Tuesday, 31 March 2009

Forgiveness

To err is human ... but is to forgive in the best interests of the country?

Am I being unduly tribal in thinking that since 1997 – with the election of a people's prime minister leading a people's parliament – the qualities we expect from our legislators and the standards by which we judge them dropped below any effective radar?

Overlooking poor judgement, inappropriate statements, unwise actions or senseless initiatives used to be the quality of generosity attached to an administration's first 100 days. Forgive them for they know not what they do, but in a few months they'll get the swing of it.

But with the onset of a Labour government Рfull of ingénues, teachers, social workers, females and people who if not actually from the working classes acted and spoke as if they'd been thrust into parliament from the unemployed estates of Mile End, Hoxteth, or the Gorbals with no expectation of actually being elected Рour own expectations that they'd behave like intelligent and reasonably effective public figures of old seemed to permanently disappear.

Listing the instances since 1997 in which Labour ministers have been forgiven – or allowed to get away with – their failures in proper administration would be a futile exercise. If you are with me so far, you may agree that the missing data files, the missed misapplied targets, the ministries unfit for purpose, the agonisingly populist gestures, the uncontrolled expenditures, the unverified statistics, the recycling of incompetent or untrustworthy ministers, etc., etc., are so manifold they blur into an endless catalogue of administrative failures and mediocrity that became accepted as an inescapable norm.

They're just ordinary folk – could we do any better? was our exasperated but listless response.

But now, finally, it seems most people think they could do better. Or rather, another bunch of politicians, anyone but Labour, could do better. Yet it's taken the biggest cock-up in Labour's history – recession, devaluation and a bankrupt Treasury – to wake the population up into realising that, as ever, Labour just f*** things up.

The problem is Labour's years of misbehaviour and maladministration have deeply tarnished all parliamentarians and even parliament itself.

The present row about MPs' expenses affects both major parties. There's no doubt the need to resolve this issue has long been overlooked with, most recently, the connivance of Labour's Speaker. But it has taken government incompetence so vast it threatens economic catastrophe, and the widespread public disdain this unleashed, to bring MPs' expenses and other misdemeanours to the fore.

This time the public won't let MPs off the hook. Let's hope a reasonable solution can be found, the parliamentary slate cleared and the decks washed down in time for a new administration. Let's hope this also leads to an era of government that delivers honesty, accountability and proper financial administration.

We can dream. Thanks to Labour, the public are finally no longer in a mood to forgive parliamentarians anything.

Sunday, 29 March 2009

Which one is a Conservative?


Answer: Neither.

The two men above share many characteristics. Both are self-made millionaires. Both are English patriots. Both feel a deep resentment at the interference of the EU in British affairs.

Both have given large donations to the Conservative party. Both have committed large donations to UKIP as well. And both have tried to hijack Conservative party policy by putting extreme pressure on the leadership to adapt its policies to their views.

The fact that, at different times, neither of these men has been satisfied their pressure has worked – and consequently they have redirected their wealth at UKIP – shows the Tory party, at least, is not easily for turning by the screw of wealthy donors.

And that, unequivocally, is a good thing.

But what about the polices these, undoubtedly sincere, men wanted to achieve?

The one on the left (above) has been a eurosceptic campaigner for nearly twenty years, joining and leaving the Conservative party many times over the EU.

His first resignation, in 1991, came when John Major forced the Maastricht Treaty through parliament. He joined again, but resigned again over Major's flirtation with the euro. In 1997, he subsidised Tory candidates election expenses as long as they stood on a eurosceptic manifesto. Soon after, he formed the all-party Democracy Movement. In 2000, he was persuaded to join the party once more under William Hague. But after some months he was finally expelled over his non-party line on EU statements.

The man on the right (above) made his most significant donation of £5 million to the Conservatives before the 2001 election. Asked what he hoped to gain, he said, "I don't want anything from them at all."

Since then, he has been a frequent voluble critic over his wish that the Tory party stiffen its resistance to the EU, especially over the Lisbon (Constitutional) Treaty.

Last year, he sought a High Court injunction to stop Gordon Brown ratifying the Treaty without first holding the referendum he, and other main parties, had promised on the pre-Lisbon version. He failed and Gordon Brown rushed the Treaty through parliament before an appeal.

