CentreRight

It was James Carville, President Clinton's advisor, who famously articulated how he was stunned by the power the bond market had over governments: "I used to think if there was reincarnation, I wanted to come back as the President or the Pope or a .400 baseball hitter. But now I want to come back as the bond market. You can intimidate everyone." For those who doubted in any way the power he attributed to the bond market the events that may now unfold, after yesterdays shocking budget, should put paid to that. Its the bond market, not this shambles of a government, that will now decide the destiny of our country.

Yesterday Darling announced future borrowing levels only usually associated with wars. He stated that the budget deficit would equal 12.4% and 11.9% of GDP this year and the next, not only the highest of any leading economy, but higher than most developing nations such as Indonesia and Brazil. In short, such deficits can only be paid for by very strong future growth, higher taxes, drastic spending cuts or by printing money. Darling seems to be relying on future growth - but does not have an once of credibility. In just 6 months, he changed his growth forecasrt drastically. Not a single independent economist accepts the forecasts he made yesterday.

The government has relied on the benevolence of the bond market. We saw a failed auction already a few weeks back. Yesterday, Gilt yields shot back up to pre-QE levels.

I hope I'm wrong, but I think the bond market is about to demonstrate its awesome power.

Yesterday evening I was thinking that I must pen a quick blog on the AIG bonus fiasco as soon as I can, and was a admittedly a little concerned that Andrew Lilico would beat me to it. Then I remembered...he’s no longer blogging for CH! I must admit, I will miss his missives, and wish him all the best with his new role at PX.

Now, to the bonus fiasco in the US. It's very rare that when legislators pass laws with haste (especially rage filled haste), that such laws are sensible, practical or reasonable.  So it was with the first reading of a special tax bill that the US House passed yesterday – which, if signed into law – will impose a 90% punitive surtax (that’s a tax on top of existing taxes) on any income above $250,000 paid to an employee of an institution that has been the recipient of US$5bn or more of government money. If there ever was a stupid law passed anywhere in the developed world since the onset of the global recession, this is it. US legislators, Democrat and Republican alike, far from behaving like representatives of a modern, stable democracy, have descended to the antics of a banana republic. It's the McCarthy witch hunt era all over again.

This law will not only impact institutions that are already on their knees like AIG, Citibank and Bank of America Merrill Lynch, but also the ones just about still standing, such as Goldman Sachs and JP Morgan. What was the point of pumping government cash into these banks, only to cripple them right after? There is no doubt that these institutions will now do whatever they can to repay the government as early as possible, instead of keeping the extra capital until things stabilised. If the legislators were going to do this, what was the point of rescuing the banks in the first place? Better to have let them gone bust, as I have argued in the past, through a pre-packaged type bankruptcy arrangement. 

Spot the odd one out: a colossal banking crisis, soaring unemployment, global depression concerns, rising jihadist terrorism, Eastern Europe on the brink and, the quality of coffee at the European Commission.

You would hope that EU Commissioners in Brussels were spending their time and our money on some of the grave problems facing Europe today, but no – instead their spending it on 21 new coffee machines costing £4,400 each (pictured). I doesn’t stop there. Not happy with the quality of coffee that they were getting from the machines, the EU Commission has now also offered training for the staff of each Commissioner on how to make that perfect espresso.

When we’re back in power lets please do something to reform an utterly discredited EU.

"The most expensive cocktail party in history" is how Michael Fallon rightly characterised the discussion between Gordon Brown and Sir Victor Blank, Chairman of Lloyds Banking Group, over drinks in September of last year.  It was at this cocktail party, just a few days after the collapse of Lehman Brothers, that Brown strongly urged Blank to have Lloyds absorb HBOS (which was on the verge of collapse).  Brown dangled the carrot of waiving anti-competition law.  With Brown breathing down thier backs, Blank and his team spent less than a week looking at the books of HBOS, and were effectively left with little choice by the government.  It was a decision that would lead to its own collapse within months and, eventually, will contribute to the collapse of Brown's government.

Brown was the father of the tragedy at Lloyds - responsible for taking a relatively decent bank that avoided many of the policy mistakes of RBS and HBOS, and forcing it into a shot-gun marriage of death.  Lloyds too has now effectively collapsed with the government taking a majority stake of up to 77%.

"Britain says open to talks with Lebanon's Hezbollah".

I wonder what message Hamas will take from this?

