Britannia Radio

If I tend to focus on the Telegraph this is because it seems the only 
paper to have fully grasped the enormity of the crisis that faces 
Britain  and the uniqueness of Britain's position compared with all 
other major economies.  For instance the FT today is focussing on the 
international aspects and of "A crisis of global finance needs a 
coherent international response."   No other country went into the 
crisis so little-prepared and so complacent about the future.  Other 
countries had built up reserves in the good years to provide today's 
cushion .

The policies Brown is pursuing are all designed to stave off the 
worst until after he can call an election, and his remedies are 
useless but politically shrewd.  The saver is expendable, the banks 
can be bullied, debts can run up, those who have over-borrowed are to 
be rescued.  It might work for him, except the pace of collapse 
gathers speed daily.  In any case,  one day all this will have to be 
paid for.  I fear for social stability as the young, burdened with 
educational debts, find themselves jobless and without hope.

I have been calling on the Tories to promise severe cuts in 
government expenditure on major projects and listed some.  They don't 
seem to be living in the real world though,  and continue with their 
'business-as-usual' attitude.   But meanwhile the pet socialist, 
totalitarian projects seem, sacrosanct,  while today we learn that it 
will be defence - of all things - that will first feel the axe 
(aircraft carriers, armoured vehicles etc)

The Times majors on Brown forcing banks to cut rates to borrowers but 
fails to point out that such threats are counter-productive as, if 
they do,   they will have to cut rates to savers,  and, if they do 
that, they will have no money to lend!  All the time the money that 
the taxpayer has put into the banks is costing the banks 12 percent - 
no less - 12%.. At what rate could they possibly lend that money to 
anyone?   The government seems to want them to do it at 2% -  sheer 
lunacy!

The most likely outcome of this slump will be - as I suggested last 
night,  the injection of cash directly into the economy - see last 
main posting below.

Fasten your seat belts and tighten them too. It's going to be a very 
rough ride.

XXXXXXXXXXXXXX CS
PS US employers axed 533,000 jobs in November, the biggest monthly 
cut in 35 years, the US Labor Department said.
============================
TELEGRAPH   5.12.08
1. Interest rate cuts: Deflation harms everyone
By Philip Booth

Deflation means that the pound in your pocket is worth more each 
year. In an earlier age, deflation was regarded as benign at worst.

For a couple of hundred years before 1946, moderate deflation would 
occur over long periods of improving productivity. It was often 
associated with the good times.

It is easy to see why. The purchasing power of people's incomes 
increased; people could take out life insurance policies knowing that 
if the sum assured paid for a funeral at today's prices, it would pay 
for their funeral when they died; and businesses and individuals 
could sign contracts spanning the generations knowing that inflation 
would not lead to either party losing out.

Indeed, the economy can work better in a period of gentle deflation. 
If the price of housing rises for example, when prices in general are 
falling, we get an unambiguous signal that housing costs are 
increasing relative to other costs and that we should think about 
economising on housing. At a time when all prices are going up, it is 
difficult to work out what is going on in the marketplace.

Sadly, those days are past and we now have an economy that has 
adapted to inflation. The pound has had 97 per cent shaved off its 
purchasing power since 1946 and the Bank of England has a statutory 
mandate to target positive inflation, year after year.
A severe and unexpected deflation at any time can have serious 
consequences, but the consequences will be worse for an economy that 
has adapted to inflation. What could happen in practice if prices 
suddenly fell by (say) 10 per cent next year?

Deflation would mean that financial obligations of individuals, 
governments and businesses would rise in real terms (ie, in 
purchasing power terms). For example, if an employer expected to pay 
a salary of £100, the purchasing power of that £100 would rise to £110.

Prices have fallen, so a given sum of money is worth more. This is a 
bonus for the employee, but a disaster for the employer who is 
selling goods and services at lower prices and still facing the same 
wage bill.

Unless wages adjust rapidly, the cost of employment rises and people 
are laid off - this was one of the reasons for the unemployment of 
the Great Depression.

The story does not end here. Tax revenues will fall - the link is 
obvious in the case of consumption taxes such as VAT. But government 
spending will probably not fall. Will the Government be able to 
reduce public sector wages and social security payments to match the 
fall in prices?

It is highly unlikely. The more regulated and unionised the labour 
market, the worse these effects are, as employers and employees find 
it more difficult to change contracts and reduce wages and other 
benefits.

The real value of debts also rises, so individuals and companies find 
it more difficult to service and repay their debts, especially if 
interest rates on those debts were fixed at high levels before the 
period of deflation began.