Now he wants David Cameron to reiterate his promise that in government he will hold a referendum. Cameron has promised a referendum, but has left the issue open if the Treaty has already been adopted by all EU states. And this is where the two finally came unstuck.

There is no doubt this man is deeply sincere over the present annual cost of EU regulation of Britain (£1000 per head) being an unjustifiable burden on our population. And EU influence in domestic, judicial and foreign affairs becoming an ever-enlarging menace to our liberties.

But David Cameron is merely reflecting the view of most of the population in wishing issues concerning the EU to simply go away. At this moment, there are bigger fish to fry, rigging to clear and hulls to caulk.

Pol-e-tics believes lobbying political parties for policy change is an honourable part of the democratic process. But changing policies on the demand of one wealthy donor just appears corrupt. However worthy the cause, financial reward makes it tainted. Better he takes his money to UKIP.

Note: Pictured on the left, Paul Sykes and on the right, Stuart Wheeler

Friday, 27 March 2009

Globalisation under scrutiny

Expectations of significant thoughts, let alone actions, emerging from next week's G20 summit are diminishing by the day. Attention is focusing on the more energetic activities expected outside the venue and on London's streets.

Anti-globalisation protesters have followed Global Summit meetings around the world for more than ten years. Their message has been that globalisation is bad because it enriches global corporates at the expense of impoverished third world countries.

But yesterday's message to the world from Brazilian President Luiz Inacio Lula da Silva, delivered in Gordon Brown's presence, contained a rather different view on the merits of global trade, which protesters in London may not appreciate.

President Lula blamed "white people with blue eyes" for the global financial crisis. "It cannot be, in a society where a person is filmed and is always under surveillance ... [that] the financial system is not watched and is not regulated," he said.

However, this was not a criticism of global rules that shape international markets. Lula was castigating Western nations for not seeing that regulation was strong enough to prevent the financial crisis.

As Lula will know only too well, ten years ago Brazil was a cash-strapped nation suffering one of its own many currency crises. By 2006, it had become one of the word's fastest growing economies – forming part of the BRIC group that featured in every serious investors' international portfolio.

Rather than globalisation stripping assets, as G7 to G20 protesters claim, it has been the path to helping Brazil become the tenth largest economy in the world.

As a result, Lula's message to the G20 is that protectionism must now be avoided at all costs. He sees the G20 meeting as vital for developing nations and intends to call for a $100 billion expansion of trade finance aid to help stimulate global trade.

Those who will be demonstrating on London's streets in the next few days will not be demanding better financial regulation or even smaller government deficits. They will be a mix of anarchist, anti-capitalist, anti-establishment, anti-war and anti-environmental-change direct action groups whose message to the G20 leaders will be that globalisation sucks.

Perhaps this message had some relevance ten years ago as global trading rules were being set. But today, global economic interdependence and the importance of continuing global trade is as much a fact and a necessity of life for the developing world as it is for countries where people are white with blue eyes.

Wednesday, 25 March 2009

Fiscal boost the way to hell

Nominal Czech prime minister, Marek Topolanek, has not allowed a little local difficulty to affect the influence he can wield from the current Czech Presidency of the EU Council.

Despite his government narrowly losing a vote of confidence in the Czech parliament yesterday, today he delivered an EU Presidency speech saying Barack Obama and Gordon Brown's plans for global fiscal expansion were the way to hell.

Marek Topolanek is from the same ODS political party as Czech President Vaclav Klaus. Klaus is famously sceptical about the one-size-fits-all authoritarianism of the European Union. His prime minister is equally unhappy with the EU being told to fall in line with the fiscal expansion measures promoted by Obama and Brown.

The Czech Republic, though affected by the global downturn, has been relatively untainted by the banking crisis. Both German and French premiers are also wary of committing domestic budgets to further debts.

With Governor of the Bank of England Mervyn King advising the UK government against a further economic expansion programme there seems little chance Brown's G20 gathering next month will agree on coordinating anything purposeful.

Since the final communique is already being put together we might ask: What is the point of hosting the event at a cost of £20 million?

Rotating EU President falls

In a major incident in the Poslaneck√° Snemovna yesterday, Czech Prime Minister Marek Topolanek was toppled by his political opponents, also bringing his cabinet crashing down.

