Category: Articles

We need some commonsense over global warming. The failure of the world’s leaders to agree a target based approach in Copenhagen should come as no surprise. They were unable to do so at Kyoto, where the USA, China and India opted out. Some of the European countries which did sign have so far failed to hit the targets they promised to meet. The 2009 European Environment Report showed just five of the fifteen EU western member states already hitting their Kyoto targets. Countries like Spain, Italy and Canada experienced substantial rises in CO2 output in the early years of the Kyoto plans.

Some of my constituents think a target based approach is the answer. There are several problems with such a policy. There are no global sanctions against countries who sign up and then fail to hit the targets. Some states like China are reluctant to commit themselves to long range targets, as they see their growth and economic development as more important, and difficult to predict accurately. Some states like the European countries that have not hit their targets so far will sign up, but fail to deliver. Most of these targets fall to be delivered by some future government at some date long after the next election, so governments can find it tempting to sign but to defer the action hitting the target would require. Many governments have in the past signed up to targets without having any detailed idea of who has to cut their carbon output. The targets require big changes of behaviour by many in the society, but governments find it difficult or unpalatable to force people to change their lifestyles to that extent.

To me, the three main environmental issues that we need to address here in the UK are flooding, water supply and transport. The truth is the UK will not be able to tell the world how much carbon dioxide to exhale and vent in exhausts from central heating and transport systems. Mr Brown tried very hard to get a deal but was not even part of the crucial meeting of the five countries led by the USA which gave us what agreement was reached at Copenhagen. This is not an issue within UK democratic control. It is also subject to manipulation. A country with a rising population will find it much more difficult to hit targets than one with a declining population. A low income country will find it more difficult than a high income country to limit growth. What is in the control of our government is how we respond to the threat of floods, how we regulate and organise our water supply, and how we configure our transport networks.

People who worry about global warming think there will be two main adverse consequences for the UK. They fear long hot dry summers when we might have insufficient water. They are concerned about warm wet winters when too much surface water leads to floods. They are right to be worried about both a water shortage and potential flooding. We have experienced both in recent years. Too much building on flood plain is causing regular and unacceptable flooding. A big increase in the UK population in recent years has not been matched by extra water capacity. We need to tackle both issues.

I am trying to persuade the government planners – and local ones – that we need to stop building on local flood plain. It is shocking to visit people in their brand new homes just after their first flood, as I have done. We need to intensify the efforts of the Environment Agency to manage the waters of the Loddon, Emm and Thames better. We need more ditches, sluices, holding areas for excess surface water. I am also trying to persuade our water companies to put in more reservoir capacity, so if we are ever blessed with a hot summer we can water out plants and take our showers without fear of running out. If the forecasters are right about the climate you only need reservoir capacity to bridge summer to the wet autumn each year.

Which leaves me with transport. We need to improve our rail and road networks, so traffic can flow more rapidly with more capacity. That cuts congestion and pollution, and makes our lives easier. To me this is all environmental commonsense. We have to accept we do not rule the world There is now ay we can make India and China forgo energy intensive growth. With their 2.5 billion people that will mean a lot more energy use. What we can do is work away at fuel efficiency to cut our bills, at insulation to limit our heat losses, and at better transport systems to cut out waste. It was good to see the efforts Wokingham Borough Council put in to keeping the main roads snow free over the last week. I am taking up why the Highways Agency was unable to do the same on the night of the first snowfall.

I am a natural optimist. I like to see the opportunity and the possibilities in life. The background as we travel through the end of the old year and into the new is not auspicious. The news background threatens worse to come on jobs, company failures, house prices and much else. Just to make it all worse, violent war breaks out in the Middle East.

Last year I urged the authorities to try to stave off recession. I explained how “If the authorities cut interest rates and make more cash available to the banks we can avoid too sharp a downturn.”

This year I am forced to write about how they could limit the damage of what is likely to be a severe downturn in the UK.