What on earth processed the Republican leadership (assuming there is still is  leadership) to pick Gov Bobby Jindal to deliver its response to Obama's Congressional address on Tuesday? Obama set out a grand socialist plan for the largest peace-time expansion of the US government since WWII, with so much low hanging fruit for the GOP to pick off, and Jindal starts by giving his bio and then talking about how the Republicans expertly dealt with Hurricane Katrina! Unbelievable!  And what's with the grin and talking to the American people as though they command the vocabulary skills of four-year olds?

Big mistake by the GOP leadership.  Next time you get a such a big opportunity find a guy that can connect with the people, has integrity, experience and gut conservative instincts....someone like, wait for it....John McCain.  Yes, really.

From today's Times:

"Couples who have more than two children are being “irresponsible” by creating an unbearable burden on the environment, the government’s green adviser has warned.

Jonathon Porritt, who chairs the government’s Sustainable Development Commission, says curbing population growth through contraception and abortion must be at the heart of policies to fight global warming. He says political leaders and green campaigners should stop dodging the issue of environmental harm caused by an expanding population.

“I am unapologetic about asking people to connect up their own responsibility for their total environmental footprint and how they decide to procreate and how many children they think are appropriate,” Porritt said.

“I think we will work our way towards a position that says that having more than two children is irresponsible. It is the ghost at the table. We have all these big issues that everybody is looking at and then you don’t really hear anyone say the “p” word.”

What right does the state have in restricting the number of children we choose to have? None whatsoever in my opinion.

I think that Hamas, not Israel, was responsible for the destruction in Gaza. It was Hamas, not Israel, that demonstrated a callous disregard for innocent life.

But, despite this, I still think that the BBC SHOULD have broadcast the DEC Gaza appeal. Whatever you view on causes of the conflict, there is no question that hundreds on innocent Palestinians need immediate humanitarian help. The thought of children in need is especially painful.

If the tables were turned and, god forbid, Hamas had killed hundreds of Israeli civilians, do you not think that the BBC should have broadcast an appeal on their behalf? I do.

What happened to compassionate conservatism?

First it was Northern Rock, and now it looks like RBS, Lloyds/HBOS and Barclays will follow.

We’ve become used to hearing how these banks are “too big fail”, but plainly that’s utter rubbish.  They are, in fact, too big to save.  Our banks have vastly outgrown the size of their domestic economy and – no matter how you cut the numbers – the UK cannot, and should not, nationalise them.

Yes, banks have a critical economic role to play in our economy.  But, no, that does not mean that the state should take full ownership and control of them when they fail to function properly – as nationalisation will only exacerbate the problem, delaying our eventual economic recovery for years.

The Euro is totally spooked today on unconfirmed reports that the Irish PM, Brian Cowen, said in Tokyo today that Ireland may have to go to the IMF for a bail out if its economic situation continues to worsen. Although, within hours of the initial news report, the Irish government swiftly denied that Cowen had said this, the damage is already largely done - the markets are concluding that there is no smoke without fire. This brings me to an interesting question: is this the beginning of the end of the Euro?

Although many Save the Pound proponents have been driven largely by a patriotic arguments, I have always felt it sufficient to be against the Euro on purely economic grounds: each European economy is different, so each needs its own monetary policy to best meet its needs...simple.

Now, after a decade of the Euro, we are seeing its real test. Eurozone economies are collapsing fast, led by Ireland, Spain, Portugal and Greece – yet none of them have the ability to respond with lower interest rates, currency depreciation or even fiscal policy (given the requirement that they cannot have a budget deficit exceeding 3% of GDP). As a result, they are in a far tougher spot than the UK.

Personally I’m not saying the Euro’s days are over, but its most certainly being tested to the limit. Thank goodness we stayed out.

I would be interested in what readers think...are we nearing the end of the Euro?

Upon the start of the New Year, my (easy) prediction is that the first economic milestone we’ll see is the Pound at parity with Euro, probably sometime next week. There are some Euro enthusiasts that think that Sterling’s sharp decline against the Euro (to its lowest level since the Euro’s emergence exactly 10 years ago) is a vindication of their views. I think absolutely not.

Although there is no doubt that the economic backdrop leading to Sterlings sharp decline is particularly bad, the fact that we are alone amongst major European economies in enjoying an independent currency means that our economy can emerge out of this nasty recession far quicker than had we joined Euro. With Euro membership, we would not have avoided the recession, but would have had our arms tied behind our backs in dealing with it.

So, on the tenth anniversary of the Euro, Slovakia has decided to join the Euro, but here’s to another 10 years (and beyond) of the Pound staying independent.

