Regulation is like the 3 bears porridge. If you have none, the world is worried about your businesses and the safety of their money if placed with you. If you have too much it is too costly and difficult for businesses and customers  alike, so the work goes elsewhere. You need the Goldilocks amount, not too much and not too little.

        As you need to ration your regulatory interventions, you should establish the priorities you need to achieve with effective regulation. There are two overriding requirements when regulating businesses that can take your money on a promise of giving it back sometime.

           The first is the regulator needs to ensure your money when invested with a bank or other institution remains your money, held to your account or available when you need it. You must be able to get it back at the stated  times in the contract. That is why we have bank solvency and liquidity requirements, and custodian and Trustee arrangements for funds.

           The second is the regulator needs to ensure that the institution does with the money what they say they will do with the money. If the financial institution has said it is running a fund which bets on the horses, it needs to show how it is has placed bets on the horses and what happened to its bets. If it says it is keeping your money safe in deposits it should do so and be able to show you where and how it has done so.

           The regulators these days try to go much further than that. They are interested in ensuring advisers offer correct advice. The problem with this approach is no-one knows in advance what is correct advice. Today’s risky asset can be tomorrow’s investment success. Today’s safe asset may collapse tomorrow. The Regulator could end up entrenching the errors of the day into many people’s portfolios or savings. Regulators would urge people not to buy the betting on the horses funds, but to stick with the bank deposit fund. That would protect their money in normal circumstances. If , however, the fund had placed lots of its money in Icelandic deposits in 2008, whilst the horse betting fund had a winning streak, the results could confound the normal predictions.

          Investment today poses serious problems for regulators and investors. Are gilts still a safe haven investment, the possible core of a cautious portfolio? Or are the small yields now a warning sign of another bubble, which will one day burst and lose holders a lot of money? Is gold a great idea, with more years of bull market ahead of it as people get more disenchanted with paper currencies and as Asian demand stimulates the party? Or is gold a barborous relic, now sitting at a high price, which could itself tumble?  Have European bank shares discounted the obvious discomforts of life in the Eurozone, or have they further to fall as the crisis unfolds?

         The clash of opinions on these and other investment matters are what makes a market. If the Regulators spend too much time worrying about wrong selling, and risk measurement, they run the risk of missing the big issues over solvency, liquidity and transparency which should be fundamental to  regulating honest and sucessful markets. Many investors accept caveat emptor when they themselves choose which funds or assets to buy. What they cannot accept is the failure of a bank to return a deposit when due, the collapse of an investment fund because it has done things it did not say it would do, or the theft of money from an investment by a crooked manager. Those are the big things the Regulators need to target.

 

           Transport policy is a strange UK battleground between car enthusiasts and rail fans. There is a reluctance by some of  the participants to recognise that both trains and cars require burning large amounts of fuel, they both pose safety hazards which increase as speed increases, but both are important to many people’s lives. They are both noisy neighbours. New roads and new railway lines are equally unpopular with the people living near to the proposed route.

           Rail enthusiasts try to claim their preferred mode is greener. This depends on how many people are making the journey. A full commuter train where most of the passengers live near the entry stations and work near the destination stations should burn less fuel per passenger mile than if those people drove.  In contrast, a little used cross country train,where passengers need to drive to the station to catch it and get a bus or taxi at the other end, may entail a lot more fuel being burned than if each passenger drove to their destination. You need to measure point to point total journeys, not just the rail bit. You  also need to take into account the journeys of the train crews to and from work. When it comes to the external impact of the railway, we also need to understand that a shortage of vehicle crossings over the railway can cause extra congestion and fuel burn for road vehicles.

             It is claimed that railways are safer. This is because railways enforce complete exclusion of all cars, vans, cycles, pedestrians and others from the tracks, whereas most roads allow mixed use with pedestrians, cyclists and others using the same infrastructure as the cars. The road lobby has secured a few higher speed roads where most other potantial users of the road are excluded, which are the safest roads as a result.

