Month: February 2009

Today we are back to playing the absurd media/government/Lib Dem game of threatening nationalisation if a bank share price goes down too far, only to see the share price go down because investors fear nationalisation.

Why can’t they all understand that a falling bank share price is no crisis unless they make it one. If the bank does not want to raise new share capital from the market any time soon, it can live with a low share price. If a bank has something to prove because it has just lost a lot of money it might have to live with a low share price until it can publish some figures showing it is back making profits. So what?

It doesn’t help to have instant pundits opining that if the price falls too far the company needs to be nationalised, and it does not help to have Ministers refusing to rule out nationalisation. Where are they planning to get all the money from to nationalise another bank? And why do they think a falling share price matters? If the bank has cash and capital, as they tell us the main regulated banks have, there is no problem. Leave the private sector ones alone.

Here on this site:

27th September 2008

“Nationalisation is the worst option….By all means strengthen deposit protection. By all means act behind the scenes to help a private sector solution, but do not promise to buy it or take it over”

November 4th 2008:
“It’s great news that another group want second thoughts on this deal.(LLoyds/HBOS) Let’s hope they can come up with a persuasive enough proposal for more shareholders to vote for it.
It would be better if the government vetoed the merger on competition grounds. They should stand behind any bank as lender of last resort, but should not be buying shares and acting as midwives to mergers which cut competition, choice,and pressure for more efficient banks.”

I have been asked to sum up the mood of the bloggers. I think it is quite like the mood of the students I met at Oxford last week as well.

There is a new seriousness. The many who found economics dull are now straining to understand what is happening and are hungry for more news and views. Most share a sense that we are living through unusually worrying and dangerous times.

Most who blog on this site accept that government and regulators are deeply implicated in the banking crisis. Many agree with me that the government cannot simply spend and borrow its way out of it. They want to see some commonsense and business expertise applied to sorting out broken banks. They want the government to target its spending better on people and projects that need public spending, whilst reining in the runaway state with its spy cameras, its thought police and its overweening arrogance.

Most are appalled by public profligacy and waste, by the gross unfairness of job losses and more rules for the private sector, and better expenses and bonuses for the public sector. People are hungry for change for the better, but know they have to live with another year or more of the current government. They fear for their jobs and their savings and have a sense of powerlessness.

So what can we all do? We have to take to the airwaves and the blogsphere, answer the endless surveys and pollsters enquiries, to persuade the politicians in power of our views. The government is uniquely unsure of itself, and vulnerable to polls and media advice. We need to be noisy in asserting a different reality to the government’s parallel universe. Bailing out big banks and spending more money in the public sector is the route to undermining state credit and the currency, not the way to prosperity.

When I heard the BBC tell me this morning that the CBI had called for £100 billion extra public spending in order to prevent a deeper recession I was ready to blog about the CBI’s economic illiteracy. When I read their Press Release I was interested to see the CBI said no such thing. They merely reported the obvious, that as the economy falls so public spending and borrowing will increase automatically, to pay more benefits to the unemployed against a background of declining tax revenues.

The CBI’s latest press release makes sense. It is a distinct improvement on their dangerous advocacy of the Exchange Rate Mechanism in the late 1980s, when I took a large Stock Exchange quoted company out of membership of the CBI in protest at their wrong headed stance. I remember their incomprehension that I felt so strongly about it as to cancel membership. I subsequently had to face taunts in government when I opposed our membership of the ERM that I should be supporting it as a DTI Minister faced with the strong representations of the CBI in favour.

Instead I can blog about the BBC’s sloppiness and their misunderstanding of how an economy works. Let’s try again. If you order another £100 billion of public spending on top of what is already happening, you need to increase taxes by £100 billion to pay for it. If the taxes fall directly on companies they will be worse off by at least the costs of collecting and spending the money. If the taxes fall on individuals, the companies will lose that part of their demand as people’s incomes are cut by higher taxes.

If the BBC’s idea of the CBI idea is that the £100 billion should be borrowed, then the taxpayer in the longer term will be even worse off, as the government will need to increase taxes some time to pay not just the £100 billion but also the interest on it. In the short term if the money lent to the government would otherwise have been lent to the private sector we are not better off. Indeed, borrowing from individuals and companies is a bit like increasing their taxes in its economic impact, as money they might other wise spend is taken by the government as a loan instead.

President Obama’s naïve “Keynsianism” is being well and truly
criticised in the USA. The BBC does not seem to understand why.

We are stuck in slumpflation. It is time for some commonsense amidst all this bank nationalisation madness. We need some hard truths for hard times.