If deflation does not cripple companies because of its effects on the 
level of their debts, then their pension liabilities will probably 
cripple them instead. Many pensions are linked to rising prices but 
not to falling prices.

Indeed, this is all reminiscent of what happened after the Berlin 
Wall fell. Helmut Kohl foolishly decided to give East Germans one 
Deutschemark for every Ostmark. All very nice - unless your debts 
were in Ostmarks, in which case you suddenly owed a lot more. Jobs 
were decimated.

Pensioners will also suffer from falling interest rates. A bout of 
deflation probably means a period of zero interest rates. This is not 
an enticing prospect for those relying on their savings to provide 
them with an income, though at least the purchasing power of their 
capital will rise.

So, what do we do? Inflation is a disease of money (too much). 
Deflation is a disease of money too (not enough). Just as the Bank of 
England should not have allowed monetary growth to get out of control 
in the boom, it must not allow severe monetary contraction either.

The Bank of England is reducing interest rates to try to stop 
deflation happening. But what happens when interest rates hit zero or 
if reducing interest rates has little effect? [It will have NO effect-
cs]

There are other ways of increasing the quantity of money. As Milton 
Friedman suggested, banknotes could be dropped from a helicopter if 
necessary. Ben Bernanke, Mervyn King's equivalent in America, is 
considering less crude but potentially equally effective ways of 
directly influencing monetary policy - we should do the same here.

The Government's so-called fiscal stimulus, on which so much energy 
was expended, will be useless at best. The Government is piling its 
own debt on over-indebted households and promises a whacking great 
tax increase in a couple of years' time. Instead, energy should be 
focused on monetary policy.

But Gordon Brown has made this all much more difficult by his reforms 
to the Bank of England in 1997-98. The Bank has the responsibility 
for preventing deflation, but Mr Brown gave many of the instruments 
that can be used to achieve this to an agency of the Treasury.

This dismembering of the Bank of England caused chaos when the 
authorities tried to "co-operate" during the Northern Rock affair. I 
hope that co-ordination to avoid deflation, if it proves necessary, 
works better: the stakes are high.
------------------------------------
. Professor Philip Booth is editorial and programme director at the 
Institute of Economic Affairs
==============
2. Bank of England cuts rates, but will it do any good?
Posted By: Edmund Conway

It's a weird and wonderful world we're living in when a one 
percentage point cut in interest rates is considered the bare minimum 
the Bank of England should do in one month without scaring the hell 
out of everybody. But that is undoubtedly where we are today - and 
things will get weirder still in the coming months.

Having dropped to 2pc there seems little doubt that at some point 
before the end of the winter they will have to be slashed that one 
step further, according Mervyn King the dubious distinction of 
presiding over the lowest interest rates since the advent of British 
central banking.

Was the decision the right one? I am rather dubious about how the 
amount of difference a 100 basis point cut will have in comparison to 
a 75bp reduction. Either way, rates would still have been more than 2 
per cent lower than they were little over a month ago. When you add 
that onto the fall in the pound during the same timescale, that's a 
serious amount of monetary stimulus.

However, inasmuch as a 100bp cut will keep the markets from sheer 
panic, it has to go down as the right move. Indeed, far from falling 
further as it dawned on markets that rates now equal the level they 
plumbed to in the wake of the Great Depression, the pound actually 
rose following the decision.

The economy is deteriorating at a speed and with a vigour we have 
rarely ever seen. Anyone who was in doubt that the housing market is 
suffering a crash of monumental proportions should take a look at the 
house price inflation figures from the Halifax today. They show 
prices dropped by 2.6pc in November - the biggest monthly collapse 
ever - and are down by more than 16pc from the peak last autumn. 
Worse still, prices will surely fall much further in the coming 
months as panic selling really takes hold against a background of 
soaring redundancies nationwide.

The news from the wider economy is just as stark. Both the 
manufacturing and services sectors are in the grip of an 
unprecedented dip in activity, and profits are in freefall. 
Unemployment is rising sharply and the question is no longer about 
whether Britain is facing a recession, or even a virulent recession, 
but whether this will turn into a long-lasting depression.

The Bank of England is alive to these issues, and its decision to 
slash rates in November and then again today undoubtedly signals that 
it is prepared to do whatever it takes to prevent such an outcome. 
Admittedly it took its time to adapt to this, and was still talking 
about the risk of inflation back in August, when in fact it was 
becoming blindingly obvious that the UK was heading for an inherently 
deflationary recession. But, as they say, better late than never.