             It is assumed in the UK that ways must be found to make trains go faster, whereas road vehicles are always limited to well below their maximum speeds. Allowing faster trains does increase the danger of a very bad crash in the exceptional circumstances that the train derails or encounters a vehicle or other obstacle on the tracks. Trains have far less adhesion to the infrastructure than cars with rubber tyres, and cannot of course be steered around an obstacle in the way motor vehicles can. Seat belts are life savers. They  are mandatory in road vehicles but not supplied in trains.

             There has been a large and expensive  programme of bridge improvement to protect the railway from the unwelcome intrusion of stray road vehicles. Bridges have been rebuilt with high and strong sides, and with strong safety fencing in the approachs to the railway embankments and cuttings. There has been far less spent on removing  level crossings, where motor vehicles and trains can be in conflict through accidents or deliberate and dangerous actions by motorists.

                As the UK is short of transport facilties of all kinds, we need a better analysis of our needs for improved transport links. Where we have rail routes we need to make more productive use of them. They are probably best for peak hour demand into and out of our major cities, for big sporting  and cultural events, and for fast long distance  city centre to city centre travel where enough people wish to do that regularly. We need to improve the technology so more trains per hour can use these precious links right into the heart of our major cities.

                  We need to spend more on segregating roads from rail, and improving the crossing of rail lines by roads. We need to do more work to segregate different users of the roads, given them the safer space they need. Road can learn from rail when it comes to limiting the danger of conflict. Rail can learn from road when it comes to maximising throughput on the network.

 

             The Lib Dems are sending warning noises. They are telling Conservatives that Conservative MPs have to vote for their House of Lords reform if we are to have their continued support for reducing the Commons to 600 seats as proposed and promised. Some are hinting that if Conservatives do not support them on Tuesday they will want to walk away from the Coalition.

               This is proving counter productive with some Conservative MPs. They argue that given the current state of the polls the Lib Dems are not going to want an early election. Conservative MPs remember the agreement to give the Lib Dems a referendum on the AV  voting system in return for agreement to cut the number of MPs. Conservatives delivered on that promise.  The 2010 in take of Conservative MPs are tiring of whips’ threats if they fail to get into line on government votes. They take even stronger exception if the Lib Dems use the same arguments as the whips, but do it in public.

              The rebellion planned for tomorrow  night is a rebellion led by and planned by the 2010 intake of Conservative MPs. Jesse Norman and Nadhim Zahawi have set out a clear case against the current Lords reform proposals and have kept pressure up on the government throughout the planning stages of this measure, warning them of the strong Conservative opposition to it.  The Bill should pass its second reading easily because Labour, of course, are on the side of the Coalition government. Whether the guillotine motion to limit debate also passes is more doubtful, as presumably Labour will be with the Conservative rebels on that motion.

                I do not expect this vote to end the Coalition. I do expect the Bill for Lords reform to have a troubled passage. The government has the votes to clear the Commons all the time Labour helps them, but the Lords will be another matter. There was wisdom in saying we would only proceed with Lords reform once there is a wide consensus on what reform is needed. The government has procedural devices it can use to prevent the debates on the Bill going on for ever. They can move closures, and order all night sittings if necessary. In effect Labour will decide on when and how the Bill gets through the Commons, if the Conservative rebels stick to their view and are there in the strength their leaders say they enjoy.

                I do think we need a “use it or lose it rule” when granting people the right to sit in the Upper House. It would be good to have a limit on how long people enjoy the privilege, or at least introduce a suitably high retirement age. For those with party affiliations, there could be a ban on appointing anyone who had given large sums of money to their party.

Today’s papers are full of pictures of Mr A Murray, Wimbledon finalist. The front and early inside pages are full of assessments as to whether he can win.

Spare a thought for two great British sporting success which did happen yesterday, which daily papers fail   to place on  the front pages at all. The English cricket team completed yet another series win, this time against Australia. It reinforces England’s position as No 1 in the world.