This embarrassing clash occurred as world premier, Gordon Brown, was winding up down a speech to the EU parliament in Strasbourg.

A spokesman for the (former) Czech premier said: This is really awkward as our Prime Minister is meant to be representing the EU nations at Mr Brown's summit in Canning Town.

However, after close examination, it is thought Mr Topolanek's seat could be patched up, allowing the Czechs to bounce back until their EU presidency ends in June.

President Vaclav Klaus, a well-known critic of the EU, is rumoured to have said: Ha, ha[this comment removed].

From our Fornign Corespondent

Tuesday, 24 March 2009

Hannan's Broadside



You'll have seen it everywhere. And you can watch it here too.

Dan Hannan fires round after withering round at our unesteemed Prime Minister as Brown sits like a coconut shy trapped in the belly of the European Parliament.


Brown was in Strasbourg as part of his demi-global tour trying to whip up enthusiasm for world leaders to commit the biggest financial stimulus the world has seen at the London G20 meeting in April.

I'm pleased also to quote from Brown's speech on his obsequious claim to European credentials:
"I stand here today proud to be British and proud to be European: representing a country that does not see itself as an island adrift from Europe but as a country at the centre of Europe, not in Europe's slipstream but firmly in its mainstream."
Words that surely spell electoral ignominy for any British politician.

Tories may change IHT early

The pledge to raise inheritance tax threshold to £1 million was first made by George Osborne to a party conference in 2007.

At the time it was seen as a populist measure.

Alastair Darling immediately responded by making the existing allowance transferable between married couples - effectively doubling the rate from £312,000 to £624,000 for a surviving spouse.

Despite Tory tax confusion over recent days, the IHT pledge has survived. Raising the threshold to £1 million will be in the party manifesto implying implementation in a first parliament.

But if the Tories also intend to raise top income tax to 45p then a question of relative importance will arise.

Without changing IHT, a single person's estate over £312,000 and a couple's estate over £624,000 will be hit by the rise in top rate tax.

So either IHT must change first, or the 45p tax and IHT change must be announced together. This means in 2011 or earlier.

But if wobblies in the party still flutter over the 'rich person's party' tag, there's still an adjustment they could make.

Namely, reverse the little spoken of decision to follow Labour's principle of a transferable allowance between married couples.

Under Tory plans, this actually raises the maximum threshold to £2 million rather than £1 million.

Then again, once the party's in power, perhaps no-one will bother to quibble.

Monday, 23 March 2009

The intelligent bank manager approach

Well, trying to embed a window into a window doesn't seem to work with Blogger. So you'll have to click off and view this video yourself ...

In case you didn't see it today, here is a rare TV interview with John Redwood – courtesy of the BBC and Andrew Neil – in which he explains what is wrong with the government risking £3 trillion plus of public finance to support failing British banks.

Redwood says the Bank of England should have taken the intelligent bank manager approach, requiring the banks to restructure their activities and balance sheets before offering them far less financial support.

These banks are continuing to abuse our trust and our money, Redwood says.

View video here.

Sunday, 22 March 2009

Inheritance Tax Sticks


Conservative Shadow Business Secretary, K.Clarke, speaking to the media today, said raising Inheritance Tax threshold will no longer be a Conservative party priority.

No expectation then of an end to falling house prices!

One thing that can be said, or perceived, is that Tories are taking a lead in raising the hard choices to come to address the ruined public finances.

Labour, in contrast, has postponed the summer comprehensive spending review.

Tax Update

Conservative Central Office this afternoon issued a clarification of the party's position. Raising the inheritance tax threshold to £1 million remains an objective.

So that's clear then!

Less clear is the work that remains to be done to embed shadow minister K.Clarke into collective front bench positions.

So it's forty-five pence, are we all agreed?


I thought I might title this 'How do you solve a problem like George?' But that would be demeaning and possibly misdirected.

Osborne's latest statement – that a 45p top tax rate may be unavoidable – is particularly extraordinary since the tax rise that's "going to be difficult to avoid" is not planned by Labour until 2011.

Is Osborne saying it may be unavoidable then? Or that it may be unavoidable in a first budget after Conservatives win the general election?

Either way, the message is the same – the plan is all but agreed to introduce a 45% rate.

Why would George announce this and now?

