Thinking positively in the middle of a mounting disaster is rare, but
Iain Martin here provides it. He sets out the way ahead though his
“The government must pay down debt” might be clearer. This means
in effect - “Cut expenditure” , so it needs spelling out.
Ruth Lea’s contribution here is welcome reminder that some saw this
coming before it struck. (If I may make a modest reminder - I signed
off my warnings for a long time with the suffix Cassandra!)
Finally for this posting note the tangle Barclays has got itself
into . See “Barclays may lose control to Gulf investors” at the end.
xxxxxxxxxxx cs
========================
TELEGRAPH 22.1.09
Nationalise RBS, then rebuild capitalism
Dramatic action is required to break a national cycle of despair,
says Iain Martin.
By Iain Martin
At this rate, the Prime Minister is going to need a helicopter to get
him off the roof of Number 10. He should plan for a quick getaway as
economic disaster is overtaking his government fast.
Extraordinary things are happening to indebted Britain. Sterling fell
dramatically on Tuesday, below the $1.40 level against the dollar, as
traders fear our recession will be worse than envisaged. Yesterday's
minor rally could not disguise the prolonged run on the pound. A
former partner of the esteemed George Soros (the man who beat the
Bank of England on Black Wednesday) makes an ominous statement. "I
would urge you to sell any sterling you might have."
This is the market pronouncing on what it makes of the nation's
prospects. Accordingly, profoundly unpalatable decisions are going to
have to be taken for the sake of our survival and the possibility of
future prosperity.
It is not enough to say that confidence must return. Instead, great
truths will have to be spoken: we are going to have to start being
honest with each other about our predicament. Britain has spent and
borrowed too much, saved too little and produces not enough of what
the world wants.
The Prime Minister, still refusing to admit any responsibility, is in
terminal denial. This is inhibiting clear thinking.
The banking crisis needs breaking down into two parts. First, there
is what should be done immediately to end a cycle of despair. Second
is what a future government should do to rebuild capitalism. The
situation is that serious.
On the first, as a free-marketeer what I am about to say pains me.
But there had best be a full nationalisation of the Royal Bank of
Scotland and Lloyds/TSB/HBOS. The former is regarded by the market as
broken and we own 70 per cent of it, anyway. The latter is in nearly
as much trouble. Let us stop pretending they operate as independent
institutions.
The alternative is to just let them die. However, the atmosphere is
so febrile there would be queues round the block at all banks. We are
well beyond the point at which it might be safe to conduct an
uncontrolled experiment in chaos theory.
Barclays is healthier and has battled valiantly against state
control. It should be encouraged, as with the bigger HSBC, to take
its chances in the private sector knowing that there is no prospect
of any state rescue if either runs into more trouble.
The nationalised chunk might then be rationalised. Its combined debts
would be worked out and parked in a bad bank. Out of the good parts
could be spun later one or more small, old-fashioned commercial banks.
There were alternatives if the government had not made such a serial
hash of things and forced the banks to own up earlier to the extent
of their losses.
But we are where we are and there are historical parallels. One is
with Sweden in the early 1990s and the other is Japan. It is now
obvious that Britain is following the Japanese in conducting endless
running repairs to a broken banking system. It did them no good.
Similarly, every few months the British government returns to the
markets with another pile of taxpayer money it is prepared to lose.
In contrast, the Swedes were vindicated when they took the pragmatic
view that when you are in a hole it is best to stop digging. Admit
how bad the situation is, nationalise quickly what you need to and
have regulators search through the wreckage.
Only such a dramatic act of leadership, a purging, can put a floor
under this crisis. It is time for such a "game changer".
After that, nothing less than a co-ordinated attempt to rebuild
British capitalism is called for. It should contain three elements:
1) The banking system needs to be regulated to make it more old-
fashioned. Bankers should not trade in complex instruments they do
not understand. Their job is to take in deposits, encourage saving
and help fund sensible property purchases. It may be necessary to
prescribe how many times salary can be borrowed until we relearn the
lessons our Victorian ancestors taught us about responsibility.