It took them nine months to recognise the dangers of the high interest rates and tight money they were offering in 2008. All too late in the day they started to shower the banks with cash and bring the interest rates clattering down. These changes will have an impact, but not in the early months of 2009. The authorities seem to have forgotten that it takes a year or more for changes in interest rates and changes to money market liquidity to work through the system. In the meantime there is the remaining problem that the banks themselves are still weak, need to write off more from their assets, and are under regulatory orders to strengthen their balance sheets at the moment of greatest difficulty.

The UK authorities could start to get a grip on their banks, and start to make better decisions about helping nurse them back to health so the wheels of borrowing can move the vehicles of commerce again. We need a government to understand that their regulatory and monetary policies need to reinforce each other, not struggle against each other, a government which finds a way for banks to pass on some of the cash it is now tipping into the system, and then controls the amount of that cash, before we start up another damaging inflationary cycle.

Last year at this time I went hoarse asking them to cut interest rates immediately. This year I say the rates are low enough. The problem now rests elsewhere. Indeed it is savers now who need the better deal, and I would like the government to help them.

They could afford to do so, and to lower taxes on income and jobs, if only they would forgo their foolish cut in VAT. We need now intelligent and affordable tax cuts, rather than clumsy and expensive ones which are not going to lift us out of recession.

I wish you all a happy and prosperous New Year. It’s the year when savers are asked to share the misery of the borrowers, as we continue to sift our way through the debris of the Credit Crunch. I just hope you and yours have jobs that survive and enough cash to see you through.

Last autumn, the British Government stepped in with massive cash injections for the banks. A few weeks on, and ministers admit this pounds 487 billion package did not even put the main banks into a condition where they can lend normally, let alone save the world.

The country faces a severe economic decline. The Government is trying to print money, slash interest rates, expand public spending and borrowing, inject capital into certain banks, nationalise others, boost demand by an expensive tax cut, prop up certain companies and industries, while lecturing the banks to lend more. So far, none of it is working. The cruel logic of past mistakes is pushing the economy into a vicious downward spiral.

We should remember the origins of our problem. The Monetary Policy Committee kept interest rates too low for too long. The banking regulator allowed banks to balloon their balance sheets and supplement this excessive lending with off-balance-sheet devices that came to haunt them in the bad times. The economy ran faster than could be comfortably handled, leading to a large balance-of-payments deficit as we sucked in what we could not produce at home, and a large private sector borrowing binge. Asset prices escalated giddily on the back of easy money. Homes became unaffordable without taking on a huge mortgage, which would prove too burdensome come higher interest rates or job loss. Once the authorities called time on excessive debt, there was bound to be a downturn. Their decisions to hold rates too high for too long, and then to require banks to hold more capital and cash to support their lending when we were well into the downturn, made the problem considerably worse.

I argued strongly for lower interest rates a year ago to take the edge off the coming decline. I argued against nationalising banks. I would have kept them in business by having the Bank of England act as lender of last resort, providing cash and loans against proper security, and offering stronger deposit guarantees when needed. The aim should be to see them through, with their shareholders and senior executives taking all the hit for past mistakes. Government’s role towards the banks should be that of the intelligent bank manager, not the owner needing profit and access to cheap cash for himself.

The Government, as it says, needs to stabilise asset prices, get the banks to clean up their past mistakes, ensure none of the major banks goes under, and reflate overall demand. However, a number of the measures it has taken are making the problem worse.

Nationalising Northern Rock and the loan book of Bradford and Bingley were bad mistakes. On current policy, and given competition rules, neither of these institutions can now make a contribution to new mortgage lending.

Forcing three banks to take taxpayers’ cash for shares because the authorities wanted them to have more capital was not clever either. The government failed to do any proper due diligence on what it was buying and failed to require write-downs of the loan books before venturing. As a result, taxpayers now have shares in institutions that may announce further big write-offs. The regulators should have discussed with the banks how to strengthen their balance sheets through retained profit and by raising money from markets. The central bank should have stood behind them in the normal way.

In trying to stimulate demand, cutting VAT was about the worst option, and has left us with a costly hole in the national accounts for little benefit. The escalation of the government borrowing requirement, mainly through the mistaken bank nationalisation policies and the VAT reduction, is alarming.

