Cuckoo banks threaten the public spending nest

Yesterday I met local FE College Heads. Top of their list of issues is the sudden cessation of money for their building plans, brought on by the incompetence of yet another government quango that “funds” them. Ministers cower behind their quango, denying responsibility and making sure the well paid CEO leaves, presumably with plenty of freshly printed fivers to see him over the next few months.

They asked me what a Conservative government would do about their bids for more money if elected next year. I told them that currently we have two parallel and totally different approaches to public spending.

On the one hand the business of government goes on as if things were still normal. FE Colleges, hospitals and schools compete against bureacrats, spin doctors and management consultants for limited sums of “new money” in a traditional budget round. The Colleges are currently losing. People argue over just tens of millions of pounds, as if they were significant to the public accounts.

On the other hand, the cuckoo banks now in the public sector ask for hundreds of billions. They are asked in turn if that will be enough. Hundreds of billions are showered on them in the form of loans, guarantees and new share capital. The government doesn’t argue over the odd ten milliion or even the odd hundred million. We have moved from considering tens of billions to now considering hundreds of billions.

The government seems to think bank money is different from other public spending. The sad truth is they are the same. They are all spending which taxpayers have to pay for, ultimately through taxes. If the cuckoo banks take more, other types of public spending will take less.

So what can the Conservatives afford? They can only tell you that when they have got in charge of the banks, and turned off the money taps to them. The sooner the banks are told to sort themselves out, the sooner we might have some money for more worthwhile purposes. At the moment the government’s answer is they cannot afford new building schemes for FE Colleges, and the ungrateful banks are reluctant to lend to some FE Colleges as well I was told. There’s the final irony for you.

As readers of this blog will know, you can only understand UK public finance in the age of public sector irresponsibility if you see it as two large banks with a medium sized government attached. The two bank cuckoos in the nest got there well before spring. They now determine the future of public spending and the prospects of the rest of the brood.


  1. Deborah
    March 25, 2009

    “Cuckoo banks” – what an excellent descriptive term

  2. Steven_L
    March 25, 2009

    “you can only understand UK public finance … if you see it as two large banks with a medium sized government attached” (JR)

    You seem to be neglecting the all important printing press!

  3. Richard
    March 25, 2009

    Don’t you think the Conservatives should announce a Great Reckoning immediately on coming to power: all future financial obligations of the tax-payer which are in effect debt would be counted as such? Dealing with the Brown Debt is going to be the greatest challenge for the next government and is the sine qua non for the restoration of confidence and economic recovery. Included in the Great Reckoning should be: PFI; nationalised industry debts and public sector pension liabilities. A good first step to dealing with the Brown Debt would be (i) put an absloute cap on earnings anywhere in the public sector (eg at £150,000) and (ii) a compulsory conversion of public sector final salary schemes to money purchase schemes (cap equal to the lifetime allowance as in the private sector). This would have the benefit of defining and capping the liability and might have a side benefit of encouraging more market-oriented thinking in the public sector. A simple recognition by the government of the scale of the problem would go a long way to restoring confidence in the UK (and in £)

    Reply: Yes, I have proposed a full speedy audit and publication of proper figures. I think the Leadership will do this.

    1. Colin D.
      March 25, 2009

      Re item (i), you could add ‘no bonuses for public sector management’. These people are phenomenally well paid – if you pay top salaries then you must expect and demand top quality results – why should the taxpayer pay bonuses to someone just for doing the job he/she was recruited to do?

  4. Demetrius
    March 25, 2009

    Think of the two big banks as boats. One is called the “Titanic” and the other “The Marie Celeste”. Captain, art thou sleeping down below?

    1. michael mcgrath
      March 25, 2009

      Gosh I wish he were in Westminster

    2. alan jutson
      March 25, 2009

      Yes its excellent.
      Viewed it before I saw your Blog.
      About the only good thing to come out of the EU Parliament.

      The telling factor, how Brown smiled, he’s been found out !!!!!!

  5. DBC Reed
    March 25, 2009

    Mr Redwood complains that the “ungrateful banks” are refusing to lend to FE Colleges.What is the answer? That the banks lend money at the Government’s direction?Not a very Conservative policy surely? Would n’t worry me but I would have thought Conservatives ,to be consistent, would have defended the banks’ rights to conduct their business as they saw fit.The banks have certainly got their fingers burnt bankrolling Property 0wning Democracy schemes with cheap mortgage credit but the politicians behind the schemes who have come to rely on the ever-reliable homeowners’ bloc vote have not got the message.