It's generally prudent to avoid committing to round figures this far from an election. And it's also impossible to predict the state of our public finances more than a year from now. (Assuming Gordon drags out our pain to the bitter end.)

The impact of his message on grass-roots Tories has been like waving a red flag at the party Conference. Could there be an alternative agenda to George's pre-emptive tax strike?

'Decontaminating' the party has been going on for some years. In fact, one thought the need to constantly impress that Tories have a social agenda as much as a business one was over.

Is Osborne trying to influence the wider electorate now by suggesting the Tories' first response to the budget crisis will be to tax the rich?

Or, has he concluded the public finances next June will be so dire that a small rise in top rate tax will be the least of the un-Conservative tax-raising measures he'll need to take? In which case, he may judge it better to have his ideological battle with the party faithful now than immediately before the election.

Whatever Osborne's reasoning, it must surely be the case that this unpalatable announcement has the sanction of the party leader.

Osborne may be the messenger but the message comes from Cameron.

Friday, 20 March 2009

Recession hits auto models


It's official: the British Motor Show is scrapped for 2009.

A spokesperson for the Automobile Models Association said:

"Our models are extremely disappointed with this news and will need to lean heavily on motorbikes this year. Let's hope the Bike Show doesn't fall over."


Former pin-up, man-about-town, Monaco-resident and auto enthusiast David Coulthard said:

"It looks dark out there."

Thursday, 19 March 2009

RBS and the regulator

Just to confirm John Redwood's point that financial services in UK have suffered from too much over-sophisticated regulation, especially from Europe, which completely missed its target...

Reading through the RBS Annual Report 2007, as you do, I find the following under the heading of Credit Risk:
RBS has received agreement (called ‘a waiver’) from the UK Financial Services Authority to adopt the Advanced Internal Ratings Based (AIRB) approach for calculating capital requirements for the majority of the business with effect from 1 January 2008. The Group, therefore, will be one of a small number of banks whose risk systems and approaches have achieved the advanced standard for credit, the most sophisticated available under the new Basel II framework.
Case closed.

A sterling meeting


I attended a meeting with John Redwood and Tim Congdon last night. They on the platform - me in the audience.

It was absorbing and revealing.

Tim Congdon is an economist who prefers to speak the truth: even when it's uncomfortable.

On measures to overcome this recession he says there's just one answer. The government or The Bank needs to spend money on us.

Note: that's spend, as in buying, not just giving money away.

And that's just what the government is doing - at last.

According to Congdon, 'printing money', as the tabloids describe quantitative easing, is no great shakes: as long as the Bank knows when to stop. And buying Treasury gilts and bonds is the most practical type of purchase.

As for encouraging banks to lend: it isn't a priority. What is important is to increase the amount of money in the system.

Congden also says (as many have thought) that if the government had adopted quantitative easing in the first place there would have been no need to inject all that taxpayer's money into our banks.

However, in Congden's view, the government's investment in bank shares on our behalf will pay handsome dividends. From which we may assume he believes UK plc will ultimately survive, and prosper.

John Redwood expressed frustration. With Alastair Darling for refusing to debate his economic measures in the House. With pointless junior ministers making pointless points instead. With the absence of any briefing papers on Lord Turner's FSA plans. And with the government's failure to get any of its recession-softening schemes running.

Most of all, he was frustrated at the government ignoring the need for banks to sort out their finances themselves. Plugging every hole with taxpayers' money was no incentive for the banks to reorganise, recapitalise with sell-offs and get themselves into downsized shape for future business.

As for new regulation, the need wasn't to import tons more useless rules from Europe. The need was to focus financial regulation where it counts. As ever, John Redwood was in witty and spirited form.

Tuesday, 17 March 2009

Job satisfaction

Robert Peston, man with the government's ear, sympathises with Lord Myners, man with a heavy workload, for overlooking asking the RBS board how much Fred Goodwin's pension would actually be when told it would be enormous.

However, Peston (reporting on radio) does lay opprobrium pretty heavily on certain members of the former RBS board.

The latest revelations come from today's Treasury Select Committee interview with Myners. It appears Goodwin took away not only £4 million up-front cash from his pension pot, but was also credited with twenty years previous RBS service, which he had not served.