Remember, access to credit is not a human right. If you want
something, earn the money, save and then buy it. Venture capitalists,
entirely separate from high street banks, should operate in a free
market but their risk is their own and they must follow the law.
2) The public sector needs to shrink as the facts of life mean we
cannot continue to spend in the current fashion. Consider Deputy
Assistant Chief Commissioner Alf Hitchcock, who is leaving the Met
with an annual pension of £80,000. He is crossing the road to the
National Policing Improvement Agency, a Home Office quango, on a
salary of £120,000. That's £200,000 a year. When it emerges we pay
this gentleman nearly as much as the Prime Minister, surely the party
is over?
3) The government must pay down debt and, when it can, cut taxes to
encourage hard work. Also reward enterprising souls searching for
productive ways in which this great country can make its way in the
world again.
None of this can possibly be delivered by the current PM and
Chancellor. Are the Tories prepared to be bolder? Perhaps they hope
to win by default and indeed that may be enough for an election
victory. But this is an emergency and radical surgery requires voters
to be persuaded to grant a clear mandate. Now is the time to start
fighting for it.
========================
CONSERVATIVE HOME Blog 21.1.09
Centre Right Posted by Ruth Lea
Gordon Brown’s economy: hubris turns to nemesis
This week is yet another week of horror for the British economy.
Monday’s banking rescue package contained several useful ideas –
including the “Asset Protection Scheme” (the insurance scheme for
“toxic” assets) and the “Asset Purchase Scheme” in which the Bank of
England will buy corporate bonds, initially with Treasury Bills,
though probably, before long, by pressing a few keys on a computer
(“quantitative easing”). Indeed one could argue that this second
rescue package was necessary - such are the problems with credit
availability. But the potential costs of this new bail-out, along
with RBS’s mammoth losses, spooked the markets and sterling fell like
a stone.
I have already written about my concerns for the public finances –
indeed I have been writing about them obsessively since Gordon Brown
foolishly turned on the spending taps at the beginning of the decade
– but it is now quite clear that chickens are coming home to roost,
bringing all their avian friends with them. And the markets are
beginning to worry about the long-term ability of the British
Government to service its debt. Today’s public sector finances data
(for the month of December) were simply dreadful. Making allowance
for the “financial sector interventions”, including the
recapitalisationsof RBS and the Lloyds Banking Group, public sector
net debt as a percentage of GDP reached 47.5%, the highest since 1978
– two years after the humiliating IMF bailout.
Today’s labour market data were also shocking. The claimant count
alone was up 78 thousand in December and it is quite clear that
unemployment, on the wider ILO measure, will reach at least 3 million
during this recession. The preliminary estimate for fourth quarter
GDP is due on Friday and is expected to show a drop of around 11/2%,
thus officially confirming the British economy is in recession. The
economic news is unremittingly appalling.
Now it is true that even the most pessimistic of us (and I was on the
pessimistic side of “consensus”) simply did not expect the severity
of the recession in which we now are. This is a chastening experience
for all of us. But perhaps we are in good company. As Nils Bohr,
Nobel laureate in physics, is alleged to have said, “prediction is
very difficult, especially if it’s about the future.”
And economic forecasting during this recession is especially
problematic because most economic models (and hence forecasts) have
an inbuilt assumption that the banking sector functions effectively
and efficiently, lubricating the economy with the necessary credit.
In the current recession, this crucial assumption has been
spectacularly and uniquely (certainly post World War Two) violated.
The British banking system is malfunctioning and such malfunctioning
is especially difficult to quantify.