This crisis began because the UK had borrowed far too much. You do not get out of a debt crisis by borrowing more. You get out of it by paying some off and taking your losses.

If you have a set of banks that have too many bad and doubtful debts, you do not get rid of them by transferring them to the taxpayer. If you transfer too many to the taxpayer, you bankrupt the state.

It is said that some banks are too big to go bust. Fine. Shrink them. If they want public assistance, make them sell assets, close down unruly books of trading positions, cut costs, weed out poor business. Lend them enough short term to keep them going, but leave them under pressure to cut costs and bring themselves down to a sensible size. Giving them access to limitless share capital just gives them the money to pay bonuses they do not deserve, to pay too many people too much money, to take unacceptable trading risks and to avoid hard choices which sometime they have to make.

Understand that the UK Parliament now has to supervise a large bank with a medium sized government attached. If they nationalise LLoyds as well as RBS the banks balance sheets will be more than twice the national income and more than five times the annual tax revenue. That’s taking a crazy risk.

The governing class now all tell us the banks took too much risk at the peak – though they as regulators allowed that and even encouraged it at the time. Why then is it now acceptable for the state to take so much risk, accepting the very instruments and loans which went wrong before? Have they learnt nothing? Remember we should not be discussing whether we set up a bad bank, when the state already owns three bad banks with plenty of bad and doubtful debts. How many more bad banks do they want?

Meanwhile even with all the taxpayer money going into the banks we have a deep recession. If at the same time as shrinking the bad banks we already own we have a sensible monetary policy we could turn the recession. Sorting the banks out instead of subsidising them would help restore confidence in the UK.

On current policy sterling is taking the strain, as the currency and international bond markets do now understand that the financial health of our banks is the same thing as the financial health of the state itself. This policy can best be called Slumpflation. Prices will go up thanks to sterling, despite very low levels of demand.

I’m fed up with slumpflation, and the banking and monetary madness which has brought it on us. Please don’t nationalise another bank. Please start to sort out the bad banks, and please run a monetary policy that finds the right balance between too much and too little.

The monetary authorities have been in the shower, tugging the control from cold to hot to cold to hot again. Set it for comfortable and stop fiddling with it. Let’s hope they haven’t broken it with their violent moves.

Alan Greenspan became a popular figure. Everytime there was the threat of a downturn or a suggestion the US should draw in its belt, he slashed interest rates, created more money and allowed the good times to go on rolling.

More recently he has become less popular. His successor, fighting to deflate the bubble his policies helped create, has attracted some support for the view that Mr Greenspan overdid the bubbles It was Mr Bernanke’s decision with colleagues to deflate the bubble and restore some balance in the US economy that helped create current conditions. In the UK the Bank of England followed a similar course with its interest rate strategy over the last ten years, preferring always to inflate the housing bubble than to correct the imbalances until they became so gross around three years ago.

When governments saw the results of their monetary authorities new austerity they moved from “teach them a lesson” to “let’s panic”. They now want the authorities to try to puff up a bubble again. In the UK the governemnt thinks one more puff will enable them to emerge from the electral hole of the opinion polls, and in the US Mr Obama, only used to being popular, thinks one more bubble could make him a hero just as Mr Greenspan used to be.

That’s why they want to support rather than mend the banks. That’s why they are committing unbelievable sums of money to underwriting business that has gone wrong, more large sums to “reflationary packages” and still more money to what they hope will be new lending. They are gambling the credit worthiness of the state on the hope that short term it will spark things back into life.

I have news for them. The way out of this mess is not another bubble, but working through all the past excess and winding it up, paying it off or netting it out with as little loss as possible. The private sector banks should take the hits, not the taxpayer. The Central banks should stand behind the banks that have a solvent future, and should force the pace of making the larger banks solvent in the long term by insisting they raise more of their own capital by asset sales, cost reductions and other marks of better management. We can neither afford to lose a major bank, nor afford to feather bed it with state capital. If in need the authorities should lend short term money against promises of better management and against what security they can find.

The loss of most of the £37 billion the UK government foolishly tipped into three banks here in just two months should be a warning to them. The rate of loss is too high. They should have blocked the LLoyds/HBOS deal, as advised here, so LLoyds was untainted by all this. They should have required substantial change at HBOS for any loans they asked for from the state to tide them over. They should have demanded that RBS wind up, sell or otherwise reduce the extent of its risks in the investment banking side of its activities. We have a large bank attached to a medium sized government. The bank is in danger of capsizing the public finances.