In a free country like ours, broadcasters are rightly free to air more or less what they like.  But one can still take huge offence to the vile President of Iran, Mahmoud Ahmadinejad, being given the opportunity by Channel 4 to give an “Alternative Christmas Message” to the British people on Christmas Day.

Ahmadinejad is a senior leader of a regime that denies its own people the most basic freedoms and has vowed to wipe out Israel in his hate filled speeches.

Channel 4 should be utterly ashamed of itself.

Two months ago terrorists attacked the Marriot hotel in Islamabad killing 57 people, and today they unleash an even more deadlier attack on hotels in Mumbai, with a reported death toll of over 100 as I write. Our heart goes out to India and her people in her hour of need.

In August, upon the 61st anniversary of independent India, I wrote that India is our greatest and most important ally amongst developing nations. We must do all we can to help her hunt down the perpetrators of these most heinous acts, and then help her heal the wounds.

We are stand united in the global war on terror.

Last month I penned a scenario (“The hand of history is on Cameron’s Shoulder”) on our economy that that I hoped was going to be wrong.  Since that time, the economic outlook continues to worsen, and that’s worrying me tremendously.

Stock markets around the world have continued falling sharply, bond markets (which are about 5 times the size of all stock markets in the world combined) have virtually ceased trading, banks around the world have stopped lending, the US government has canned its dodgy asset repurchase program (the so called TARP) because its already spent the cash on nationalising its banks (and its all but decided to nationalise its car companies too).

Here at home, we have seen the largest quarterly rise in unemployment benefit claims and the largest quarterly rise in redundancies since records began; the first fall in average producer prices in history; a further collapse in sterling (to $1.48!), the largest fall in average house prices in a quarter....the list can go on and on...each economic fact being the largest, first, quickest.....all in the worst possible direction.  But here’s the thing......we ain’t seen nothing yet.  Unless we all take stock of what’s really happening and where we are potentially heading right now, and take proper unprecedented action, we are sleepwalking into worst economic depression in history.  We need the right type of policy response from the government, and the and the right action and attitude from the Conservatives.

Now that the pollsters have been proved right, and John McCain has made his concession speech (a very gracious speech indeed, which reminds you yet again of his strength of character), what can we conservatives reasonably hope for from President Obama?

Two of my biggest hopes:

On the economy: Obama treats the unprecedented government intervention in the markets as a necessary evil required to save capitalism, and that he works hard to cut the levels of intervention as soon as possible.  He does not go crazy with new regulations on the financial industry and that he does not raise trade barriers by as much as he indicated on the campaign trail.

On defense and national security: Obama keeps US forces and diplomacy actively engaged in the world's trouble spots, and does not leave Iraq in a hurry.  He capitalises on the feeling of goodwill he has engendered in many parts of the world to help persuade other nations to more actively join the global war on terror.

Let's hope that President Obama is not all gloom and doom for conservatives.

Nice piece by Bill Kristol in yesterday's NY Times (Hey, liberals, don't worry) where he explains, as a compassionate conservative, that he feels for his liberal friends should McCain win today.

Kristol goes on to list five reasons why liberals "should be cheerful" about a McCain victory (he's an underdog, anti-establishment, he's not George Bush, it will be a victory for freedom and liberals can rally around a new hate figure!).

As Kristol concludes, on the off-chance that Obama wins I hope there are some compassionate liberals out there that will spare a thought for us conservatives!

Although largely anticipated, Powell's endorsement last night of Obama could have a significant effect on floating voters.  It may enhance Obama's standing to be commander in chief. 

Powell also said that Palin was a poor choice for VP, and questioned McCain's judgement on this - a view that is now becoming widespread amongst many conservative commentators (except Louise Bagshawe of course).

Newt Gingrich has just said on ABC's "This Week" program that the endorsement is significant: "What that just did in one sound-bite -- and I assume that sound-bite will end up in an ad -- is it eliminated the experience argument,'' Gingrich said. ``How are you going to say the former chairman of the Joint Chiefs, former national security adviser, former [Republican] secretary of state was taken in?''  Watch Gingrich here.

Although the Obama Express is looking unstoppable, I am still in the camp that thinks it ain't over till its over.

Let me say upfront, loud and clear, that I hope my view on the way this economic crisis could go for our beloved country is wrong.  Totally and utterly wrong.  I fear that we could soon be staring down the financial abyss.  Unless this situation is arrested here and now, we could be facing an economic crisis of Icelandic proportions.  Reading through many of the opinion pieces in this weekend's press, I fear that many political commentators and players have just not comprehended how serious the situation is.  And that includes the leadership of the Conservative Party.

