Month: March 2009

The meeting of the President and the Prime Minister at the G20 is a meeting of the new Masters of the Universe. Between them they wish to gear up the world economy with unprecedented levels of public borrowing on both sides of the Atlantic. They will privately chide the Europeans for not doing more of the same.

The President’s levered fund to buy toxic bank debt looks very like the old hedge fund model. The Prime Minister is stress testing UK public finances by adding as many wobbly financial institutions as possible to the nation’s balance sheet to see how much stretch it can take.

Both these men seem to have learned from the excesses of the private sector.They think the message is that it’s fun to borrow, and a good idea to gear yourself beyond the levels of normal prudence. They have obviously been dying to run a bank or three and to have a go running their very own hedge funds with public money.

Now the President favours a version of the pre-pack bankruptcy and newco for a couple of struggling car makers. Alternatively, he subscribes to the theory that if you merge one weak company with another weak company you create a strong one – just as Mr Brown thought if you merged an OK bank with a weak bank you would create a strong bank when he merged LLoyds and HBOS.

I fear they have learned the wrong lessons from the past. You cannot cure a crisis brought on by overborrowing, by borrowing more. You cannot create strong companies by merging weak one. We need a new more prudent model for finance – and that applies to governments as well as to banks and investment institutions.

It is amazing that some want to try to make the story “leaks” from the Commons fees office when MPs expenses are available for their annual viewing. Whilst leaking information is not a good way to behave for any employee, these are hardly state secrets that need to be held back. All this information is going to be made available to the public under Freedom of Information requests soon anyway. The important issue is not disclosure, but whether each and every claim is both legal under the rules, and defensible in the court of public opinion which will judge these things.

Each party leader moved quickly yesterday to demand reform of the system. They can all see that some of the individual items claimed by MPs are too easy to ridicule or to challenge, alongside the more fundamental questions over some MPs choice of second home and designation of primary residence.

Looking at the overall figures it is the staff and office costs that represent the most serious chunk of public spending, but these only seem to get scrutinised if the MP has chosen to employ a family member.

Is £93 million good value? No it’s not. Could it be less? Yes it could. Is it going to be? Probably not. Public sector reform under this government normally takes a long time and costs more. Are these costs out of line with the rest of the public sector? No they are not. Indeed, the salaries and expenses at the top of quangoland and local government make this all look like small beer. It’s just that people have heard of the perpetrators, and feel they have some chance of making them accountable becuase they have to stand for re-election, unlike the executive public sector bosses.

(In the interests of disclosure my total expenses including travel were £106,000 compared to the average of £146,000 and the highest of £187,334)

Today’s news that Nationwide will take over the deposits, staff, offices and good mortgages of the Dunfermline Building Society presumably requires substantial taxpayer payment or guarantee, just as the Bradford and Bingley one did. Once again I can find no mention of the sum of money to be handed to Nationwide as dowry to pay for the deposits minus what mortgages they are taking. The Bank of England website skates over that uncomfortable truth,and the Treasury website ignores the whole topic. Alex Salmond thinks there is a £1 billion Treasury payment to go with the assets and liabilities passing to Nationwide.

What we do know is the taxpayer is taking on the social housing loans, to be held in a “bridge bank” owned by the Bank of England on our behalf. And what we also know is the Labour supporters are on the airwaves already, telling us the Scottish government was not big enough and rich enough to “save” Dunfermline, which required the government of the UK to come in with the resource to sort it out.

We can expect a continuing spat between Mr Salmond, arguing it would have been cheaper to have subsidised the original entity, and the government, telling us the losses were potentially too large. They claim it will be cheaper to put the bad bits into Adminsitration and let Nationwide have the good bits with a dowry.

Once again the taxpayer – and the good institutions that stand behind the Compensation scheme – will pick up the bill, however big it may prove. Supporters and members of mutuals, ever willing to take the better interest rates or bonuses in the good days, will not of course be willing to put up the capital to pay the losses at their Society, now the management they chose has made such a mess. That is one of the weaknesses of the mutual model. Shareholders in banks have often been prepared to put in more share capital to pay their losses.

Most of us know there are limits to what we can afford. We manage our daily budgets with an eye on our income. We know that the taxman has the right to grab loads of money first. We know we have to pay the mortgage and whatever ransom payment the local Council and the utility companies demand. We concentrate on trying to balance the rest of the budget so we don’t end up with a large overdraft or credit card debt.

