Month: February 2009

The failure of not just one, not just a couple, but three of Obama’s top team to qualify for high office reveals the reluctance of some high spending big state Democrat/Labour figures to pay for the state they want to expand. All three perished under questioning for the same reason – they had failed to declare or pay all the tax they owed under the (relatively) low tax Bush regime they had criticised or opposed.

So many advocates of bigger and dearer government want other people to pay the tax, but don’t fancy it themselves. If it had been three low tax advocates who had been delaying payment you could at least say they were showing consistency between their public positions and their private actions, even though as law abiding citizens they too have to accept the state can take what the law says. For three leading Democrats to be so reluctant to part with their cash to the state when they support a new Administration who think the Bush regime was not spending enough is humbug. Higher spending must lead to higher taxes. If they want the higher spending they should willingly pay the existing taxes. Maybe they should send in a bit more too. If I receive the odd letter from a high paid person who thinks taxes are too low, I tell them there is nothing stopping them making a larger contribution to public services if they wish. The best test of whether you really think taxes are too low or not is whether you personally want to pay more.

The media this morning are talking down Mr Obama. So let me say three good things about him.

My first cheer is for his rapid U turn on protectionism. When he saw the reaction and the possible tit for tat moves other countries could make, he changed the policy.That is very good news.

My second cheer is because he has announced he wants the USA and Russia to cut their nuclear warheads by 80%. He is right to do it bilaterally. The UK has already slashed her warheads, so it willl be good news if the world’s large nuclear powers are able to do the same.

My third cheer is because he accepted responsibility and admitted his errors when three of his nominees for high office had to withdraw. That is so refreshing for those of us who live under a UK government that never admits a mistake.

I have had my two easiest journeys to work this week for many a long year. The Highways authorities did a great job in gritting and salting, so the roads I used were fine. Yesterday Boris sensibly lifted the Congestion Charge so I could drive the whole way, instead of having to park more than a mile away from my work and walk the rest. It was trip down memory lane to a time when we used to be able to travel more easily.

I understand there were problems on the M25 and I am sorry for all who got delayed. I can also understand the anger of many who wanted to get to work by train or bus but who had a miserable time discovering they couldn’t.

I would like to thank the drivers who took the salting and gritting lorries out in the cold, the dark and the dangerous.

Of course I would have been stranded if I was planning to go anywhere by public transport. What have Ministers got to say about that? If we can keep the main roads open, why can’t we keep the train tracks open as well?

It’s not the economy, it’s the banks, stupid.

The US and the UK economies are not going to function properly again until the problems of their bloated banks are solved. The US and the UK authorities from time to time announce new packages of huge sums of money to help the banks, in between their preferred choice of planning to spend huge sums of borrowed money on public works and projects in the hope these will reflate them out of trouble. They will not, unless they also mend the banks.

There are several alleged solutions being investigated to tackle the banks:

1. Establish a bad bank, to take away all the toxic debts from the current banks. The slimmed down banks can then resume lending.
2. Nationalise the existing major banks, pumping in enough money so they can start lending again.
3. Create a state sector good bank which starts lending
4. Offer state guarantees to the commercial banks for new lending to encourage them to start it up again
5. Relax regulatory constraints to allow more lending from stretched balance sheets
6. Print more money and inject it into the banks to encourage them to lend more

Proposals One and Two would be very expensive and unlikely to work. Transferring the bad debts from private to public sector doers not cure the malaise. It merely shifts the losses from shareholders and bankers to taxpayers for no obviously good reason. There is no evidence that a state owned bank would be better run than a private owned bank, despite the poor performance of several private sector banks. Governments themselves anyway say they do not want to run the banks they nationalise.

If more lending is the aim then establishing a new state owned competitor to existing banks and giving it capital so it can lend would be a less expensive way of creating new lending, pound for pound, than subsiding and propping up an existing bank. It could not realistically be large enough quickly enough to make a lot of difference. If it lent too much too quickly it would soon itself have lots of toxic debts, whilst its capital requirements would impose a substantial strain on public finances. Lending in these conditions is not easy, as many companies will struggle to repay the borrowings. Toxic debt is not a large pool of bad loans from a past era of excess that can be identified and tackled. The toxic loan pool is growing and changing all the time as the economy deteriorates.