The single most significant development of last week was the realisation that the financial markets have lost all rationality.  Traders are totally gripped by fear, and have started to liquidate many assets regardless of cost.  Their fears are becoming self-fulfilling.  As they liquidate, prices fall more, forcing them to liquidate further and so the cycle starts again.  Any argument about the fundamental value of certain assets has become irrelavant.  Prior to last week, many traders were still talking about fundamental value and how things were starting to look cheap.  Now, even after a fall in global equity prices of 20-25% in five consecutive business days, the same traders view the same assets as too expensive.  It's not rationale, but that's the point.  Britain, and the developed world, has never seen such a situation before - ever.

You may easily say that Britain is no Iceland and that I must have gone off my head,  but let's look at the facts.  Iceland, a tiny country, had built a huge banking system relative to its size.  The total short-term liabilities (debts due in one year or under) of Iceland's banks represent 480% of government debt and 211% of GDP.  Furthermore, in aggregate, its banks have a leverage ratio of 14 times, meaning that they hold ISK14 of assets for every ISK1 of shareholders equity.  As a result, as Iceland's banks suffered losses on there huge asset pools, the banks had too little equity to absorb them.  The Icelandic government was virtually powerless to act, as its own economic resources (measured crudely by GDP) proved too small to bailout its banks.

The news on the financial crisis has kept a historic development off the front pages: on Wednesday, President Bush signed legislation that reverses three decades of US Policy by allowing US companies to sell civilian nuclear technology and supplies into the Indian market.  The deal will allow India to more easily develop much-needed nuclear power stations, and put further safe-guards around its nuclear weapons (India has promised not to conduct any further nuclear weapons tests).  It formally brings India into the world's nuclear club, and rewards it for responsible nuclear weapons development (unlike its neighbour Pakistan).

Bush did a great job in getting this through both Houses, and in convincing the Nuclear Suppliers Club.

No doubt there are risks in how Iran, Pakistan and China react to this but, on balance, its was the right thing to do.

With all the flak he's getting at the moment on other issues, Bush deserves to be congratulated for helping India and making it a stronger Western ally.

I was just about to do a quick blog on the Palin-Biden debate, but Danny Finkelstein's hit the nail on the head in his blog on TimesOnline:

"The conventional wisdom on last night's debate is that by not losing, Sarah Palin won.  I have the opposite view. By not winning Sarah Palin lost.

For a period, it was possible to view the McCain versus Obama election as a toss-up, but we have gone beyond that point. It is no longer a toss-up election.

Obama is decisively ahead.  His lead is clear, it is reflected in state races and it is consistent.

McCain's only hope is to shock the race somehow. He succeeded in doing it at the convention. He tried and failed during the bailout crisis.  But there aren't very many opportunities to repeat the trick and last night was one of those.

So Sarah Palin needed to win last night. Of course Republicans feared disaster, but avoiding disaster wasn't enough. Avoiding disaster means the race goes on smoothly and serenely.

And if it does that, Obama wins."

In the two remaining Presidential debates McCain has to turn it around or, regrettably, his campaign is finished.

McDonalds is a safer credit-risk than the government of the United States, according to the Credit Default Swap (CDS) market last week. The cost of insuring against the default of US government debt was quoted at 0.28%, meaning that it would cost you $28,000 per annum to insure against the default of $10,000,000 face value of debt (an all time high). The comparable cost of insuring against the same face vale of McDonalds Corporation debt was quoted at $26,000. Not much difference you may think - but thats the point! The psychology of this is huge.

But, lets get this into perspective guys. Uncle Sam has endured a revolution, civil war, the Great Depression, two World Wars, the Cold War and the terrors of 9/11. Its resilience and strength is astounding. As bad as the current financial crisis is, Uncle Sam will eventually come through - of that, I have no doubt. So, as much as I like my Big Macs, the markets got this one wrong.

Just finished watching the first Presidential debate a couple of hours ago.  McCain needed to deliver a knock-out blow and, unfortunately, failed to do so.  Each candidate held his own ground firmly and came across as “Presidential”.  Neither screwed up.  It was a tie.  But, given McCain’s current position in the polls and the fact the next debate is on economic policy, McCain needed a win.