Ministers in this government think they can behave totally differently when it comes to spending the nation’s money. This week-end there has been no question about whether the taxpayer can afford to take on risks from yet another mortgage bank, just an attempt to spin that this time will be cheaper because it is “not a bail out”.

Meanwhile in their personal conduct some ministers show the same lack of respect for taxpayers money. It’s not just the questionable claims for their own living expenses, which attract so much attention. It is the whole army of extra “Parliamentary” assistants, case workers, secretaries and the like charged to the taxpayer, along with the massive expansion of the civil service and quangoland. The biggest increases in the costs of MPs have come from a big expansion in the numbers and pay bill of Parliamentary staff, and the new army of auditors and box tickers that have been employed to chronicle it all. It is all symptomatic of a governing party which thinks public money grows on trees, and they own the orchard. Or maybe now it’s just the result of their discovery that printing money takes the waiting out of wanting.

Parliament has become a perfect mirror to Labour’s public sector. More cost, less delivery.

On Wednesday I was asked to write an article on how we got into the current economic mess by the Daily telegraph. They told me they wanted it for Monday’s paper. On Friday after I had written it they changed their minds and said they did not want a piece about that after all. I thought I would share it with you here:

A couple of years ago many people thought all was well with the world. The economy was no longer an issue. Even some Conservatives would tell me they thought Gordon Brown had done a pretty good job, and that Bank of England “independence” was excellent. Endless repetition of the propaganda, ”We have abolished boom and bust”, lulled many into false security.

Two years on and how different it all looks. Even the government has given up repeating the boom and bust mantra, realising hubris came before a tumble. Gordon Brown did not make the Bank of England “independent”. He gutted and filleted it, taking away its duty to manage the government’s own debt, and removing the responsibility to supervise the banks.

He put his own people on the Monetary Policy Committee. He changed its target in 2003 so it kept interest rates down prior to the 2005 election. The MPC failed to hit the inflation target, allowing some prices to soar. It ignored the sharp rises in house and property prices, the fall in the pound and the commodity cycle.

We have lived through a colossal debt binge. The UK’s growth rate was flattered because the authorities helped turbo charge the debt. Our economy created hundreds of thousands of jobs for new migrants, because they opened our borders at the same time as opening the debt taps. We sucked in new people, hot money, and lots of financial business based on more and more leverage.

Monetary policy lurched from too hot to too cold. Just like a person in an unfamiliar shower, the authorities hurled the controls from hot to cold and now back to super hot again without waiting for the water temperature to settle down. They never found the happy mean.

Today the government wishes to blame the bankers. The Prime Minister tells us he wanted an international clampdown on too much credit, but unfortunately other world leaders did not share his foresight. This is difficult to believe, when we consider just how big a contribution the government made to excessive debt.

In the glory years the government was not more cautious than the banks. It was egging them on. The Treasury decided to finance ever more projects they could not afford, by ever dearer never never schemes. We had various types of Private Finance Initiative, and then moved on to Public Private Partnerships. The government flexed the national plastic, took out the biggest mortgage possible, drew down a personal loan and topped it all up with additional credit cards. That was all before the downturn and the reflationary packages.

It never warned the banks to lend less. It wanted to promote home ownership, so it encouraged banks to lend to people on lower incomes who might find paying the mortgage more difficult. It was a keen advocate of debt based major investment projects. The Chancellor, the Head of the cumbersome tripartite regulatory structure, never called the regulators in for a review. He did not ask them to require more bank capital and cash to cool things down a bit. Far from controlling the fire, the government was busily stoking it up.

The crisis that struck was easy to forecast. In the Economic Policy Review I helped write in the summer of 2007, we underlined the weakness of the financial regulatory system and said it would not be able to handle a crisis. I warned that monetary policy had lurched from too easy to tight. There was bound to be a crash.

Things got worse as the authorities displayed monumental incompetence in the face of gravely weakened banks. In the late summer of 2007 they kept the markets starved of cash as the wholesale money markets seized up. Banks like Northern Rock were bound to come to grief in such circumstances. Some of us told the authorities to loosen money so these banks could survive. Instead Chancellor and Governor lectured the banks on “moral hazard” and refused to ease the markets.