Offering guarantees to stimulate lending, relaxing regulatory restraints on capital and injecting more cash into the banks are all helpful measures. If done in moderation they could help solve the problem.

None of this , however, tackles the underlying problems of overstretched balance sheets, too much dangerous business on banks books, past large errors by banks and a new climate of fear engendered by market movements and government hostility. There are a couple of proposals in the debate which do tackle this which need to be dealt with:

1. Make the banks declare the full extent of their losses – the full transparency approach
2. Bankrupt selected banks that have performed especially badly to force out their losses and get them behind us

The first idea has some merit, but is not of itself a solution. If the losses are too large markets will be spooked and then there will be even larger losses as the market value of banks assets falls further. To some extent this is happening anyway, as auditors and Directors consider what to put in accurate accounts at the 2008 year end. RBS is going to declare around £28 billion of losses as a result.

The second proposal was tried when the US authorities allowed Lehmans to go under. It led to further falls in asset values, destabilised other banks and made most in authority think they should not do that again.

So what should the authorities do? One day they might conclude that my proposal of the “intelligent bank manager” is worth a try, so here’s another effort to explain it.

The regulators and the commercial bankers have to work together where a bank is in trouble, to find a way of getting from overlent, overstretched and sitting on too many losses to a position where the bank’s balance sheet is strong enough to resume normal banking.

This requires case by case analysis, and agreement between regulator, central Bank and commercial bank about the timetable for remedial work. All the time the commercial bank is making the agreed adjustments it should receive lender of last resort support, and continue to receive regulatory approval.

Actions bad banks need to take include:

1. Cutting costs sharply. They need fewer highly paid people. There must be no bonuses. In some cases higher paid people will need to take a pay cut. These banks need to make more profit to pay the past losses.
2. Going through all loan books and having a plan to maximise the repayments on each loan – as many of them are doing to an extent already. Tough judgements have to made – will continuing the loan and keeping the customer going result in a better outcome, or is it better to demand repayment now because the customer losses and asset values are going to get worse? There was a lot of wishful thinking about property values and the like in the early phases of the downturn.
3. Closing down the investment banking and trading activities that put too much bank capital at risk. The world market has been oversupplied with derivatives, futures, options, collateralised debts and the like. Big book positions should be closed out wherever possible by banks at risk, and losses taken where too many bad bets have been placed.
4. The large banks created by expensive and over rapid acquisitions should be broken down into their old components, re-establishing the separate brands . Individual businesses should be sold off to reduce risk and raise cash.
5. Adding selective new business where risks and margins look attractive, but resisting efforts to make these banks lend to whoever at whatever, recreating past errors of optimistic lending.
6. Raising new priovate capital when becomes possible thanks to the recovery work.

This is just a sketch of what needs doing. Call it if you like the Intelligent bank manager approach. The central Bank in most countries is both the banks’ banker and their regulator. In Brown’s Britain of course we need to have two public bodies doing this job, so we need to involve both the Bank and the FSA. It is so obvious, it never gets examined on the BBC and therefore does not rate as an option for this media oriented government. Perhaps, however, one day they will give it a try, having tried everything else with such a lack of positive results. It is not a quick fix, but it is a reliable one. This is a big problem, so it requires hard work and patience to get ourselves out of it.

The Obama package to save the world is now under scrutiny to see if it can even save America. Adding too much public borrowing to protectionism is not a winning recipe for success.

I can see why Mr Obama thinks that if he is going to borrow and spend such huge sums, he should at least say that the money should be spent on American supplies and American labour. After all, he will reason, the point of the package is to revive the US economy, so it must make sense to spend the money on employing Americans. The USA has been importing too much. It would make little sense for the US state to borrow more and spend it on imported Chinese steel or Japanese cars.

Unfortunately things are not as simple as that. Drawing up a list of useful purchases where the US is more likely to win the contracts is one thing. Placing a ban on products and labour from overseas is another. If the USA moves from the former to the latter, other countries around the world may follow suit, making it more difficult for the USA to export its goods. There would be no winners from a trade war.

