Yesterday there was more gloom and doom about banks, as yet more punishments were imposed for wrongdoings in the past. I know from the tone of anti bank contributions here that many of  you will be pleased action has been taken, or will be urging more and tougher action.

             I want to talk about the future, not the past. I want to ask the question, what type of banking services do we  need to fuel a sensible recovery and to meet the needs of individual and company customers over the next decade? Why have so many people fallen out of love with their banks, or moved from indifference to outright hostility?

            Most people  need a bank account to carry out transactions in our electronic world. If you need to pay the gas bill, receive your wages, or draw out cash you need access to basic banking services. People want it to be secure, swift and cheap. There should be economies of scale. Although many say they do not like or trust banks, in pratice most people most of the time do trust our main banks to keep our money safe, to settle our bills on time by Standing Order  or Direct Debit, and to send us accurate records of what we have done.

             The criticisms of these central basic services are that they can be too expensive, it can take too long to move money, and sometimes mistakes are made that can be difficult to rectify. There are second order  arguments about whether these servcies are best on line, in branches or by phone. Different customers want a differing combination of these methods of  servcie delivery. High Street banks need to get better at delivering what people want. More banks and more choice of bank, coupled with better portability of accounts would help a lot.

              Many people and companies also need to be able to borrow money. They may need money for the short term, to handle cash flow problems.  Individuals may need to borrow until  payday, or ahead of a rise or bonus. Companies may need to finance working capital, awaiting payment by customers or movement of stock.

               They may need money for longer term investment. Most individals need a mortgage to buy a house. Many companies need money to buy a property or to finance plant and equipment.

               Today there remain serious cricisims of the availabilty and price of credit. Mortgages have been in very short supply, and the requirements are now much more stringent than before. There are signs of improvemetn from a low level. Property lending for companies has all but dried up, yet this used to be one of the main forms of long term bank  financing for companies. Smaller companies report banks keen to get early  repayment of loans, and only willing to lend with large fees and charges added in.

               People and companies also may need help with investing savings and surpluses. They have other sources of advice and assistance, as the banks have found it difficult to recruit and retain the more expensive investment personnel needed to assist in most branches.

                 The banking models of the last decade created mega banks whose main products and services were directed at the larger companies.  They hired very expensive people to invent and sell ever more complex products. They did so by persuading Companies treasurers they needed various types of derivative insurance. They then extended these products to back a variety of savings and loans products, and to overlay pensions and other funds. This made big money, and enabled the staff to enjoy huge salaries and bonuses . The branches did not have empowered or expert staff to look after normal customers.

              A future bank has to accept that there will not be so much lucrative derivative, future and options business. There will be a stronger demand for more basic loans and savings products where costs are under better control. This means lower overall remuneration for the practitioners, and more service for the smaller and medium sized customer. It will need a different kind of branch banking.

    Alastair Heath has recently drawn attention to the collapse in net income of the top earners in the UK under the Coalition. The top 1% took home 11.2% of the nation’s net income under unequal Labour in 2009-10, and a much lower 7% this year under the much more equal Coalition. This fall goes all the way down through the top half of earners. The top 50% received  75% of total net income in 2009-10, and only 60% this year. Meanwhile the bottom half receives a bigger share of the income than at any time this century.

          All those who wanted a more equal society should rejoice. Indeed, they should be voting for Coalition parties out of gratitude. The Coalition has done something Labour was quite unable to do during its period in office, when the UK became less equal.

          Not everyone, however, is rejoicing. Getting inequality down by moving rich people offshore or out of the country altogether is no great success. It is easy making the top half of earners worse off, but doing so does not help the economy to improve, grow, change for the better. We need economic growth to raise all living standards. We need more jobs to rauise the living standards of those currently living on benefits.

             The government is busy trying to stop the next banking crisis. I want it to sort out the last one. It is all very well giving the Bank of England powers to force the break up or segregation of a large conglomerate bank in the future if it lends too much and runs too much risk. The real issue is how is this government, now, going to get RBS working properly and lending enough to the starved UK private sector?

             Giving the Bank of England an electric ring fence does not mean a future problem is sorted out. An electric fence warns but does not kill an animal that encounters it. An electric fence would not withstand a determined herd of animals wanting to trample it. Metaphors are often misleading. The issue in the future is would the Bank see the need to use its new powers at the appropriate time?  Would they turn the current on when things seem to be going well? The problem in 2006-7 was not a lack of power to rein in excess banking risk, but an unwillingness or inability to see the need to do it. Can you really see in the next boom the Governor going to a very powerful, profitable and successful world bank in London and telling them, he will force break up or better segregation? Why wouldn’t they just change domicile?

              Meanwhile, close at home and largely owned by the taxpayer lies the damaged RBS – becalmed  because it still cannot get rid of the taxpayer shareholding and rarely makes an overall profit. If ever there were a candidiate for break up, there is one. The government could agree a break up with the minority shareholders. The UK needs more soundly financed competitive clearing banks to finance a recovery. The government owns many of the components to do that in RBS. Why doesn’t it get on with it before it is too late to improve the economy before the next General Election?

