity.

If he had bothered to thinik about the crisis we have lived through, he would have noticed that the two biggest catastrophes in the US were Freddie and Fannie. These are both specialist mortgage banks, brought down by advancing too much mortgage to too many people. His remedies do not tackle that issue. He might have spotted that Lehmans went bust. That was a specialist investment bank, that would also be unaffected by his two paragraphs. If he had looked across to the UK he would have seen that Northern Rock, Alliance and Leicester and Bradford and Bingley were also all specialist mortgage banks.

Out of his soundbites could come a sensible policy. As readers will know, I do want the two UK state owned mega banks broken up. They were too big to fail and too big to bail. The break up of banks that needed taxpayer support and might need it in the future is a good idea. Ensuring that in future they have more capital at the dangerous stages of the cycle would also be a good idea.

So was George Osborne right to back Obama? Yes, he played it shrewdly. He welcomed Obama’s interest in better banking regulation, and said it must be done globally. He also implied that Mr Obama’s message was the beginning of a long process of negotiation, not a settled answer for the world. That would be a kind way of putting it. Mr Obama came up with a bare knuckles soundbite. Maybe sometime the governments of the world will get round to getting some justice for hard pressed taxpayers, who were made to put too much into propping up some banks that did not not deserve it. They should have helped depositors, but they should not help bankers pay themselves too much.

A few years ago the world’s four largest economies were the USA, Japan, Germany and the UK. We have long warned readers of the UK’s spectacular fall from grace, which is still continuing. The UK is now in seventh place and still declining. The sharp sell off in sterling last year, allied to the contraction in GDP, has propelled the UK below France and Italy.

The rise of China will also be familiar to visitors to this site. China has stormed up the league tables, to reach the second slot in a table of the world’s largest economies. This has mainly been achieved by growth rates of close to 10% per annum, based on her huge success as an exporter.

When I wrote Superpower Struggles in 2005 I forecast:

“A much more effective competitor to the US, potentially a major global player, is rising in the Far East. … It (the Chinese economy) has already overtaken Italy to become the world’s sixth largest economy, and will soon pass the size of France and the UK at market exchange rates. By the next decade it will be larger than Germany, in third place, poised to overtake Japan.”

The forecast was almost too cautious, as China only waited for three weeks of the new decade before announcing her second place.

Before the latest phase of China’s rise and the UK’s decline, the top four economies of the world had a certain balance. The US and UK were heavy borrowers. Their consumers sucked in imports from the successful exporters. Their banks and borrowers drew on capital from the savings of the successful exporting economies. In contrast, Germany and Japan were economies driven by savings and manufacture for export. It is true that the US was a lot bigger than the other three, but for a number of years it was a relatively stable system which let the Anglo Saxons borrow and spend, and the others save and sell overseas.

China’s rise now has an important impact on the world economy. China’s huge stimulus last year helped end the recession in many parts of the world. Now China’s early wish to rein in bank lending before the bubbles grow too big is sending shivers around world markets as changes in the Fed’s attitude always do. The arrival of another export led high savings economy at the top of the tables makes it even more competitive for Germany and Japan, struggling to handle the sharp downturn in demand triggered by the bursting of the borrowing bubble on both sides of the Atlantic.

Nor should we think China’s arrival in second slot marks an end to this period of rapid change. Whilst it is going to take a good few years for even China to catch up with the size of the US economy, we could well see India from just outside the top ten and Brazil from tenth slot advance up the rankings. Going in the opposite direction could well be Spain and Italy as well as the UK, as all suffer from economic weakness in an ever more competitive world.

What lessons should we draw from all this? The first is that this remains the age of the Pacific. Two of the largest economic gainers are and will be China and India. There is a decisive shift in economic power occurring from old world and western world, to new world and eastern world. It could have a lot further to go, as these emerging economies have many more people to shift from agriculture to more productive activities. They remain with low incomes per head, able to apply existing technology to catching up the west.

The second is that the big gulf between the exporters and the borrowers has become too large and is now a cause of instability. Adjustment hurts both sides. Indeed, Germany and Japan, the exporters, took a bigger hit than the leading borrower, the USA, during the last downturn. From here we think the borrowers are going into leaner times, as they have to rein in some of their excess consumption and borrowing.

The third is that there remains too much capacity around the world. The older and dearer exporting countries, like Germany and Japan, will probably struggle more to adjust than the newer and cheaper exporters like China.

Yesterday in the Commons during the debate on the deficit reduction I warned the government again about rising interest rates. I tried to explain to them that if they persist with huge borrowings and so much overspending, it will drive interest rates higher, damaging the recovery in the private sector. I explained that the markets could do this on their own, whether the Bank of England left interest rates on hold or not.

This morning I awoke to read that Skipton Building Society, one of Labour’s own preferred mutuals and a specialist institution taking deposits and lending for house purchase, has hiked its interest rates. It feels it cannot compete for deposits from savers unless it does so.

The Minister of course was unable to refute, comment on or accept my remarks. It is such a pity they neither listen nor understand what is happening to the economy, preferring their ludicrous soundbites to the realities of the markets that are now beginning to bite them.

Skipton have hiked their standard rate from 3.5% to 4.95% – a big rise of 1.45% or over 40%. It’s 5.2% if you do not pay by direct debit. That’s a mighty long way from the 0.5% the government boasts about in the Commons.

I must say I enjoyed reading the Skipton’s account of what it is doing. Their site begins with an all too true remark “At Skipton BS we know every penny matters”. No doubt that’s why they need more of them.