Meanwhile at Wimbledon Mr J Marray became the UK’s first male doubles  Wimbledon champion for 76 years. It was a fairy tale end for a wild card late entrant. Presumably his fantastic success does not count because he did not have a spin doctor to talk the media through it all.

When England was busily losing the soccer contest our cricket team was winning in style. The papers went to town on the failure and largely ignored the success. Let’s enjoy our victories more, and put the striving into balance. There’s plenty of space to write up Mr A Murray tomorrow, if he does manage to beat one the world’s all time greatest players in the final.

 

             The last Conservative manifesto said Conservatives would seek a consensus on Lords reform in the present  Parliament. It did not promise to enact any particular version of Lords reform. It recognised the complexity and variety of opinions. Indeed, when I was asked about it during the election campaign I drew attention to Mr Cameron’s remark that it was a “third term priority” and said I myself did not think it was a priority for the current Parliament.

             Mr Clegg thinks otherwise. His party is more firmly pledged to Lords reform. He has come up with a scheme which proposes 360 elected Senators, each elected for a single 15 year term. These would be supplemented by 90 selected Senators, 12 Bishops and 8 Ministers, producing a total of 470 members of a new upper house.

             I have various misgivings about this scheme. Electing another 360 politicians is not an immediately popular answer to our current difficulties. It is even worse if they can never be re-elected, never have to stand the electoral test for what they do and say. It is difficult to see how they can ever be accountable once elected.

             I have difficulties with mixing elected and non elected members in the same House. There is a danger of two tiers emerging, with the elected ones claiming greater authority than the non elected. The elected, being more normal party politicians, are likely to want to intervene in MP constituencies politically. They will be able to cherry pick cases and causes they think will help them or their party, without being responsible for all the case work in a given area in the way an MP is.

               As a contentious constitutional matter Lords reform is bound to generate a lot of debate and argument at Westminster on an issue which is not currently a central topic of concern or debate for electors. Whilst governments and Parliament can do more than one thing at a time,  it runs the risk of giving a distorted view of Parliament’s priorities at a time of economic and EU crisis.

                Tomorrow I will talk about the kind of reforms I would like to see for the Lords, which would be I suspect less contentious and easier to achieve. I will not be voting for the second reading of this Bill. Jesse Norman and Nadhim Zahawi, two able Conservative MPs from the 2010 intake, are leading the opposition to this proposal. What kind of Lords reform do you want, if any?

 

          The government’s economic plan rightly said it intended to cut the share of the economy taken by the public sector, and boost the share of manufacturing and production. The aim is to reverse the dramatic move in the other direction under Labour. In their last three full calendar years they presided over more than a 10% fall in production industries output, and a 3.7% increase in public sector real output.

            In 2010 and 2011 production industries edged ahead by 0.7% whilst public sector output rose by a further 2.2%. These figures of course include four months of Labour and 20 months of the Coalition.

             The overall figures for the period 2007-2011 inclusive show just how far the imbalance has gone. Over that time period public sector output rose by 6% whilst production industry output fell by 10.5%. It just shows how much now has to be done to rebalance as the government intends.

              Putting this right cannot be done by monetary policy alone. Industry needs cheap energy in abundance. The UK is taxing and testing high energy using industries  by its dear energy policies, partly required by its consent to EU carbon dioxide policies.

               It requires a well trained and flexible workforce. Working needs to be more rewarding than being unemployed.

              It requires good transport links.

              It takes the patient building of supply chains, with the capability to produce more components locally to cut costs and logistic delays.

               The UK is having some success with increasing its motor industry output. It has good positions in areas like pharmaceuticals, food manufacturing  and aerospace engineering.

                The UK needs a period when it avoids major companies getting into difficulties. BP was badly hit by the drilling disaster. RBS and Lloyds HBOS were brought down in ways we have often described on this site. This week GlaxoSK paid a $3 billion fine to draw a line under mistakes they have made in selling and marketing. It is a good job that Parliament and press have not launched a bank style witch hunt against this large pharmaceutical company at the same time as the attack on Barclays.  We need more corporate successes so we can earn our living in an increasingly competitive world.