Indeed a chastening experience – but one man seems untouched by
humility as the economy slides and people lose their jobs. I am of
course talking about the man who had put an end to “boom and bust”,
whilst presiding over the mother and father of all “booms” – in the
housing market, in easy credit, in an unsustainable explosion of
personal sector indebtedness and in British banks’ increasing
dependency on borrowing, much from abroad. These were all potentially
dangerous developments which are now bursting spectacularly. Someone,
surely, in the Treasury was pointing out to the then-Chancellor that
these were dangerous developments. But, as the greatest Chancellor
the country had ever seen, he knew better.
Even now Gordon Brown does not offer a smidgeon of apology. I suppose
he cannot. Even now he blames the world for our problems that are
uniquely the consequences of his disastrous stewardship of the
economy. I’m aware that the following quotation is already doing the
rounds in political circles, but I cannot resist it. Back in 1992
after the pound’s welcome departure from the ERM, he said “a weak
currency arises from a weak economy which in turn is the result of a
weak Government.” There is simply no better way to encapsulate our
current economic woes.
------------------------------------------------------------
Ruth Lea is director and economic adviser at the Arbuthnot Banking
Group and a governer of the London School of Economics.
========================
ECONOMIC ‘Shorts’ 22.1.09
TELEGRAPH
=Barclays may lose control to Gulf investors
Government dismay as state bail-out plan hamstrung by capital-raising
clause that saw Gulf investors pump £5.3bn into bank.
[Under the terms of the deal, the investors have to wait seven months
for delivery of the shares, which convert at 153.276p. - now at
66.1p However, if at any time until June 30 Barclays raises more
capital at a lower price, the Middle East investors are able to take
their stake at that lower level.]
Iain Martin here provides it. He sets out the way ahead though his
“The government must pay down debt” might be clearer. This means
in effect - “Cut expenditure” , so it needs spelling out.
Ruth Lea’s contribution here is welcome reminder that some saw this
coming before it struck. (If I may make a modest reminder - I signed
off my warnings for a long time with the suffix Cassandra!)
Finally for this posting note the tangle Barclays has got itself
into . See “Barclays may lose control to Gulf investors” at the end.
xxxxxxxxxxx cs
========================
TELEGRAPH 22.1.09
Nationalise RBS, then rebuild capitalism
Dramatic action is required to break a national cycle of despair,
says Iain Martin.
By Iain Martin
At this rate, the Prime Minister is going to need a helicopter to get
him off the roof of Number 10. He should plan for a quick getaway as
economic disaster is overtaking his government fast.
Extraordinary things are happening to indebted Britain. Sterling fell
dramatically on Tuesday, below the $1.40 level against the dollar, as
traders fear our recession will be worse than envisaged. Yesterday's
minor rally could not disguise the prolonged run on the pound. A
former partner of the esteemed George Soros (the man who beat the
Bank of England on Black Wednesday) makes an ominous statement. "I
would urge you to sell any sterling you might have."
This is the market pronouncing on what it makes of the nation's
prospects. Accordingly, profoundly unpalatable decisions are going to
have to be taken for the sake of our survival and the possibility of
future prosperity.
It is not enough to say that confidence must return. Instead, great
truths will have to be spoken: we are going to have to start being
honest with each other about our predicament. Britain has spent and
borrowed too much, saved too little and produces not enough of what
the world wants.
The Prime Minister, still refusing to admit any responsibility, is in
terminal denial. This is inhibiting clear thinking.
The banking crisis needs breaking down into two parts. First, there
is what should be done immediately to end a cycle of despair. Second
is what a future government should do to rebuild capitalism. The
situation is that serious.
On the first, as a free-marketeer what I am about to say pains me.
But there had best be a full nationalisation of the Royal Bank of
Scotland and Lloyds/TSB/HBOS. The former is regarded by the market as
broken and we own 70 per cent of it, anyway. The latter is in nearly
as much trouble. Let us stop pretending they operate as independent
institutions.
The alternative is to just let them die. However, the atmosphere is
so febrile there would be queues round the block at all banks. We are
well beyond the point at which it might be safe to conduct an
uncontrolled experiment in chaos theory.