    Reply: I did not propose making the banks lend. Please read it again. It is an irony that after all this public money they can’t or wont

  6. oldrightie
    March 25, 2009

    The Labour Party are definitely a cuckoo in the nest. Trouble is they never fell out or fled it. Well, it looks as if they may have to very soon!

  7. Neil Craig
    March 25, 2009

    I think the optimum size of the banking sector, even if we kept the same share of the world banking industry would be much smaller than it is now. Perhaps half the current size if the mortgage industry recovers to present levels. That would imply 1/4 if we were to have a non-regulated free market in housing with construction at 1/4 present costs. In which case lending to them is merely putting off the inevitable.

    John do you have any idea of how much of the £180 bn deficit this year is payments to banks?

    Reply: I have set out all the banking support in previous posts

  8. Simon D
    March 25, 2009

    I prefer the expression “legacy banks” – an idea borrowed from “legacy airlines”. A legacy bank is an institution designed to be fit for purpose prior to 2008.

    Ideally a legacy bank should have:

    1. A large tranche of Government ownership.
    2. A huge plate glass head office.
    3. High costs.
    4. An unsustainable system of staff remuneration.
    5. A large pension fund deficit.
    6. Low levels of customer service in branches.
    7. A flawed lending policy.
    8. Masses of toxic derivatives.
    9. A top layer of management with a 2008 mindset.
    10. A directors’ dining floor serving fine wines.
    11. No credible business plan to put matters right.
    12. Minimal Government intervention in its strategy.

    The danger is that someone might just come round the corner and found a new bank that provides proper services tailored to the real needs of customers and businesses. Sir Richard Branson your moment has arrived!

  9. Stuart Fairney
    March 25, 2009

    I understand a Gilt auction failed this morning.

    The beginning of the end?

  10. David JM
    March 25, 2009

    Hi John
    Wonderful blog. Prescient and informative.
    Just wondering what you make of some info from Open Europe: “The Times noting that Mervyn King met the Queen at Buckingham Palace yesterday to discuss the economic crisis. It was the first time the Queen has held an audience with the Governor of the Bank of England in her 57 year reign.”
    Sounds remarkable to me.
    Keep up the wonderful work

  11. Yarnesfromhorsham
    March 25, 2009

    John – given the recent failure at the Gilt auction I am not quite certain that I understand what is going on – (a)selling Gilts takes money out of the system – yet (b)QE is puting money unto the system. Both these actions appear to be the two sides of the same coin.

    Presume that the Gilt auction is involved with the long term management of the national debt whilst QE is hopefully short term.

    So if its not possibly to get Gilt papers away to roll-over the national Debt – where do we go. Surely increasingly the Government finds itself in a vary similar postion to say Northern Rock when it was unable to roll over its wholesale borrowings.

    Reply: The Governor’s comments on QE and other matters this week wiped out the gains made in getting gilt prices up by the purchases the Bank was making! QE can only work if it does drive up prices and therefore drive down yields. The government also has decide which maturities it wants to influence, and have a consistent new issue and public pruchase policy to bring this about.

  12. mikestallard
    March 25, 2009

    OK, so let’s see what is happening here in the (Conservative) Fens, miles and miles away from Mr Brown’s government.

    Our Comprehensive more or less has a monopoly on all secondary education. It has no sixth form. This means that everyone who wants to study A Levels has to go to College.
    Meanwhile, our local College is being transferred some 17 miles away to March where a new Campus is to be prepared with full Sixth Form facilities. Our local College is being deliberately run down therefore. The best teachers, of course, left ages ago.
    Today’s local paper said that the March Campus is now put on hold. Last week’s said that there was to be no sixth form at the Comprehensive.
    The nearest College is in Norfolk, which is not Cambs. Up to now, it has generously been admitting Wisbech A level people who have 20 miles to travel to get there, if they have a car. If not, the bus takes more or less one hour.

    So now can you see why people get really upset about “Fred the Shred” and so on?