The run on the Rock was the result. A £25 billion limited term loan against security was all it needed to prevent the run on the Rock. Alternatively modest sums by modern standards supplied to the money markets may well have stabilised the mortgage banks at risk. Instead the authorities opted for disaster, and ended up guaranteeing all the deposits of the entire banking system. In addition they nationalised the Rock, putting the taxpayer at risk for much more than they needed, and ensuring big taxpayer losses from their new bank.

You might have thought that the Rock experience would have led them to take urgent and private action to sort out the other and larger banks in the system. Instead the authorities wasted the next year. They should have invited in each of the big banks in turn for a private review. They should have told them they wanted them to strengthen their balance sheets. They could have given them a period of months to do so. In 2007 all the main banks had options. They could have sold assets and subsidiaries to raise money. They could have made major issues of shares to raise new capital. They could have cut their bloated costs. They could still have securitised more of their loans, passing the risks to more patient holders.

Instead the authorities let matters drift, until the autumn of 2008. Then, inexplicably, they demanded more capital for each of the banks. They did so in public, creating a loss of confidence and facing banks with an impossible timetable to meet the new capital requirements. The catastrophic result was to put the taxpayer at risk for both RBS and HBOS. Worse still, the authorities helped broker the disastrous merger of Lloyds with HBOS, undermining a relatively strong bank needlessly, and putting the taxpayer behind Lloyds as well.

It would be difficult to imagine more blunders. It was almost as if they wanted to end up nationalising most of the banks. Barclays was spun against for daring to find private sector solutions to the new capital requirements. We are living through a nightmare.

Today the authorities are still making several major errors. They seem to believe the credit of the state is inexhaustible. They have been going around trying to find more liabilities to take on. “We will do whatever it takes” includes more borrowing to pay for the IMF, for eastern Europe, the developing world and for the ailing UK economy. They have chosen to ignore the warnings of those of us who think there are limits to how much a state can borrow at sensible interest rates. The little wobble in the government bond market last week should be a warning to them.

They seem to think that transferring problem loans and other bad investments from banks to the taxpayer will solve the problem. It doesn’t. It means the taxpayer has to pay the losses. You still need to manage each and every bad loan and dodgy investment, with a view to getting back what you can.

They seem to believe that the answer to excessive credit in the private sector, is to indulge in excessive credit in the public sector. Surely the lesson from 2003-7 is that borrowing too much cannot be sustained. Why therefore should we borrow more? Of course we need to look after people thrown out of work, but we cannot afford to subsidise the banks to keep them in bonuses.

They also seem to believe that spending more in the public sector is “reflationary”. It may not be as reflationary as they hope. If the extra spending is paid for by higher taxes, as with the 45p income tax increase, it means less spending in the private sector which offsets some of the extra public spending . If it leads to fewer people staying in the UK and running businesses here, that too reduces demand. If the extra spending is paid for by borrowing more, that cuts private spending. If they issue more National Savings the people who buy them cannot then spend that money. They might opt for the security of a savings bond instead of the pleasure of a new car.

They need to control their deficit and to get much tougher with the banks. The state’s banks are cuckoos in the public spending nest. They need to be slimmed down and sorted out quickly, or else they will topple the public finances.

Listening to the Chancellor he apparently needs to be careful when bailing out an institution that just loses a few tens of millions, whereas he was remarkably careless when bailing out RBS, an institution that lost £24 billion last year.

Beneath all that spin, it sounds as if the taxpayer is still going to end up owning or guranteeing the bad loans and poor investments Dunfermline has made. The poor old taxpayer may have to to carry the can, so it is just spin and positioning. Attempts to make out they lost in US sub prime seem to be rebounding, as it looks as if the losses have come from British business made by a Scottish institution under the not very watchful eye of the British Regulator.

PS: It is unusual for third parties to be discussing in public what to do with a Building Society or other institution against the wishes of that institution and without talking to the Chairman of it first. The government needs to make sure that what it is saying and doing either has approval of the members of the Society or is covered by some regulatory power they intend to use. This would be best stated openly so the Institution itself understands what is going on and can then co-operate with the regulator.

The government will spin that there is no bail out for this Building Society. Yet we learn in the smaller print that taxpayers are likely to end up owning the bad debts and the dodgy assets, or at least guaranteeing the deposits. So it’s not dun bailing – it’s more bailing.