McCain went into this debate on his back foot.  He has two cannon balls chained round his neck, one marked “Bush” and other “Economic Crisis”.  On both issues, just by virtue of being a Democrat, his opponent has a natural advantage.  McCains pussy-footing earlier this week with “I’m not going to attend the debate because I’m needed in DC” didn’t help him either.  But given that the debate topic (foreign policy) was on McCain’s turf, he should have done better.

Clearly, the moderator had to start with a question on the financial crisis.  It was favoured ground for Obama, but he failed to deliver a blow.   On Iran, both were pretty much in agreement.  On Russia, they were as hawkish as each other.  When asked about the risks of another 9/11 type attack on the US, Obama talked a lot about rebuilding the US brand abroad – it was a good point that McCain would have done well to push too.

The only thing they really disagreed on was Iraq, where all the familiar points about judgement were re-cycled.  No blows.

Forty-three years after first being banned from Israel, Sir Paul McCartney sung his heart out in front of 50,000 rapturous fans in Tel Aviv last night.  All credit to him for defying calls from pro-Palestinian groups to boycott Israel.  Sir Paul wants to "give peace a chance" - good on you Paul!

Great opinion piece in the Wall Street Journal today on how too much government intervention was also a major contributing factor to the current financial crisis.  Excerpt:

"Once upon a time, in the land that FDR built, there was the rule of "regulation" and all was right on Wall and Main Streets. Wise 27-year-old bank examiners looked down upon the banks and saw that they were sound. America's Hobbits lived happily in homes financed by 30-year-mortgages that never left their local banker's balance sheet, and nary a crisis did we have.

Then, lo, came the evil Reagan marching from Mordor with his horde of Orcs, short for "market fundamentalists." Reagan's apprentice, Gramm of Texas and later of McCain, unleashed the scourge of "deregulation," and thus were "greed," short-selling, securitization, McMansions, liar loans and other horrors loosed upon the world of men.

Now, however, comes Obama of Illinois, Schumer of New York and others in the fellowship of the Beltway to slay the Orcs and restore the rule of the regulator. So once more will the Hobbits be able to sleep peacefully in the shire."

History is in making as we you read this. What we know so far is that as a response to the most serious financial crisis since World War II, President George W. Bush has initiated the largest expansion of peace-time government the free world has ever known. Perhaps the Chinese brainwashed him at the Beijing Olympics....he has made Hugo Chavez look like Ronald Reagan.

Over the last few months, the US government has bailed out Bear Stearns with a $30bn financial guarantee given to its acquirer, nationalised the two largest mortgage financiers in the world (representing over 85% of US residential mortgages) and guaranteed their $5,400bn debt, nationalised the largest insurer in the world (whilst giving it a $85bn loan) and given a blanket guarantee of $3,400bn to US money market mutual funds.

But, as you will probably have heard by now, its not stopping there. Bush and Treasury Secretary Paulson (the former head of Goldman Sachs) have initiated a program to directly bail out the banks that made huge mistakes: he’s going to buy all their dodgy assets and put them, most probably, into deep freeze. That way, the banks can rid themselves of their problem assets and start afresh – they can get back to “business as usual”. The total cost to the US taxpayer: somewhere between $1,000bn - $2,000bn depending on the final details of the bank bailout plan.

Just to put this into some perspective, the US federal budget deficit is already projected to be around $425bn this year, its highest ever (but it would have been manageable had it stopped there). Bush’s financial interventions are already expected to cost $200-300bn extra this year alone, with an ultimate cost of many times that. There’s no question that his successor will have to raise taxes. On the national debt front, Bush was already projected to leave office with the highest public debt/GDP ratio (68.2%) since Harry Truman. But now, if you add the $5,400bn Fannie and Freddie debt (as Congress has already demanded) and the $3,400bn of mutual fund guarantees, that ratio would be around 192%, the highest in the developed world, and somewhere up there between Zimbabwe and Lebanon.

This is not to argue that this financial crisis is not serious and unprecedented. That is obvious for all to see. But the answer is not for government to get knee-deep into the workings of the free market economy and bail out those that made bad decisions with taxpayers money. The lessons to be drawn are that financial markets need to be more transparent, with tougher scrutiny and enforcement by the authorities. Tim Montgomerie’s insight yesterday was also spot on: bankers are a lot smarter than the regulators. We need better regulation, and smarter regulators. We need to encourage private sector solutions (such as Lloyds/HBOS, BOA/Merrill) and not be afraid to let companies fail if they screw up (such as Lehman Brothers – a moment when I thought Bush was actually coming to his senses).