  13. Jason
    March 25, 2009

    Two important pieces of information to bring up in parliament today are firstly the fact that the government failed to raise the full amount at its gilt auction for the first time in 7 years. Secondly, the BoE which conducted a reverse auction (ie buying gilts from the market) was covered 1.4x. This, if extrapolated out signals the end of the game for this government. They want to buy gilts to increase the money supply whilst their ability to borrow from markets is becoming increasingly questionable. Coupled with certain tax shortfalls and you have a picture of total incredulity. Something has to give….currently it is sterling. Quantitative easing could also be used to fill the gap in govt finances – simply print the money. This surely is the next step in their ridiculous plan. Every time sterling looks like bottoming – the actions and consequences of this govt persistently stop it dead in its tracks. Anyone listening to Comerade Brown speak to European Parliament or to the US congress could think he is a man in control, who has a good plan etc. Nothing could be further from the truth. The reality is indeed sordid and getting worse.

  14. alan
    March 25, 2009

    Mr Redwood.

    The Conservatives, when elected, MUST do something about these quango’s In the NHS there are so many behind which Ministers can hide and blame.

    So much money could be saved by swift action. Hospitals responsible to the minister direct! No quango’s in between. Hospital Trusts in charge of their own destiny, with a management ELECTED by local people.

    No more jobs for our friends!!!

    Good luck.

  15. TomTom
    March 25, 2009

    The Great Y2K Software Scam in 1999-2000 led Central Banks in the US and UK to splurge liquidity to prevent a supposed Banking Armageddon………..RESULT……… Boom

    The Great Boom and subsequent Bust threatened a Banking Armageddon ……..RESULT……more liquidity injected into system and the housing market deliberately pumped up to boost bank profitability

    The Great House Price Boom in UK, USA, Spain creates a Supercharged Credit Multiplier as people borrow against any piece of collateral to consume………RESULT…….Consumer Boom and Savings Collapse…..China racks up trade surpluses recycled as cheap credit to Western Consumers

    Great Housing Boom busts and banks fall flat on their faces……RESULT….Bankers tell their hirelings to produce more liquidity to get the show back on the road.

    So since Gordon Brown took office in 1997 we have had at least THREE major injections of credit into the economy to get us to where we are today……and he wants MORE !!!

  16. Adrian Peirson
    March 25, 2009

    Instead of printing Gilts, we should just print the money, it’s still the same worthless paper, why borrow it.

  17. rik
    March 26, 2009

    Excellent article yet again. Tell me, how is it that the labour party has managed to turn all the peoples anger away from their management of the economy and shift it all onto the banks? Now it seems that Sir Fred Goodwin is the only person to blame for the crisis the country is in. If Gordon Brown feels so strongly ” that values such as “honesty, integrity and working hard” may have been absent from the financial system in recent years. Why did he allow it all to happen for so long on “HIS WATCH”?

  18. TomTom
    March 26, 2009

    Instead of printing Gilts, we should just print the money, it’s still the same worthless paper, why borrow it.

    Because they are printing “high-powered money” by injecting it into the banking system to work on the Credit Multiplier so it expands through fractional-reserve banking by 10-15 times the injection. Simply printing bank notes has no real impact when you are billions in the hole.

    The problem remains huge contingent liabilities in poorly-valued bond holdings that banks used as collateral for Credit Expansion and the fact that some of these bonds may not even be genuine since they were packaged portfolios of individual contracts with documentation up to 15,000 pages long with each bond.

    Who knows which customers will default on car loans in a bonmd packaged with student debt, credit card debt and car loans ?

  19. […] To add insult to injury the foolish bailouts and quasi-nationalisation of the banks means we are two large banks (near bankrupt ones) with a medium sized government attached, which isn’t an attractive […]

  20. Colin Hart
    March 28, 2009

    The FE farce is one of a number of stealth cuts now going on. The same thing has happened to the Regional Development Agencies. Whatever we feel about these quangoes, the issue is one of accountability. Their budgets are cut by administrative fiat from the centre, without any reference to Parliament. They are made to take the blame and Ministers get off scot free.
    Once upon a time Parliament used to vote the money and would have debated whether it should be subsequently cut. It’s what happens in the US Congress. Time we started to do something similar, give up on the idea of ‘independent’ agencies and restore ministerial responsibility.

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