I guess they have chosen to spin it this way for three reasons. One, they must know the rest of us are fed up with bailing out rich bankers and badly run institutions. Two, this one is in Mr Brown’s backyard, so they don’t want it to look cosy. Three, this one is a Building Society, a mutual. Labour has been telling us the mutuals are great, unlike the Societies that went to market.

So it’s not dun lying then. They’ve been wrong about mutuals as well. We now can see that they failed to regulate the cash and capital of Scottish Building Societies, mutuals close to home, just as much as they failed to regulate the cash and capital of demutualised companies.

Last night the BBC invited me to debate the G20 with Derek Draper. Like the rest of Labour he seemed unable to grasp the point that they should have regulated the risk of the mortgage banks, at a time when they introduced all sorts of new mortgage regulations which failed to stop a single dodgy mortgage. Mr Draper’s inability to understand this basic point, just as Ministers fail to grasp it, meant most of the interview was wrecked. You cannot have an intelligent conversation with these people, because all they want to do is to miss the point and bash the Tories.

I have always wanted tough regulation of the mortgage and other banks to make sure they have enough cash and capital for the loans they have advanced – pity they didn’t do. Their failure to do so is going to cost taxpayers a massive sum, as yet another Scottish financial institution struggles to the Treasury and seems to think it has a divine right to taxpayers money when it’s in trouble. If they had regulated these banks properly, as previous governemnts did, they would not be needing taxpayer support or taxpayer buy up of the toxic debts. Tougher regulation of cash and capital was what we were calling for well before the crisis hit.

I have been chided for daring to write about this on my blog. You all understand only too well the Labour spin machine, and why this story suited the BBC.

It’s a nice irony that you have now all done what I did – written about something that is a non story – in larger numbers than write about most of my pieces on the economic collapse.

I was telephoned and Thursday and invited onto the Today programme for Saturday to discuss the successes and failures of the Govvernor of the Bank of England . I readily accepted and said I would adjust my Saturday morning to get to a studio.
On Friday evening they left a message to say I would no longer be requried.

So I listened this morning, to hear two others agreeing in a technical discussion about quantitative easing. Both said they thought printing money to buy government debt was a good idea. Both said they thought the Governor had made a mess of it, by his recent comments. The interviewer got frustrated that the interview was so technical, punctuated by “quantitative easing” “driving down long term interest rates” and “corporate and government bonds” instead of talking about the rates we have to pay to borrow from the banks, the absence of interest on our savings, printing money and the persistent inflation in the prices of food and other imports.

I guess the reason I was not invited on was they did not like my viewpoint. On the Thursday they wanted a long conversation to find out what I thought about the current position. So I will share it with you here, as it was kept off the airwaves.(This is a reconstruction rather than a transcript)

BBC Question: What do you think of the performance of this Governor and the Bank?
Answer: The Bank has failed in its two given tasks, to prevent the collapse of banks and to keep CPI price rises down to 2%. Never before has the Bank presided over the near collapse of five important banks, all rescued by large injections of public money. Inflation is still 60% above the target given, despite a severe downturn in activity and substantial unused plant, equipment and labour.

Not all of this should be placed on the shoulders of the Governor. As he has pointed out, the credit boom which led to too many price increases was partly created by the government’s decision to switch inflation targets to keep interest rates down prior to the 2005 election.

The Bank of England was stripped of its powers to supervise the banks day to day in 1997, which made it much more difficult for them to understand the degree of banking risk built up in the credit bubble and to take action to stop it.

BBC Question: Was the Governor right to intervene on fiscal policy as he did this week?
Answer. He was right about the substance of the issue. More spending and borrowing now would be wrong for the UK economy and could damage the government’s ability to raise money and lead to further weakening of the pound. It is a pity he has to do it in public, but it is a sign of how the system is not working well that he feels the need to. There are clearly tensions at the top, when these things should be sorted out in private.

It is clearly the BBC’s new tactic to waste my time telling them my thoughts only to discard them. Last week the BBC wanted me to make a film of my views on how to sort the banks out. I cleared my diary for the Friday afternoon, organised a local business who would help us set out the case in tele language, and laid on a windows and conservatory showroom as the film set with script based around breaking glass and difficult times in the building industry. They came, they filmed, they said it was great – and then they failed to show it!