It's been clear since reporting of the issue arose that the previous RBS board, particularly the Chairman and the Remuneration Director, went to frenetic lengths while the bank collapsed to stitch up an outrageous deal with Goodwin. I see no mention of what Tom McKillop and Bob Scott walked away with. Follow more at Coffee House.

Where's the message?


It’s a sad feature of Nu-politics that those politicians who are most rational and practical have the least chance of preferment into Cabinet.

Take John Redwood for example, who has been at the forefront on the blogosphere in exposing the real cost of Labour’s economic reflation attempts. And in warning of where these enormous costs for the nation will lead.

Perhaps I should balance that statement by saying that the irrational have little chance of preferment either. (No I didn’t mention David Davis.)

On the Tory side we are left with a largely uninspiring cabal who are required always to be on message. Even K. Clark seems to have accepted this rigour.

The problem is there seems to be very little message being sent. And those charged with sending what there is make little impact.

Perhaps the negative criticisms in the media of the Tory front men over the last few days, reflect the forced absence of the Party’s leader.

Without Cameron’s presence the Tory message seems to disappear altogether. Helped inordinately by the BBC, who seem to have assumed for the past two weeks that all Tories have been off the field.

Perhaps once Cameron is fully back to speed, he will have something more important to raise than the cost of the TV licence. (Or is his licence freeze a backhander at the BBC’s ignoring his players?)

But I suspect the run-up to the general election will be much like that of 1997. Namely, a youthful alternative to the incumbent leader, promising change, but without describing much of what change means.

Given the results of the more radical Tory election approaches in 2001 and 2005, copying Labour’s 1997 air-headed tactics might seem the best bet.

But the nation is now in so much deeper mire than ever it was even under John Major.

Surely a party expecting not too distantly to assume power can find some message to attack Brown with that creates a lasting impact.

Monday, 16 March 2009

Banking crisis solved?

Perhaps this blog should be called eek-o-nomics. The government's disastrous management of the economic disaster remains the biggest political story of our times.

So today I present my solution to the banking crisis:
Lift the requirement for banks to use mark-to-market asset values.
What?

Marking-to-market is an accounting practice that developed on futures trading exchanges in the 1980s. Its aim was to protect market makers from potential defaults by traders. Traders were required to price their asset holdings at the end of each trading day or week at fair current market values. This ensured they didn't exceed their credit margins due to changes in the market or sales value of assets they'd bought.

Mark-to-market gradually spread as an accounting practice to value almost any kind of asset. Its virtue is seen as revealing a true price valuation of assets, rather than historic value, for the benefit of investors, shareholders and anyone rating current value of stock.

The practice is supported by international accounting bodies and applied by regulators such as the FASB in the US and, presumably, the FSA in the UK. But there has been increasing pressure, especially in the US, to lift its requirements.

Why?

Because the effect of marking-to-market in this crisis - and a considerable contribution to its cause - is to rate banks' lien over mortgaged property assets as valueless. This is because in the present turmoil there is no active market in the derivatives attached to these mortgage loans. These 'toxic assets' create an enormous balance sheet black hole. Yet, this doesn't reveal underlying asset value. It simply reflects the absence of any price-revealing market at all.

Legislators in the US - not for the first time in this crisis - are lobbying strongly for changes in mark-to-market rules. Federal Bank chairman, Ben Bernanke, is being cornered to respond. But so far his response has been ambiguous.

How about the UK?

The need for change in the UK is perhaps even more urgent. Obama's new reflation package is still stuck in Congress. Here, Brown has committed £585 billions of taxpayer's money (so far) in a bank Asset Protection Scheme with hardly a parliamentary debate.

Lifting mark-to-market rules and repricing banks' property-based assets at their original cost price (less an averaged loss from repayment defaults) would be no less unrealistic than their present unaccountable guesstimate value. It would actually allow a better estimate of where bank finances really stand.

The effect would be to significantly rebuild banks' balance sheets - in appearance anyway - until property prices bottom out and a functioning price market returns, when these assets can deliver back some value.

But perhaps the biggest benefit would be to the operation of banks and the wider economy. With assets restructured to reflect long term regeneration, banks could focus on current profit building, from prudent lending, without fear such profits would instantly disappear into the bottomless hole in their balance sheets.

And if accountants tut-tut at messing with such important rules, perhaps they should look at the government's accounting practices. Since the £585 billion asset protection scheme is named 'contingent liabilities' the Treasury seem set to record the impact on the public finances as zero!