So what should they do now? They should cancel the remaining VAT reduction, and look instead at cheaper tax reductions that put more money into the pockets of individuals and small companies. We need an expansion of cash and deposits in the hands of individuals and companies to get the economy going.

They should aim for early repayment or sale of the taxpayer shares, and ask the banks to accelerate a programme of cost reductions, asset sales, and resumption of profitability. The immediate target should be to get the cash back for the special preference shares the government bought, and to sell the mortgage books and administration of the Rock and Bradford and Bingley on to the commercial sector, where there would be more chance of building these businesses and saving some jobs.

Mr Brown should invite the Financial Services Authority, the Bank of England, the Treasury and the commercial banks to a meeting to hammer out the right mixture of regulation, loans and guarantees so that they can restore normal lending levels more quickly. The Prime Minister has to defend the taxpayer, but he also needs to listen to the people running the banks. The meeting will need to decide to temporarily lower the level of capital banks are required to hold against their lending, to withdraw the proposals on banks keeping more in cash and bonds, and to tweak the packages of short-term loans and guarantees so they are more attractive to the banks.

None of this is guaranteed to lift the recession quickly. The authorities have allowed the downward spiral to become entrenched. The banks face further write-offs from their corporate loan books as trading deteriorates and more companies go under. House prices are still high. People are reluctant to commit to large new loans when there are so many uncertainties about their jobs. Many people and companies are unable to take on more debt, if it becomes available.

The proposals above are designed to hasten the end of the recession, and to cut the risk in current policy. They would reduce the Government’s need to borrow substantially, and would speed up the resumption of more lending by banks. You cannot end a crisis brought on by borrowing too much by the state borrowing even more, or by transferring all the dud loans to the taxpayer. We have to work our way out of borrowing too much and inflating asset values too much. This package would at least put us on the right road to recovery.

The government has had to reveal at last just how big a deterioration there has been in our economic prospects and the public account. They now accept we are going into recession. They see that we are going to face a winter of job losses and bankruptcies. Woolworths and MFI have led the way in recent days. There are all too many more companies in distress, or good companies that cannot get the borrowings they need to see them over a difficult patch.

Interest rates are the price of borrowing money. When the private sector was borrowing too much, the Bank kept the price too low, encouraging many more people to pay too much for houses, and allowing businesses to pay too much for commodities and raw materials.

Then they decided to end the party, bringing down prices, damaging the banks, and disrupting trade and jobs.

Now the government is going to borrow too much. It looks as if the Bank is going to cut the price of money further, to allow the government to borrow more than it should – all the time the markets still allow them to do that.

Before the last round of interest rate cuts I suggested that the Monetary Policy Committee wrote to the Chancellor and said they would only cut rates if the government agreed to keep its borrowing under reasonable control. There was no letter, but the Bank and the government did start telling us they saw the need to have a clear pathway set out to return government borrowing to more normal levels, from the £157 billion bulge this year. The government also decided to talk about £78 billion borrowing this year – leaving out the money to buy bank shares and pay for the bank losses.

The proposed pathway back to sensible public sector borrowing still leaves us too much in debt. The Monetary Policy Committee should have another go behind the scenes to get the government to see sense. If it cannot, it needs to leave interest rates higher to allow for the government excess.

The problem is the Monetary Policy Committee is acting out of fear, following several years of getting it comprehensively wrong. They failed to see either the inflation or the recession they triggered. Now they are likely to misread the government debt problem.

Huge amounts of liquidity are being built up. In the short term this will not be inflationary overall , as the broken banks are not passing it on to the private sector. It remains inflationary in the public sector, which lives in an unreal world compared to the rest of us. The money is being passed on within the state, allowing many quangos, departments of the government and some Councils to be overmanned, and paying many very high salaries over £100,000 to people taking little risk and in some cases making little useful contribution. The public sector still has huge advertising and consultancy budgets, still has a massive army of officials looking for new ways to check up on us and persecute us, and still churns out the forms, compliance manuals, consultation documents and bossy boots instructions as if nothing had changed.