However, it is becoming increasingly clear that as much as lower 
interest rates will help some households, they are not the silver 
bullet many had been holding out for.

The problem with the UK economy goes significantly deeper. It goes 
back to the fact that consumers borrowed too much over the past 
decade, [Those who didn't over-borrow are now expected to bail out 
those who did! -cs]  and are now left facing a monumental debt 
hangover. Had this been the only issue, the current crisis would not 
have been as nasty, but on top of this was the fact that banks also 
became reliant on cash borrowed from overseas - a flow which has now 
dried up.

None of this means that the Bank should have shied from further cuts. 
Just because you haven't yet fixed the leak doesn't mean you should 
refuse to mop up the mess it's creating. And many families will be 
saved from insolvency by these cuts.

But something more needs to be done. The statement issued by the Bank 
alongside the decision today said: "conditions in money and credit 
markets remain extremely difficult. The Committee noted that it was 
unlikely that a normal volume of lending would be restored without 
further measures."

Those "further measures" are just as likely to refer to more direct 
Treasury/BoE action to shore up banks' balance sheets or more 
guarantees on mortgage lending as to interest rate cuts.
In short, much to everybody's horror, these rate cuts are not proving 
as effective as we hoped
==============AND --->
3. (Leader) Interest rate cut by Bank of England is no cause for 
rejoicing

The last time the base rate stood at 2 per cent was in 1951 and it 
has never been lower since the foundation of the Bank of England at 
the end of the 17th century.

This in itself tells us several things. First, that monetary policy 
has been appallingly handled in recent years. Interest rates were 
held too low for too long, fuelling a credit and housing boom that 
left the country deeply in debt. Then they were held too high for too 
long, even though it was apparent that deflation, not inflation, was 
the looming problem.

Second, the scale of the cuts - from 4.5 per cent to 2 per cent in 
the space of a month - confirms that the Bank is seriously worried 
about the depth of the recession. It has good reason to be, judging 
by the latest figures showing house prices plunging at record speed 
and new car sales down by more than one third.

The rate cut was welcomed by hard-pressed businesses and home buyers 
hoping that the lower costs will be passed on. Given the political 
pressures they are under, lenders will try to oblige, but they also 
have savers, who are being hit especially hard by the decline in 
their returns, to consider.

Indeed, anyone who thinks that continued rate cuts are a panacea, or 
are likely to kick-start the economy, will be disappointed. Arguably, 
they might stop things getting worse, but only if the Government acts 
far more radically than it has so far.

Twelve days ago, it had the opportunity in the pre-Budget report to 
set out a coherent strategy for dealing with the recession, but 
singularly failed to take it seriously enough. The 2.5 per cent cut 
in VAT was a trifle that will fail to arrest the collapse in consumer 
spending.

We are looking at unprecedented levels of national indebtedness over 
the next few years and yet the Government refuses to do the one thing 
that most people would consider a priority: to rein in its own 
spending - not on productive, front-line services, but the 
unproductive, wasteful variety that has financed the country's 
biggest peacetime job-creation exercise.

This recession is going to rival that of the 1980s [It will be much 
worse, because it is taking place against a global recession in which 
Britain is the worst-placed major economy -cs] , when three million 
were on the dole. This time, though, those made redundant will not be 
in uncompetitive nationalised industries whose demise made way for an 
economic revival; they will be in the productive private sector, 
which will be far harder to rebuild.

Thursday's interest rate cut may help to prevent some bankruptcies 
and avert some house repossessions, but at the cost of leaving savers 
high and dry and making it harder for the Government to finance its 
onerous borrowings.

Further rate cuts would exacerbate this problem, without necessarily 
having the desired effect on the economy. That is the nature of the 
mess we are in: there is no corrective measure that will not bring 
pain as well as gain.
=========AND ----->
4. Bank of England mulls "nuclear option" of cash injection
The Bank of England is working on radical plans to inject cash 
directly into the economy - the nuclear option to be used only when 
interest rates approach zero.

By Edmund Conway, Economics Editor

In what would be a major departure for British monetary policy, the 
Bank is considering pressing the button on printing presses by 
engaging in a so-called policy of quantitative easing. It emerged 
after the Monetary Policy Committee cut borrowing costs by 1pc to 
just 2pc - the lowest level since 1951.
In the statement published alongside its decision, the Bank warned 
that "it was unlikely that a normal volume of [bank] lending would be 
restored without further measures."

The measures under consideration include direct purchases of assets, 
such as government debt or commercial investments, by the Bank or the 
Treasury, as well as expanding the Bank's balance sheet, a means of 
pumping extra cash into the banking sector.