             The government has much more to do to create the right climate for industrial led growth. The UK’s industrial base is now a small proportion of the total economy, so it will need to grow quickly to drag the rest of the economy into good growth. If the financial service and banking sector contracts further, industry will need to grow faster again to prevent another rise in the proportion of public sector activity.

 

Dear DG,

Congratulations on your appointment. You have a great job and an important task. Many of us are proud of the best of the BBC, and agree that much of its programming produces good quality entertainment and interesting debate.  Some of your critics come from both the political “right” and the political ” left”, claiming that the BBC has institutional bias against their parties.

I do not believe that BBC broadcasters overall have a systematic bias pro Labour or anti Conservative. I have heard good journalists give tough interviews to Labour Ministers, just as they rightly give tough interviews to Conservative Ministers. During the Labour years the BBC did cover the scandals and problems that afflicted Labour, as well as Conservatives.  As the BBC often says to a complainant, the fact that both sides have causes to complain proves they are getting something right.

 

I do, however, think the BBC has an institutional bias when it comes to general views of the world. For too long the BBC has given much too much favourable airtime to those who think the EU, the Euro and all that goes with it is a good idea. Those of us who criticised the project were, until recently, given less time, interrupted more, and often introduced in a way designed to make us appear wrong or worse. Recent interviews have attempted to balance it a bit more on the issue of the Euro, given the daily news of its problems. There is still bias when it comes to examining the debate about long term membership of the EU. The BBC still comes over as believing leaving the EU is an extreme or impractical option. BBC interviewers seem to be soundbite trained to assume we could not trade with the EU if we left it, and to assume that 3 million jobs would disappear overnight if we quit!

The same problem dogs the Corporation’s treatment of climate change theory. The BBC takes the view that the “science is settled”. Any intelligent person should know that by definition the science is never settled. Newtonian physics was a gerat breakthrough, which settled the view of the heavens. In the twentieth century its was challenged and improved. Many intelligent people have many different reaons for disagreeing with  pure climate change theory and more importantly with the policy conclusions that flow from it in the debate. The BBC does all too little to give these dissenting voices decent airtime,to explore their disagreements and to allow viewers and listeners to make up their own minds. If the conventional theory is as all conquering as the BBC says, it should be able to handle grown up examination of its alleged shortcomings from its critics. Tackling fuel poverty and promoting more industry in the UK, two popular causes even with the BBC, are difficult to combine with carbon puritanism.

There is above all at the BBC an assumption that state spending is good and more state spending is better. Rarely does the BBC give proper airtime to the case for greater freedom and lower taxes. So many interviews are arranged to regret “the cuts” and to find governmental answers to social and family problems. Even “Thought for the day”, the so called religious slot, is usally taken up with more political commentary of a particular kind, where the department, policy or Minister being criticised does not get to answer back.

 

Yours sincerely

 

John Redwood

Today I will be voting against an eighteen months Judge led enquiry into banks.

We have had a wide ranging enquiry into the industry, its structure and attitudes led by an eminent independent economist and former competition regulator, Sir John Vickers.

We are having a full scale FSA enquiry into wrong doing at various banks.

There are potential Serious Fraud office enquiries into established wrongdoing following FSA investigation.

The banks need fixing now, not in two years time.

The government should know by now what needs doing. It is poised to legislate. A Judge led enquiry would cause delay in fixing the problems.

 

                       On tuesday night I spoke at a Centre for Policy Studies event to remember Milton Friedman’s contribution to economics 100 years from his birth. Deepak Lal gave a forensic talk about the main contributions of Milton Friedman to the development of economic thought.  Niall Ferguson powerfully and elegantly set Friedman in historical context, and explained the importance of his wider work popularising free enterprise friendly economics.

                       I drew on Friedman’s work in his Monetary History of the United States where he stressed the need to keep money growth at a sufficient level to prevent depression. His commentary on the monetary errors of the 1930s was seminal when he wrote it, and is influencing Mr Bernanke at the Fed as he fights the latest  danger of recession in America.