We certainly have two Britains. The government has split the country into the hard working compliance ridden tax paying private sector, shivering without cash and awaiting the call of the well heeled state Inspector, and the overbearing, camera wielding, humourless, play by the increasing number of rules politically correct Inspector state where any amount of borrowed money can be channelled into more nonsense. This is why the state can afford to prosecute us for parking in the wrong place, for offering a client a glass of wine or for using the wrong words to describe people, festivals or religious observance with no sense of proportion.

There is a growing sense of injustice amongst all those who run businesses and try to make a contribution through the private sector, and growing sense of unfairness between the towns and districts where people mainly work in the private sector, and the ones where a majority now draw their income from tax and public borrowing.

In the longer term the danger is that the government will want to use the printing presses to sort out its huge debt, which will be inflationary when the banks are working again.

What an extraordinary week last week. On Monday we had a statement which was meant to update us on the lack of progress in the economy, but turned out to be the biggest Budget I have ever heard during my time as an MP. The government offered us no debate or vote on it, so we had to demand one. We eventually were granted just 3 hours to discuss it before the untimely closure of Parliament for yet another break.

My concern about the UK economy has centred around the large banking sector relative to National Income and tax revenue, the large consumer deficit, and the growing government deficit. I have felt the government has been running too much financial risk, whilst the economy itself will enter a period of no growth followed by relatively slow growth. I called for lower interest rates a year ago to try to stave off recession, but the loow moving authorities failed to see the problem in time. Now we are all going to suffer as a result.

All this seems to be endorsed by the government’s own heavily revised forecasts. They foresee growth for 2008 at 0.75%, with falls in quarters 3 and 4, followed by a fall of 1% next year, and growth of 1.75% in 2010.
Private sector forecasters are likely to see this as optimistic, with more fearing a continuation of the downturn beyond the second quarter of 2009. The UK’s growth in the last decade owed a lot to the success of banking, property, financial and business services, areas which are entering difficult times.

The government’s is spending and borrowing too much. The Chancellor told us he planned to borrow £78 billion this year compared with the last Budget forecast of £43 billion. The back of the new Forecast book shows that when the bank share buying and other financial transactions are taken into account, his true borrowing needs from markets and National Savings amounts to an astonishing £157.7 billion. That’s another £2700 overdraft for every man woman and child in the country. This will be followed by borrowing well over £100 billion the following year.

How has he got into such a position? There are three main reasons, The biggest increase in borrowing comes to buy bank shares and nationalise smaller banks. Their current estimate for this year is now £69 billion. It’s more than taxpayers can afford. We are already losing a fortune on the banks he is nationalising. He should have used short term loans and guarantees secured against their assets instead.

The second biggest change is the collapse of tax revenues. This year they anticipate a revenue fall of £30 billion, to be followed by a huge dip of ££64 billion next year excluding the policy change on VAT.

The third change is a series of policy alterations in favour of more spending and lower taxes. The £8.6 billion next year off VAT is the largest.

The figures reveal too much financial risk and too much borrowing. The government is now in the hands of the money lenders. It was once famously said “We do not own the nationalised industries, they own us”. The government will have to learn that lesson all over again with its expensive habit of buying banks.

Meanwhile, offering a 2.5% cut in Vat is not what the doctor ordered. People cannot afford their existing bills. They don’t want an incentive to spend more, they need to keep more of their own income to pay for the mortgage, the heating and the food. Keeping Council Tax down would have been a better help than offering a bit more ff the price of a new car or telly, at a time when prices are collapsing anyway.

Borrow, borrow, and borrow again. The government is living in a fantasy world, where foreign investors and rich British people have to lend to the government to spend like there was no tomorrow. Their political strategy seems geared to a Spring 2009 election which they will back away from when they see the opinion polls, after a winter of job losses and factory closures.

This government will drown in a sea of red ink. Never have I seen the public accounts in such dire straights. The government assumes a mild and short recession, with recovery beginning in the middle of next year. Even so, they anticipate tax revenues plunging by a massive £73 billion in 2009-10 because the economy will be weak, and anticipate borrowing £157 billion this year and £126 billion next year. This year’s borrowing including buying bank shares amounts to more than 10% of national income.

The Opposition talks of the government flashing the national credit card. They are also taking out a huge national mortgage, and will soon have us deep into negative equity, unable to pay the interest bill easily.