Sometime the world has to address the huge imbalances between countries that lies behind the current crisis. Of the five largest economies in the world at the start of the crisis, two, the USA and the UK were borrowing too much, spending too much and importing too much. Three, Japan, Germany and China were saving too much, exporting too much and lending too much. Part of the crisis lies in the painful process of seeking to adjust to a point where the three creditors import and spend more, and the two debtor countries borrow less and export more.

Policies in the UK and the US to borrow more and spend more may delay this adjustment. In the UK the government’s attempts to offset the iron laws of economics have led to a sharp collapse in the pound, cutting the spending power of all of us and putting us off buying so many imported goods. This is offsetting some of the fiscal profligacy and thwarting the government’s hopes of avoiding a fall in living standards. If the US overdoes its attempts to borrow its way out of trouble, it too could run into difficulties requiring higher interest rates and a lower value for the dollar. The US reflationary package is dependent on the goodwill of the creditor nations continuing to hold US government bonds and adding to their holdings as new ones are issued in huge quantities.

The world needs agreement between lenders and borrowers. Adjustments need to be made by both groups of countries. The successful exporters and savers do need to spend more and save less. China has announced a reflationary package with that in mind. They do need to allow their currencies to appreciate, so imports are cheaper and more attractive to them. Some of this has happened with the sharp upward movement in the yen and the lesser upwards moves in the Chinese and German currencies. It is in the interests of the creditor countries to reflate, as their economies are being hit hard by the collapse in demand for their exports which have accounted for such an important part of their past economic activity. Germans need to buy more of their own manufactured cars and trucks, and the Chinese need to buy more of their own electricals and textile products, as the debtor nations can no longer afford to.

The US and UK authorities are taking very large risks by thinking both that they restore consumption levels to the unsustainable ones of the boom, and that they can at the same time underwrite their bloated banks and stand behind all their bad and doubtful loans. Their attempt to do so has not succeeded in avoid a severe downturn anyway, but it is delaying the adjustments needed to get back into some kind of balance on trade and in finance. Mr Brown seems to think the UK’s credit is unlimited and any kind of spending is a good idea. Mr Obama must be careful not to go the same route, as we need a solvent USA tackling the twin deficits he has inherited. The USA needs a period of borrowing less and exporting more.

The government is making a mess of the strikes. Some in the government sympathise with the strikers, and want to try to find a way through the problem. Others side with the management, and think they should be required to let a contract to the best value contractor under EU rules, with the contractor bringing in labour from elsewhere in the EU if that is their wish. The uncertain note and tone of the government encourages the strikers, who want to find out how many government Ministers are on their side, and how many support the EU law.

It was always just a matter of time before the question of who governs, London or Brussels, became an important political issue at the heart of a real dispute. Many users of alternative remedies and herbals medicines felt they had raised this issue when EU rules threatened to remove products they liked from shop shelves, and threatened to close shops and small producers down for not meeting new and dearer regulatory requirements. The government sided with the EU, and the protests died down. Fishermen have long raised this issue over the progressive collapse of their industry under the Common Fishing Policy. Now we have an issue with an even wider implication, testing this question of where is accountable government?

Some now in the UK government wish to suggest this is the BNP at work. Looking at the crowds peacefully protesting, they are much more likely to be the usual mix of Labour, Conservative and Lib Dem voters, with a fair share of non voters. They are not in the main politically motivated people. They are people out of work and wanting a job, or scared that their jobs too could vanish in this crisis and under these rules.

Today I wish to discuss the EU implications of this dispute. For years the UK government has told us that it influences EU legislation, and had got on well with our partners. The truth has usually been very different. The UK government has found out what the EU plans to do next, and then has told us it finds that acceptable or a good idea. Where it realises that an EU measure is going to be unpopular it either plays it down, or tells us it is going to press for changes. If it manages a minor change it then heralds this as a success and gives in on the bigger principles at stake. As a result of its retreats we have lost a big chunk of our financial rebate successfully negotiated by Margaret Thatcher, we have imported huge quantities of regulation whilst the government has told us it is deregulatory in spirit, and we have adopted the canons of EU labour and migration law.

When people fear a law or think it is stopping them working they want their elected politicians to take that seriously and to be able to amend it. When the law comes from Brussels, the government is no position to do that. The government has honestly to tell the strikers that there is no point in them striking, because even if the government wanted to change the law in the way they would like, it cannot do so without the agreement of most other EU countries, which looks extremely unlikely on this issue.