              It is one thing for an underemployed and talented backbencher to ponder an assault on the leadership in  thirteen years time when he thinks Mr Cameron might retire (“He should be leader for 20 years” says Mr Afriyie). Mr Afriyie has confirmed that” he loves Mr Cameron” and was only thinking of running much later when there is a vacancy. The Afriyie plot has been much exaggerated, and misinterpreted.  He was not running around asking people like me to sign letters to get rid of the Leader. He has told me personally he is a Cameron fan.

           It is altogether another thing to read that the supporters of a leading and well respected Cabinet Minister, the Home Secretary, are getting ready for a Leadership camapign as if there might be one along any day soon.(Daily Mail Saturday)

           I assume Mrs May plays  no part of this speculation. I recommend she calls in those keen MP supporters of hers who have started to brief the press in her favour and tell them they are no friends of hers or the government’s. She has a wise friend or two in Downing Street who would tell her just how quickly things like this can get out of control if you allow senior MPs or whoever to brief like this.  This is not the right time for such moves. Mr Cameron needs the full support of his Cabinet to do more to improve the economy, and to fight the local elections in May for the party he leads. Dissension now before important elections is a particularly bad idea. He and the Chancellor need to be given every encouragement to take the measures needed to see a resumption of decent growth.

               There were mutterings at the end of last year and before Mr Cameron made his big Europe speech in January. A few colleagues asked me what they should do – should they write a letter demanding a vote on Mr Cameron’s tenure? I explained I was not going to do that. I thought Mr Cameron would change the party’s policy on the EU in a way we wanted, and he should be given every chance to do so.  I recommended that they waited to see Mr Cameron’s EU speech. It was clear the party needed a new policy on the EU it could believe in. It regarded a referendum, and the hope of a new relationship under a Conservative government, as essential first steps.

              Many in the party liked the new policy on the EU. So much so, that the only criticism is can we get on with it more quickly? I read that MP Mr Baron next week will launch a Bill to try to speed up the legislation on the referendum. I would urge my colleagues to get behind the Leader, and give him every support in the forthcoming local elections.  Attacking the Leader now is not the way to bring about the improvements people want. It will give encouragement to the federalist parties, Labour and the Lib Dems. Far from making a referendum more likely, it will encourage the Federalist parties to think they can get  away without offering one. It will divert attention from the essential task of mending the economy and reforming the public services so we can afford them.

          The Coalition planned to raise an extra £11,500 from the average family of   four by 2014-15, compared to 2009-10. (June 2010 budget)

           They needed all this extra tax to cut the deficit, as Labour had been spending so much more than it collected in revenue.The country cannot carry on living on a rising overdraft for ever. They also had  to pay for the extra £6000 of  current  public spending for every family of four that the Coalition itself planned. Even allowing for the cuts in capital spending, the Coalition needed a big tax rise.

         The Coalition decided to live with Labour’s proposed rise from 40% to 50% on higher incomes. They increased Capital Gains Tax from Labour’s sensible 18% to 28%. They increased Stamp Duty on property. They raised VAT to 20%.

        The only one of these tax rises that produced some of  the extra revenue they sought was the increase in VAT. The higher rate of Income Tax accelerated the departure and the decline of high end incomes in the UK, and revenue fell sharply.  The new CGT rate is forecast to yield lower receipts this year. The high end Stamp Duty has led to a big slowdown in sales of expensive flats and houses around the £2m plus mark in Central London, hitting revenues and mobility compared to estimate.

        The government has stuck to its current spending plans. The going gets tougher on these next year, when there are smaller increases than in the first three years. It is trying to buttress its falling tax revenue compared to forecast by exhortation and loophole closing. It is seeking the elusive extra billions from rich people and companies that all hard up governments seek.

         On Friday I was reminded by Andrew Neil on the BBC Politics programme just how far and fast the UK Tax Code has expanded under this government. As smart accountants, lawyers, tax advisers and Finance Directors find new legal ways round the tax code, so the Treasury hits back with yet more loophole closing measures.

        If you want to collect more tax there is a simple motto you need to follow – fewer breaks and lower rates. Higher rates and more breaks is never going to bring in enough revenue for this high spending state. It is merely going to produce an ever bigger and more complex tax code. It creates more division and bitterness within the society,as groups squabble over whether everyone is paying enough tax. The richest are the ones who can afford to leave altogether, or who can rearrange their affairs to avoid tax legally whatever the regime.

          How many EU laws and decisions does it take before people admit we no longer are self governing?  This was the central question I asked during the recent Parliamentary debate. Law by law, Directive by Directive, decision by decision, our democracy is being taken away.

            Of course Parliament remains sovereign for the one single reason – it could always repeal or amend  the 1972 European Communities Act. The day  that option becomes impossible or too remote for anyone serious to contemplate, then we have to accept that sovereignty has passed from our islands to Brussels. An In/Out referndum promised by a party that could win a General Election keeps that idea very much alive as an option.