Saturday, 14 March 2009

Lessons for Gordon from over the pond

I've been casting an eye over the thoughts of an American commentator on government econo-political policy. His name is Lawrence Kudlow and I've no idea in what respect he is held, but this is a gist of what he currently has to say.

Apparently, in the run up to the bank credit crisis in the US, the Treasury yield curve was in negative territory.

OK, I'll try to explain that.

When the Treasury has a policy of tight money then interest rates are set relatively high. In 2006-7 in the US, such a Treasury policy had the effect of pushing short-term borrowing rates above long-term rates – producing negative yields for the banking industry. This is because banks borrow short and lend long to make money profitably. Kudlow believes the negative interest margins experienced by US banks in this period were a significant factor in creating the credit crunch.

Be that contention as it may, Kudlow has noticed a considerably different environment now the US Treasury (as in other countries) is pushing cheap short-term money. US bank stocks have rallied this past week, showing 40% gains on US financial markets. This follows several US banks stating they will post handsome profits on business conducted during the first quarter of this year.

As Kudlow has it, this is an effect of the now positive bankers' yield curve. And who would argue that Treasury / central bank policy around much of the world – of dramatically dropping official interest rates – is intended precisely to encourage banks to lend again? And who would argue that obtaining virtually free money is a positive incentive for banks to lend on at higher borrower rates?

So much for Kudlow's observations. Now I turn to the situation we have in the UK.

In contrast to the US, we have a very small - and reducing - number of banks. Their toxic debts, relative to the economy, are large. And their paranoia about engaging in further business risk is great. They are proving obstinate over returning to lending mode, despite short-term capital available at 0.5% and lorry loads of government/taxpayer underwriting of their past indiscretions.

My personal belief is they are reluctant to lend because they can see the economy going bad, not least because of the way the government has reacted to the banks' own predicament.

Nevertheless, a positive up-sloping yield curve is the best business proposition our banks are likely to get. (Especially now other forms of profit engineering are 'out of favour'.) Yet what is the policy on which Magic Gordon has now bet the taxpayers' pension?

Yes, it's Quantitative Easing no less. The one policy that's guaranteed to reduce long-term interest rates.

Even as the policy was being announced, it's potential impact was being reflected on long-term financial markets. Long-term rates have begun to fall dramatically, and may continue to do so, as the Bank – on Gordon's orders – pumps £75 billion or £150 billion of electronic money into buying long-term bonds and gilts.

It's not quite negative yield territory. But the flattening yield curve considerably reduces the profit incentive banks may have to engage in Brown's sought after '2007 lending levels'.

Confused? Yes, that's as good a description as any of current policy. Look out for loads of kitchen sinks flooding the market, marked HMT.

Friday, 13 March 2009

Whitehall's Magic Money Roundabout

Ever seen a Whitehall Farce? Typically these knockabout romps involved at least one trouserless character being pursued offstage while his double immaculately appears from opposite stage to replace him. Farces at the Whitehall Theatre in Westminster ceased in the 1960s. But over at the Treasury they seem to be carrying on the tradition with gusto.

To get our facts clear: the Treasury is the body responsible for issuing government gilts. These are long-term IOUs that help the government pay the nation's bills.

Now, we know that thanks to quantitative easing (QE), Gordon's magic answer to the money shortage in our banks, the Bank of England is aggressively buying back gilts and bonds in order to issue its freshly printed money.

Not only does this increase the national money supply it also lowers long-term interest rates, both of which (other serious consequences notwithstanding) appear presently as good things for our broad economy.

But, hey, what about all those massive government debts? The hundreds of billions of pounds already handed to the banks? The hundreds of billions more guaranteeing their toxic assets? And the hundreds of billions needed to provide the public services? That's right, the government needs to borrow a great deal more. A very, very great deal more.

So what are they doing about this over at the Treasury? Well naturally, they're issuing bundles more government gilts! Which, if I have this right, is the direct opposite of the Bank's policy.

Uh... It makes you scratch you're head, doesn't it? But then you realise this is merely reviving a uniquely British tradition (last seen during Harold Wilson's confused swinging Britain).
The Whitehall Farces carry on starring Gordon, Alistair and Mervyn.