Mr Mandelson has correctly concluded that he has to argue it through against the strikers, because there is no other way out of this government impasse. Some of his colleagues clearly think the strikers are right, and from their position facing re-election, wish to show understanding and sympathy for the strikers. This division in the government’s approach will make the strike more damaging to the UK, and will make the ultimate disappointment of the workers involved all the greater.

Labour has given far too much power away to the EU. The official Opposition opposed the transfer of powers in Amsterdam, Nice and Lisbon for this very reason. We think we need more accountable politics at home, and more ability of Westminster to either amend or defend the laws when challenged by British voters. Labour’s EU policy has been based on the false spin that they wanted all this EU law and had influence over it. Just like their economic policy, it is now falling apart.

Labour are worried about a revival of the “extreme right”.In politically correct circles and on the BBC I hear talk of a stunning array of “extreme right” figures, movements and regimes. The “right” includes to such commentators military dictators, “conservative” clerics preaching religious hatred and intolerance, mass murderers, terrorist groups and others who pursue racist intolerance or authoritarian eclipse of the freedoms of others.

They lump alongside the extreme right numerous democratic groups and campaigners as “right wing” who believe in the opposite of such vicious approaches to government and community. It means that Labour and their friends in the BBC have stretched the language to breaking point, where “right wing” no longer means anything if it ever did.

The twentieth century was for many of us disfigured politically by two evil creeds, communism and fascism. To me they were similarly evil. Both entailed the establishment of tyrannies. Those tyrannies eclipsed many civil liberties, placed their citizens under surveillance by the thought police, diverted huge resources to military conquest and the suppression of their neighbours and made themselves rogue states to the international community. Their leadership killed opponents, and launched genocide against large minority groups within their conquered lands.

Some socialists try to distinguish communism from fascism, either defending its proponents like Stalin, or claiming that communism as practised was a distortion of the pure doctrine. None of us on what Labour call the “right” in British politics would ever dream of doing the same for fascism, as we loathe it with an equal passion to our loathing of communism.

In modern UK political dispute “right wing” has come to cover at least five differing groups of people or viewpoints, making it a more or less useless method of describing someone’s political outlook. The five outlooks I identify are:

1. Euroscepticism. Anyone who believes we should be governed from Westminster rather than Brussels, keeping the accumulated liberties of our country and using its representative institutions and courts as the main source of authority are now called “right wing” for such beliefs. This means that a substantial number of figures in the Labour party, including Tony Benn, become right wing.
2. Believers in free markets. Anyone who believes that in most areas of production and economic activity it is better to leave people and companies reasonable freedom to compete and choose, rather than putting more things under state control, is said to be “right wing”. This makes Gordon Brown “right wing” for his recent defence of free trade and free markets in Davos.
3. The Civil libertarian right. Those of us who believe in trial by jury, no detention without charge and trial, the right of free speech and the right to undertake peaceful protest, the right to be free of state snooping and thought monitoring are now said to be “right wing”. This also includes an honourable minority of Labour MPs who have faithfully supported civil liberties against the attacks of this government.
4. The authoritarian right. Those who believe in giving the state more power to eavesdrop, detain, monitor, and restrain in the cause of anti terrorism or civil obedience are also said to be “right wing”. This includes the actions of the present government, under the Blunkett wing of New Labour.
5. The Christian right. Those who wish the state to follow policies which accord with their views of Christian teaching are also often said to be “right wing”. In the USA the religious right are an important part of the Republican coalition. In the UK the causes of controlling abortion, the right to life, and the outlawing of various scientific practises and experimentation are not party matters but free vote ones. The coalition of support includes a number of Catholic Labour MPs as well as Conservatives. This part of the right also includes the wish to use some aspects of public policy to support the traditional family, which again runs across party lines.

Any analyst on the media who wishes to capture the cross currents and undercurrents of UK politics should understand this, and must conclude that calling someone “right wing” no longer tells the audience anything worthwhile about their position. When a term adopted from a different century and a different country is used so widely as a term of abuse, it ends up meaning nothing. As the above shows, no Conservative can possibly believe all the things the democratic right are said to believe, as the freedom loving and the authoritarian strands are in tension with one another. All democratic Conservatives are united in hating racism, communism and fascism.