Reading Evening Post

Months ago I urged the authorities to override the Bank of England’s MPC and slash interest rates to head off recession. At last the cries are coming from all parts of the spectrum to do just that, months too late.

I have also urged a sharp reduction in UK spending on bank shares and bank nationalisation. You cannot do the one without the other safely. If they press on with both interest rate cuts and with massive spending on bank shares, expect more strain to be taken on the value of sterling and in due course in the government debt markets.

A lower pound means still dearer imports, less spending power and more risk. Why can’t those in authority understand the large numbers they are playing with, and see they are putting too big a burden onto taxpayers? The government has decided to set up a holding company, UK Financial Investments Ltd, to own and manage all the shares in banks and building societies the government is accumulating at enormous expense to the taxpayer.

This conglomerate is designed to give Ministers a buffer between their decisions, and the actions of all the banks in the portfolio. They hope that as the avalanche of letters and emails comes in complaining about repossessions, foreclosures, cancelled loans, higher fees and charges, interest rates well above market rates and reduced company and individual overdrafts, Ministers will be able to claim it is someone else’s fault. The Chairman of UKFI Ltd will need to spend some of his salary on a flak jacket.

Why doesn’t the government just say they will hold the shares direct but leave the management of each bank to get on with it without Ministerial involvement? I guess they have ruled that option out for two reasons. Firstly, they do want to intervene, but need an intermediary or conduit to do it quietly. What better than a well paid quango company acting as the buffer and the prod to the banks? Secondly, they probably reckon the left in their party would not put up with a policy of complete non intervention. What is the point of a nationalised bank, the left would correctly ask, if it does the same things, imposes the same charges, withdraws the same facilities and pays the same bonuses as a private sector bank? UKFI allows some flexibility when answering the left’s criticisms behind closed doors. The plan is to have studied ambiguity, so the left can travel in hope, whilst markets are reassured.

The government has already had to modify three of its proposed interventions. It stated at the time of the original deals with RBS, HBOS and Lloyds that there would be no dividends, no big bonuses and maintained lending at 2007 levels. Now we learn there can be dividends once the Preference chares are repaid – a lower threshold to jump. There can be bonuses to senior people not on the Board – a good reason for some to resign directorships or to refuse them. There seems to be some retreat from the idea of artificially boosting lending to the levels of the boom, when there could be a shortage of takers for new loans on offer.

All this augurs badly for the experiment in nationalised banking. Still there is no proper audit of the risks and liabilities the taxpayer is being asked to take on. Parliament has been presented with no balance sheet, no accountants report, no revaluation of assets, before it makes its possible £37 billion commitment to the famous three, nor its £18 billion commitment to Bradford and Bingley. The most basic things that any private sector buyer would require do not appear to have entered the heads of our Ministers. They behaved recently as if they were in the rush of the first day of the January sales with the chance of mega bargains. They plunged into bank buying with a careless ferocity that will come to haunt them.

We have seen how we as taxpayers have already lost £580 million in half a year on small Northern Rock (c.£100 billion of assets) and had to put an additional £3 billion of equity in. How much could we lose in a full year on the £3 trillion of assets at RBS, Lloyds and HBOS combined and the £150 billion at Northern/Bradford? How big should the write downs be to establish safe values on the taxpayers balance sheet? What assessment has been made of recent and prospective loan loss rates? Can Ministers give us an assurance that all their new banks will be profitable from here, and hold assets that do not have to be written down any more? Maybe the government thinks with a portfolio the profitable ones will offset the loss makers. It would still be wise to undertake some audits and do some sums first.

To those who say there was no alternative, I say fiddlesticks. Of course the government and Bank of England needed to lend money and to make cash available. That is their role in the banking system. The government did not need to put up more capital. That is something the banks could have done for themselves, one way or another. The fact that three did not bother to, shows the terms for the taxpayer were not tough enough on the banks.