If this were a company it would be time for the Non executive Directors to have strong private words with the Chief Executive. They would tell him or her that the strategy was taking the company quickly to a position where it could not afford the interest and all the other bills. They would demand cost cuts and raising more revenue. They would warn that if the company did not do it for itself, the bank manager would take over or eventually the Administrator would be called in by the creditors to do it. It is time for the rest of the Cabinet to warn the PM and Chancellor in private, and time for Parliament to raise the roof beams, warning this government there are limits to how much a country can borrow.

Labour’s crude political strategy is to say they will take care of the victims of recession through spending more public money, whilst the Opposition just wants spending cuts. Please do us a favour. The Opposition welcomes – and urges – action to ease the plight of the victims of recession. We have asked for schemes to help small business struggling to pay the bills, to help Council taxpayers faced with another large public sector demand, and pensioners. More can and should be done. What we cannot afford is the VAT cut, the bank nationalisation, the ID cards, the unelected regional government, the public sector’s rich list, the surveillance society and all the panoply of Labour’s illiberal state.

As I have commented before, what we really can’t afford is a long and deep recession. That is why yesterday was such a wasted opportunity. Sensible action to improve the terms of the bank support in a way which cut taxpayer risk and made it more effective would have helped. Tax cuts of the right kind to target money to the lower paid would have helped. Tax cuts for business struggling with insufficient cashflow and restricted borrowing would help. Instead the PM went for broke with a VAT cut which will do little good, and could be the final weight which pushes this government under in the sea of red ink it has created.

Last week I tried again to get the message through to the government that taxpayers cannot afford their bank share buying package. If they still doubt me, they should just look at what the international financial community thinks of this government’s economic policy. Since the summer the pound has slumped from $2.05 to just $1.45 as I write this. That has slashed our living standards and the value of the pound in our pockets and purses.

If you can still afford to go the States, that $2.05 cup of coffee which cost £1 in June, now costs you £1.40. The same has happened to anything we import which is priced in dollars. It means a large amount of the fall in the oil price will not benefit us, for oil is priced in dollars. We have lost even more against the yen, so it means buying fewer Japanese cars and electrical goods and paying much more for them.

I spoke in the Economy debate on the Monday, blogged about the crisis everyday on www.johnredwood.com, was invited on Newsnight and ended the week on Any Questions. My message was simple. The banks they want to buy are too big. The costs of redundancies and write offs could be large for taxpayers to carry. The £37 billion to buy shares in RBS and Lloyds/HBOS, combined with the £18 billion being borrowed to sell the deposits of Bradford and Bingley to Santander is simply too much for the poor long suffering taxpayer to carry.

In reply, the government just says it had to rescue the banks. Yes, of course it should lend them emergency money if they need it, and guarantee transactions if that is necessary. It should always do so taking good security for the taxpayer, and should do so for as short a time as possible. No sensible person wants a major bank to go under. No, it should not and did not have to buy shares in them. So far taxpayers have lost £580 million at Northern Rock, and had to put up another £3 billion of capital for that bank. Neither Northern Rock nor Bradford and Bingley now lend new mortgage money to customers. That’s another blow to the housing market, and is helping destroy jobs in housing related work.

Do I think the government should cut income tax as well as cutting interest rates to shorten and lessen the recession? Yes, of course I do. Do I think they can afford do, given their levels of spending and their commitments to the banks? No, of course I don’t. They need to change course, and do so quickly. The recession is spreading rapidly to the rest of the economy, from property and financial services where it started. The economy needs the tonic of lower interest rates and lower taxes to stop the losses and to start a recovery. All the time we have the present government’s spending and borrowing levels we are at risk of more losses on the currency and more difficulty borrowing all the money.

A modest devaluation of the pound earlier this year could help our exporters and curb some imports. It would speed the adjustment we need. The massive fall, the currency rout we are experiencing, is damaging. It makes us all poorer, and makes the government’s task of raising all the money it wishes to spend that much more difficult. The government needs to remember that borrowing is deferred taxation. Taxpayers have to pay it all back with interest. It needs to root out waste and stop its share buying.

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.