                       I pointed out that the Coalition government offered a Plan A for recovery based on a tight fiscal policy, bringing the deficit down by reducing spending, and a loose monetary policy. This was the formula which has fuelled some successful past recoveries. We have discussed many times before the fiscal stance, where so far spending has gone up in real terms and new borrowing remains at high though reduced  levels. I also pointed out that money growth is far from easy or loose.

               Over the last year the growth of M4 lending has been around 1%. Broad money growth has also been sluggish. The large amounts of created money through the quantitative easing programmes has stuck within the banking and state credit system. Tough banking controls allied to some weak bank balance sheets has prevented this money being released into the private sector to power a faster private sector led recovery.

               The figures beneath show the fast growth of QE money and the inability of the banks to use or pass this on:

M4 lending   annualised growth           Q2    2011           +0.1%

                                                                            Q3 2011              +1.2%

                                                                           Q4 2011              +1.6%

                                                                           Q1 2012             +1.2%

                                                                            April/May         +1.5%

 

Reserve balances               June 2012 (12 months annualised)                 +77%

Notes and Coin                     June 2012  (12 months annualised)                +5.9%

          Plan A, tight fiscal and loose monetary policy for UK recovery was a good one. The problem is we are not getting either a  tight fiscal or loose money stance.

            For those interested, the three speeches are available on video through a link to the Centre for Policy Studies website.

 

          There is little discussion or analysis of what is happening at RBS amongst the political classes. This is surprising, as the size of RBS still swamps the public accounts. What RBS does is of vital importance to the future of the UK economy. Good assest management by RBS is crucial to avoid more taxpayer losses, and to get taxpayer cash back.

           I thought it might be topical to look a little at recent RBS performance, After all, the bank has been in the news recently for its computer failures, and will doubtless be in the news again  soon for the results of the enquiry into whether it had a role in the LIBOR fixing.

              The stated aims of the bank are sensible.  It aims to “serve customers well”. It aims to “restore RBS to a sustainable and conservative risk profile”. It aims to “rebuild sustainable value for all shareholders”.  I have no great quibble with those. If asked, I would say the aims should be to pay the taxpayers back for the money they have put at risk, and to make a contribution to the economic recovery the UK needs. Any large UK bank also needs such a recovery  if it is to prosper in the UK.

                Customers probably feel a bit bruised by their bank after the recent problems with giving people their balances or letting them draw out their money, thanks to computer problems. I cannot recall a major bank getting into such a difficult situation before. The Group has apologised and recognised they let customers down. Doubtless more needs to be done to make sure it cannot recur, and to ensure that customers who lost out are properly compensated.

                   The balance sheet of the Group has been reduced substantially from its peak, and strengthened through government support and other actions. Some assets have been sold to comply with competition requirements. However, as at December 31 2011 the total balance sheet had gone up over the previous year to £1.5 trillion. This included an increase of £100 billion in derivatives held during 2011, taking them up to £530 billion. In the first quarter of 2012 they shrank the balance sheet again, to £1.4 trillion, cutting the derivatives assets by £77 billion. There are also substantial derivatives on the liability side. It is important these are reasonably balanced, reducing the risk of these large positions.

                      The bank showed total loans of £516 billion to customers at the end of 2011, compared to £555 billion a year earlier. This has fallen further in 2012. There have, of course,  been asset disposals.

                       In 2010 the Group lost £1666 million. In 2011 the Group lost £1969 million. In the first quarter of 2012 the Group lost  £1404 million. Administrative expenses rose in 2011 compared to 2010.

                        The remuneration of directors remains of interest to the taxpayer funding this bank.  The directors are well paid. They also enjoy  an annual incentive scheme with “a normal maximum incentive opportunity of 200% of salary (with an exceptional maximum of 250% of salary”.) They also may gain awards to a Long Term Incentive Plan  with “a normal maximum of 400% of salary”. They receive an allowance in lieu of pension contributions. The CEO has said he is not taking his annual incentive payments this year.