The pound has just halved against the yen, so the government proposes buying a huge number of new coaches and locos from Japan at a very high price with little UK manufacturing offset. When will they ever learn? The Unions are rightfully up in arms about it. The Opposition has to say it is the wrong deal at the wrong price, and point out the country cannot afford this kind of open ended expensive commitment stretching far into the future.

If we are ever going to be competitive at making machines now should be the time. We have unemployed people, cheap capital, and a collapsing currency. We need to plug the huge hole in our balance of payments. If they must order Japanese items, they must make it a condition of the contract that we make and buy more of the kit here in the UK under licence.

The trains in question are too heavy and too fuel inefficient. Green ideologues often tell us to go by train to save the planet. They actively promote more train travel, whilst condemning all other forms of mechanised movement. These trains represent too small an improvement on the heavy fuel inefficient ones currently using our network, and will prevent us hitting greener targets for trains for years to come. All forms of mechanised travel create CO2 emissions. Rail travel can be a bigger contributor than road travel, given the low loadings on many of our trains (30% seat use overall) , the poor efficiency of the engines, and the way we generate the electric power some of them use.

If the government were serious either about saving the planet or about saving our economy it will recognise this is a bad deal and decline the sign the detailed documents. These trains are too dear in every sense.

Not long after we get confirmation that all £20 billion taxpayers put into RBS has been lost in the write offs and trading losses at the end of last year, we hear that HBOS has lost £10 billion. There’s not much left then of the £37 billion we put in so recently to the three banks.

It shows the expensive folly of setting a price and promising the money in a hurry. They then had to wait some weeks before they could actually pay the money in, whilst the documents were drawn up and shareholders agreed. Why not announce the intention to put money in, and then use the following time to get a new valuation of the assets and agreement over a price that was better for taxpayers?

Better still, why not offer cash and short term loans against security but not buy equity? These three banks are too big for taxpayer comfort, and the losses are eye watering. Why didn’t the government realise this? Why didn’t it protect taxpayers more? Never has there been so little pleasure for the expenditure of so much public money. Now we all have to work harder to pay those debts off, as it is all borrowed money they have lost.

This is an amended post. The media first reported a loss of a mere £8.5 billion, but the small print reveals it is £10 billion. No wonder departments in the government now have become even more casual about their budgets when huge numbers swing around in bank loan books owned by the state. This banking crisis is creating an unreal world in public finance. Labour’s dream of limitless spending will turn into a nightmare of debt.

Last night the Oxford Union debated the motion “ This House blames the bankers”.

Months ago in a moment of weakness I had agreed to speak against the motion. By yesterday, steeped in the theatre of the Westminster Show trials of bankers, and fresh from the hothouse atmosphere of the Commons smelling blood in the water surrounding the government’s own favourite bankers, I made my way through the driving snow and rain of this economic winter wondering why I hadn’t opted for a night off instead.

I looked on the cheerful side. I had not agreed to defend Dr Shipman’s approach to care for patients, or to defend the actions of the Australian fire razers. Even in the cauldron of censorship of current British politics there were far worse things that everyone must agree non bankers had done.

The debate itself was not what I expected. Geraint Anderson, the City columnist, laid in to his former City colleagues with a gusto, accusing them of serious crime as well as of bringing the financial house down. A communist don reminded us of the lack of power of Marxist analysis, condemning capitalism more generally for the very income inequalities which allowed him as well as the other guest speakers to earn more than the average, whilst Rachel Elnaugh of Red Letter days didn’t seem too impressed by bankers either.

On my side of the argument Ron Sandler, now head of Northern Rock, quietly reminded the House of the complexity, importance and diversity of the modern financial industry, asking why just the bankers, and did they mean bankers. He pointed out that many people got jobs and bought homes during the long period of growth. Dr Yaron Brook from the Ayn Rand Institute made an impressive speech explaining how the Federal Reserve Board and the UK monetary authorities were to blame, cataloguing their mistakes with interest rates and the volume of money and credit which they are meant to control. I also had a few words to say on the roles of the Regulators and governments.

To my surprise, after the debate, I was told the Motion had been defeated . Indeed it had been overwhelmingly defeated, by 131 votes to 51 votes, with a substantial number of abstentions. Well over half those present had voted No.

Many will say Oxford is not representative. There may have been other special factors at work. It is nonetheless interesting that an audience of bright young people who will have to get jobs in a difficult climate and help to pay off all the debts the government is taking out voted the way they did. It shows that outside the Westminster and media bubble blaming the bankers is not the automatic and easy way out that it is in the spin doctors scripts. The students, in a debating chamber known for its love of entertainment and funny quips, were eager for something serious and for some explanation of what had happened. They did not take the easy way out. Let’s hope the government listens.