Magic Money Roundabout – The Gilts and Bondage Season

Programme: Mondays, Wednesdays and Fridays... 'No Gilts Please, We're British'
Tuesdays and Thursdays... 'Gilts Away'

So have you bought your tickets yet? Or are you selling?

Tuesday, 10 March 2009

Could Brown's magic bullets turn into blanks?



I raise this topic as a question that perhaps someone more competent can answer.

My underlying premise – as you will see elsewhere on this blog – is that economic activity (and growth thereof) starts with viable markets represented by customers that have not only wants and needs, but also the willingness and ability to pay for their supply.

In other words, neither banks stuffed with taxpayer funds or freshly printed money, nor businesses perhaps suddenly finding they can borrow again (because certain banks are being instructed to lend), will change the fundamental economic environment in which most of the population find themselves, both as a result of the recession and of the measures the government has taken to try to relieve it.

That economic environment is one of caution, fear and overhanging debt caused by stalking unemployment, contracting asset values and expectation of rising taxes and shrinking public services. As a result, the public at large is presently in no mood to contribute to economic expansion. And without their contribution it just ain't going to happen.

That being said, what of Brown's magic answer to the shortage of money flowing through the economy? The idea that he will simply print it.

So far, his announcement of £75 billion in exchange for gilts and bonds, with another £75 billion in hand, appears to be having the desired impact on the long-term credit market. Quite apart from expanding the cash in our bank's current acounts, the underlying objective is to reduce long-term interest rates – buying up bonds raises their price and thus reduces their yield.

In theory, lower long-term interest rates will give businesses and consumers more certainty and confidence over future economic conditions.

But this is rather like creating a parallel economic universe: born out of electronically invented money (not funds based on actual economic activity), and with a false view of the long-term (again not based on real economic expectations) that could be reversed just by policy decision at any time.

What would happen if Gordon finds that growth in the real economy still fails to pick up? What would happen if he continues to print money, buying up long-term securities, until long-term interest rates drop to mirror the Bank rate at close to zero? What would happen if we get virtually free money, short and long term, but still no customers in the real economy where it actually counts?

Gordon would find that his magic bullets are actually firing blanks. Where could he turn to next?

This sounds similar to the experience of Japan over the last twenty years. Is it possible here?

Thursday, 5 March 2009

The long term NOT quantitatively easy

Not much blogging yet on the implications of Quantitative Easing. Well, it does take some head getting around.

The Yanks have been doing it for some while as Reuters has explained in some detail. The DT lays out the UK version a little more simply here.

As you will no doubt now understand very well, the purpose of the UK's quantitative easing is not so much to inject £75 billion or £150 billion potential spending into the economy as to achieve, by so doing, the lowering of long-term interest rates.

This is because, unlike short-term interest rates, the BofE normally has no influence over long-term rates at all.

Why doesn't the Treasury simply buy back gilts in market operations as it would normally do? Yes, you got it, the Treasury is somewhat overdrawn on £trillions of our loose change already.

The government's loss of control over the economy - through monetary and fiscal policy - is alarming. It is taking the bribe of up to £150 billion more (this time of phantom money) to try to influence confidence in future market conditions. And there is no certainty it will.

Banks and others could still just pocket these funds. And as I have said below, stimulating market activity into self-sustaining growth requires more than giving banks and businesses money. It requires a return to confidence by our consumers in their long-term economic future.

The public's love affair with borrowing is gone and their inclination to unnecessarily spend is over. The long-term debts the government has placed on all our heads may have a more significant impact on our economy than even quantitatively eased long-term interest rates.

Q&E – but where are the slumdog millionaires?

I am not a professional economist. And my early banking career was very short-lived. Does this explain my lack of confidence in today's Bank of England's decision to cut interest rates by another half percent and ALSO announce a programme of quantitative easing (QE)?

What is the Bank / government trying to achieve? Obviously, it is trying to re-stimulate lending by our banks in the hope that this will kick-start economic activity.

But pardon me for making this observation. While there may be many businesses being harshly treated by their banks (by restricting reasonable access to cash flow), there are many more with turnover that has dramatically declined who can't reasonably expect banks to provide credit on previous business terms, if at all. It's not reasonable for banks to substitute lost turnover with loans when there's no expectation of an end to the current depression.