Taxpayers will rue the days that the government was so liberal with their money in the banking sector. All these banks had a future without state equity, if the Bank of England did its job as lender of last resort, and if the Regulator worked quietly behind the scenes on a timetable for strengthening their capital. Assurances that the government stood behind the weaker banks was a good idea. Loans were helpful. There was no need to add state equity, which will prove to be a bad idea for taxpayers. Just look at the first half results for Northern Rock – large losses – and get ready for the next results from state banks. The treat is on you.

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2 Comments

  1. mikestallard
    Posted November 11, 2008 at 6:53 pm | Permalink

    Steel differs from cast iron in that it is hammered until pure.
    If, like you, you subject your ideas to ruthless discussion (and hammering!) from anyone who cares to do so, and then take the trouble to read and reflect on what you hear, developing you thought so that you are actually communicating commonsense, then you are producing stuff that people really want to read/hear (see above).
    What makes so many politicians and otherwise sensible people talk rubbish is that they do not like to think and they do not like their ideas put to the hammering. John McFall on Newsnight was an excellent example of this lack, I thought.
    What is so scary to us on the ground is that parliament used to be the place where the cast iron was hammered into steel.
    Today the leaders of both parties were in an undignified race to see who could be the first to announce their ideas on taxation – outside the Palace of Westminster. Neither set of ideas was questioned therefore – except by the (biased) press and media.

  2. Jason
    Posted November 14, 2008 at 9:17 pm | Permalink

    I agree with the comment above, the lack of proper debate in the House is simply unacceptable. The Labour government (aided and abetted by an opposition front bench seemingly unable to bring the pertinent and fundamental issues to light and force a proper educated debate), and most of the agencies tasked to have responsibility and accountability of running the economy and financial matters of our nation have demonstrated such gross ineptitude…to a degree in my view that should render them obsolete with regard to finding solutions to our current mess. I don't want to start the blame game, firstly because it sickens me to my stomach, and secondly, the horse has already bolted. So I think it is important that we now face up to the legacy of our collective ignorance / ineffectiveness. To me, the differing paths of solutions, at heart, are outcomes of a philosophical debate – that has been going on for some time – Keyensian -vs- Monetarism / Austrian. The path the whole world seems to be going down is one of more intervention and aggregate demand management – large capital spending and financial assistance schemes. Whilst I understand the political attractiveness of such schemes, the economic reality is that we cannot afford such schemes. They will tell us that unless we borrow and invest now (from future generations) we wont be able to avert a depression. Even with this, the effects are only likely to be dragged on for a long time as was the case in Japan. Remember that Japans depression happened against a benign global growth environment. This time round we have the most malignant global environment imaginable. It is very urgent that the government and government spending in the UK is downsized immediately, because the current problems are rooted in government intervention – whether that be negative (as in the case of a policy of dereliction of responsibility for prudent financial oversight) or the expansion of the 'nanny' state – which essentially distorts labour markets and stifles the innovation and inventiveness required to compete in the global economy today – via the tax system and associated reduction in incentives. This is not a question of detail, it is a question of philosophy…are we to become a nation dependant on government for employment (which always collapses under its own weight) or are we going to radically redifine the role of government in the 21st century and reduce spending, taxes and increase the incentive structure and let the power of free markets rejuvinate our flagging economy? This is the debate that the conservative party need to have with themselves and the country as the current government is rapidly leading us down the road to serfdom. Apologies if this is a bit of a rant…it is not meant to be….i just wanted to let you know that for the conservatives to be fit to govern…they will require a compelling alternative vision and will need to discredit the path we are currently going down. Unfortunately, I dont see that compelling vision – and i am not hearing a lot of discrediting either. Its time to get serious. If the leaders of the opposition cannot do the job, find people who can – period.

  • About John Redwood


    John Redwood won a free place at Kent College, Canterbury, and graduated from Magdalen College Oxford. He is a Distinguished fellow of All Souls, Oxford. A businessman by background, he has set up an investment management business, was both executive and non executive chairman of a quoted industrial PLC, and chaired a manufacturing company with factories in Birmingham, Chicago, India and China. He is the MP for Wokingham, first elected in 1987.

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