The radical proposals, which are currently being explored by Bank 
experts, could be put into action within weeks, although they would 
have to be vetted by the Treasury, which is thought to remain 
sceptical. The main obstacle is that the policy could be found to 
conflict with European Union laws on how governments manage their 
budgets.

However, added weight was given to the proposals by European Central 
Bank President Jean-Claude Trichet, who seemed to hint in the press 
conference to announce the ECB's 75 basis point rate cut yesterday 
that it may also consider "nuclear options".

"We will look at what is necessary at any period of time," he said. 
"If new decisions are needed, we will take new decisions."

If the plans do go ahead it would be the first time since the 1970s 
that the Bank of England has effectively attempted to target the 
volume of cash in the economy, by using its balance sheet, rather 
than the price of money through interest rates.

The news underlines the fact that despite having slashed rates from 
5pc this year, and put around £500bn of money behind schemes aimed at 
kick-starting the mortgage lending market, it has failed to arrest 
the financial crisis.

Danny Gabay of Fathom Consulting said: "There has been a seismic 
shift at the Bank of England. I think [quantitative easing] is a 
natural progression from where we've got to now. The Bank has reached 
a tipping-point with interest rates. With a target rate for inflation 
of 2pc, this cut means that real interest rates are now at zero.
"It's quite sensible for them to start thinking about what other 
things to do. The easiest thing that they could do is to under-fund 
the fiscal deficit."

This would involve using the Ways and Means bank account at the Bank 
to buy government securities and would, in effect, amount to printing 
cash. In normal times such a move would be highly inflationary, but 
with the UK facing deflation next year such a plan is now thought to 
be valid.

A number of other central banks, including the Riksbank in Sweden, 
the Danish central bank and the Reserve Bank of New Zealand also 
slashed rates as the global economic slowdown took hold.

With experts speculating that the MPC might contemplate another 1.5pc 
cut, the pound dropped sharply ahead of the decision, but it later 
recovered to close down 1.32 cents at $1.4690 against the dollar.

Halifax reported that house prices dropped by 2.6pc in November 
alone, while the Society of Motor Manufacturers and Traders announced 
that new car sales plummeted at the fastest rate since 1980. The 
total number of new car registrations last month was 100,333 - down 
36.8pc on last year's level.
======================
POLITICS HOME 5.12.08
Tory Comments
------------------------------------
World At One, Radio 4 at 13:25
Government must renegotiate failed rescue package, says Osborne

George Osborne, Shadow Chancellor

Mr Osborne said that the lack of lending and credit proved that the 
government's bank rescue package had failed.

He said: "A, the credit is not flowing and many small businesses and 
medium businesses are struggling...and B, the rate cuts are not being 
passed on in full."   [There's no much sign of any sophisticated 
thinking there or any appreciation of the nature of the problem -cs]

He added: "The government needs to swallow its pride and accept that 
its bank rescue package is not working as intended."

Mr Osborne said that rhetorical threats against the banks were not 
enough and that the solution was to renegotiate the bank bailout.

"It's all very well for Gordon Brown, on a regular basis now, to get 
on a soap box and shout at the banks but it's not having the intended 
effect, it's not getting credit flowing again," he said.

He continued: "We need to look again at the terms of the 
recapitalisation, accept that it isn't working and fix it so it does."

A national loan guarantee scheme was one measure that was needed, he 
said.

"We need a national loan guarantee scheme, so that the government is 
underwriting lending, this kind of radical monetary policy is what is 
needed to pull this economy out of a recession that many say will now 
be the deepest in the world."
=-=-=-=-=-=-=-=-=-=-=-=-=-=-=-=-=-=-
Daily Politics, BBC 2 at 12:15
Government speaking with a "forked tongue" on bank lending, says Redwood


John Redwood, Conservative MP

Mr Redwood said the government was "speaking with a forked tongue" on 
bank lending. He said that the government was on the one hand 
reassuring customers that the money was there to lend, but on the 
other its regulators were warning the banks they needed to save to 
recapitalise themselves.

But he conceded: "Of course people are going to get very cross with 
nationalised banks or banks where there's a big shareholder stake."

Asked for the first policy he would adopt if Chancellor, he said: 
"The first thing I would do is address that very issue, that banks 
aren't getting that money and savers need a decent return on their 
savings."

Mr Redwood criticised the government for expecting banks to lend more 
despite the 12% interest rate placed on them.

And he added that the government needed to end: "The money-go-round 
in which the banks lend to the government who give the money back to 
the banks."