Businesses do not exist in a world of their own, able to expand and flourish as long as they can borrow money. Businesses need customers, who are both able and willing to spend. For the foreseeable future, the public will not be entertaining any spending sprees. They face unemployment, crashing housing assets and their government (without formal request) has purloined several trillion pounds of their future earnings, which at some future date must surely be paid up.

Mervyn King probably does get this. Last month, heralding future QE, he said, "the balance of risks to the path for GDP is very much to the downside, reflecting in large part uncertainty about when lending and confidence will recover".

In other words, even if introducing quantitative easing does reduce long-term borrowing rates, restoring economic confidence may be a separate issue altogether.

Wednesday, 4 March 2009

It's politics, stupid!

Does Gordon Brown really believe that placing £3, £4 or £5 trillion of taxpayer liabilities onto the national balance sheet is the best way to overcome the financial crisis?

The fact is, Gordon Brown knows he's a guilty man.
Guilty of abandoning controls over the money supply.
Guilty of removing BofE authority and imposing a financial regulator financed by the banks.
Guilty of forcing public companies into excessive debt by taxing pension funds.
Guilty of borrowing and inefficiently spending vast sums on public services.
Guilty of amassing vast hidden public debts through PPP and PFI projects.
Guilty of encouraging consumer debt to the unsustainable levels of 2007.
Guilty of informing the nation we could safely live on the credit boom forever.
Could such a man, with such a guilty past, turn to the nation and say 'now its your problem: taxes will double and public services will be halved to pay for my mistakes'?

No, of course he can't. The nation would descend on parliament, pull Brown from his seat and attach him to the nearest lamppost.

Ever since Labour reinvented itself it was clear New Labour had lost not just its socialist principles but also its political ethics. There was no principle behind the new party other than determination to offer bread and circuses to satisfy the nation's basest instincts for as long as possible, delivered by any available means.

Now Gordon Brown faces the problem of trying to keep the nation happy (or rather prevent it from uprising) but without any of the means he has been able to rely on in the past.

The banks no longer dish out mortgages and loans like lollipops, they've gone bust. The financial service industry no longer contributes a third of the nation's tax revenues, it no longer exists. Foreign investors no longer pour in money to support the pound, it's fallen like a stone.

But New Labour knows only one political principle: feed the people money, it keeps them happy. So where does Gordon turn for the funds he needs to execute the only winning political principle he knows? Why, he turns to the people themselves, of course.

You know it makes sense, he says. You like bread and circuses, he says. You don't want the government to abandon you, he says. It's only for a little while, he says. Just give me a few billion, no a trillion, well perhaps two or three trillion. OK, let's make it four, no five trillion pounds. That should cover it, for the moment.

The public's reaction to this has been mesmeric. And why not? None of us have ever heard of such stupendous sums. Gordon Brown implies this borrowing will be just a taxpayer loan. He doesn't say it will be one of those new kind of loans. The kind that doesn't perform. Not only will we not see most of it again, we'll be paying out to the government for years and years and years.

But that is hardly Gordon Brown's concern. His priorities are to minimise present blame of his government, show he is doing something and give the impression that in the midst of the deepest depression for a hundred years nothing much will appear to change. That is to say, the government reassuringly will continue to seem flush with loadsa money.

That's right, trillions of pounds of your, your children's and your grandchildren's money. Because you know it makes sense.

But to repeat the initial question: Does Gordon Brown really believe plunging the nation's taxpayers into decades of debt actually makes economic sense? No, of course he doesn't, because it's not about economics. It's all about politics, stupid!

He knows he'll lose the next election. But he also knows he will have achieved something very special. Something Clement Attlee couldn't even have conceived. He will have nationalised the British people!

Yes, while we all sit gawping as Brown's claims on us grow into ever more fantastic figures, he is actually executing British history's most blatant and outrageously in-your-face political coup.

When, in about a year's time, we wake up from Gordon (Mesmer) Brown's wickedly- inflicted, hallucinogenic dream, we will discover we have returned to the Middle Ages. We will all have become become peasants and slaves, indebted to the State for as long as our debt or our brutish life runs.

Not even the election of the Conservative party will be able to change these facts. And Gordon will at last have something interesting to reveal as he retires to compile his memoirs...

As it has always been said, very deep down at heart, Gordon is simply an old-fashioned Communist.