           This same process of democratic erosion and centralisation has affected the other member states as well as the UK. Why is it only the UK that worries about it? There are a variety of reaons.

           On Thursday evening I was on a panel answering questions about the EU economies  and the Euro. The Moderator when asking the first question characterised it as one needing a European to answer first. She passed it to the Dutchman on the panel, saying he was European. It was as revealing as the moment as when I was asked if I had visited Europe recently by someone who thought I was too Eurosceptic. Even the most Euroenthusiast of UK citizens do not automatically see themselves as Europeans. They see Dutch, German and French people as Europeans, but not us Brits. The EEC was sold as a trade agreement, and so it remains in many British minds. It is not a warm feeeling in most British hearts.

          UK history is different from the history of so many continental countries. Invasion and occupation by Italians and French was two millenia and one millenium ago. In more recent history the Uk has defended her liberties and defeated continental aggressors, be they Spanish, French or German. As a result we do not fear the large neighbours as so many EU countries do. We also think that post 1945 the main powers on the continent are peace loving, and well behaved thanks to NATO and the US powerful watch. We do not think another western European war is at all possible, with or without the EU.

            The keenest members of the EU are the poorer countries. They join to get their living standards up closer to the rest. They join to benefit from subsidies and transfers to them from the richer countries. It is a transfer or subsidy union. They welcome EU laws, because they anticipate the EU law will be better and more consistent than the law codes they were used to under Russian tyranny or the rule of the Generals.

             The UK has to pay many of the bills for the subsidies, so the subsidy union is not popular here. The UK has plenty of laws of its own, and knows it can always change governments and lawmakers if it does not like its domestic laws. It sees EU interference in the lawmaking process as undemocratic and annoying.

             The UK is a gobally engaged island. It is a dynamic place that grasps the huge changes that the rise of Asia and the dominance of the internet are causing. It means we will always have a different view of the EU from the rest. It also means we will not join their monetary, fiscal and political union. We do need a new relationship as soon  as  possible.

The new Governor of the Bank will have unprecedented powers to direct and regulate the UK banking and monetary system. He will need to work closely with the government of the day, so that Bank policy is complementary to fiscal policy and to the government’s legislative priorities. He will need to shape and lead the team at the Bank to use the new powers wisely, in the national interest. He will need to decide what to do with the large QE programme he inherits, and what to do about the malfunctioning banks still with large state shareholdings.

Let us hope the new Governor is someone with good judgement about the state of the UK economy and its position in the world. I suggest there are two crucial tests of an individual’s past judgement. Did they realise the Exchange Rate Mechanism would be damaging to the UK? Did they understand how tying the pound to the DM in the early days would lead to faster inflation, and then the opposite once the inflationary effects undermined confidence in sterling? And did they read the 2005-10 cycle correctly? Did they understand that credit and money was too loose in the period up to 2007, and did they understand that this was corrected too abruptly in 2007-8, jeopardising the liquidity and even the solvency of some banks?

Did Mr Carney see the problems with ERM membership prior to our entry, and the dangers of DM shadowing. Did he think the previous policy of money targeting , as the German Central Bank did, was a safer way of controlling events? Did he argue for tighter monetary control with higher interest rates in the boom phase prior to 2007, and argue for a more rapid injection of liquidity in 2007-8? This approach should be allied to controlled administration for any bank that could not meet its obligations, is something that has now been adopted as policy for future crises. Clearly when he took over as Canada’s Central Bank Governor he did understand the need for easier money. Let us hope he has studied the unhappy monetary history of the UK and formed the right conclusions from the torrid and bumpy ride the Establishment gave us, both through its espousal of the ERM and its encouragement of Boom/Bust in the noughties.

Today the priority is to assist the government in its wish to promote faster growth. This in turn will help bring the budget deficit down. The Bank needs to relax immediate controls over bank capital and cash, whilst maintaining a more prudent level than in the period prior to 2007 to assist the recovery. There will be time to demand higher levels of cash and capital once the recovery is underway and as banks generate better profits. The Bank also needs to ensure its current policies of QE and Funding for lending are well designed to maximise the beneficial impact of these extraordinary interventions.

 RBS published some interesting figures on the US. Over the last twelve quarters US public spending has fallen in ten of them, making a total decline of 6% over the period. Despite or because of this tightening of the spending stance, the US economy has grown overall  by 4.8%.

In the UK the last eleven  quarters (since the Coalition arrived)  have seen a significant rise in real public spending but only a 0.4% increase in output. In most quarters in the UK the public sector has made a positive contribution to output growth.

Those who argue the US has grown faster because Mr Obama has avoided austerity whilst the Coalition has gone for it should look again at the figures. Mr Obama has not increased Federal spending by sufficient to offset state spending declines, so the US has been much tougher on public spending overall than has the UK.  Why haven’t the US cuts in spending led to economic decline, as some argue here?

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I am sorry for any inconvenience, but am told we will have a better service thereafter. I will of course publish a daily blog tomorrow as soon as possible.