Barclays is healthier and has battled valiantly against state
control. It should be encouraged, as with the bigger HSBC, to take
its chances in the private sector knowing that there is no prospect
of any state rescue if either runs into more trouble.
The nationalised chunk might then be rationalised. Its combined debts
would be worked out and parked in a bad bank. Out of the good parts
could be spun later one or more small, old-fashioned commercial banks.
There were alternatives if the government had not made such a serial
hash of things and forced the banks to own up earlier to the extent
of their losses.
But we are where we are and there are historical parallels. One is
with Sweden in the early 1990s and the other is Japan. It is now
obvious that Britain is following the Japanese in conducting endless
running repairs to a broken banking system. It did them no good.
Similarly, every few months the British government returns to the
markets with another pile of taxpayer money it is prepared to lose.
In contrast, the Swedes were vindicated when they took the pragmatic
view that when you are in a hole it is best to stop digging. Admit
how bad the situation is, nationalise quickly what you need to and
have regulators search through the wreckage.
Only such a dramatic act of leadership, a purging, can put a floor
under this crisis. It is time for such a "game changer".
After that, nothing less than a co-ordinated attempt to rebuild
British capitalism is called for. It should contain three elements:
1) The banking system needs to be regulated to make it more old-
fashioned. Bankers should not trade in complex instruments they do
not understand. Their job is to take in deposits, encourage saving
and help fund sensible property purchases. It may be necessary to
prescribe how many times salary can be borrowed until we relearn the
lessons our Victorian ancestors taught us about responsibility.
Remember, access to credit is not a human right. If you want
something, earn the money, save and then buy it. Venture capitalists,
entirely separate from high street banks, should operate in a free
market but their risk is their own and they must follow the law.
2) The public sector needs to shrink as the facts of life mean we
cannot continue to spend in the current fashion. Consider Deputy
Assistant Chief Commissioner Alf Hitchcock, who is leaving the Met
with an annual pension of £80,000. He is crossing the road to the
National Policing Improvement Agency, a Home Office quango, on a
salary of £120,000. That's £200,000 a year. When it emerges we pay
this gentleman nearly as much as the Prime Minister, surely the party
is over?
3) The government must pay down debt and, when it can, cut taxes to
encourage hard work. Also reward enterprising souls searching for
productive ways in which this great country can make its way in the
world again.
None of this can possibly be delivered by the current PM and
Chancellor. Are the Tories prepared to be bolder? Perhaps they hope
to win by default and indeed that may be enough for an election
victory. But this is an emergency and radical surgery requires voters
to be persuaded to grant a clear mandate. Now is the time to start
fighting for it.
========================
CONSERVATIVE HOME Blog 21.1.09
Centre Right Posted by Ruth Lea
Gordon Brown’s economy: hubris turns to nemesis
This week is yet another week of horror for the British economy.
Monday’s banking rescue package contained several useful ideas –
including the “Asset Protection Scheme” (the insurance scheme for
“toxic” assets) and the “Asset Purchase Scheme” in which the Bank of
England will buy corporate bonds, initially with Treasury Bills,
though probably, before long, by pressing a few keys on a computer
(“quantitative easing”). Indeed one could argue that this second
rescue package was necessary - such are the problems with credit
availability. But the potential costs of this new bail-out, along
with RBS’s mammoth losses, spooked the markets and sterling fell like
a stone.
I have already written about my concerns for the public finances –
indeed I have been writing about them obsessively since Gordon Brown
foolishly turned on the spending taps at the beginning of the decade
– but it is now quite clear that chickens are coming home to roost,
bringing all their avian friends with them. And the markets are
beginning to worry about the long-term ability of the British
Government to service its debt. Today’s public sector finances data
(for the month of December) were simply dreadful. Making allowance
for the “financial sector interventions”, including the
recapitalisationsof RBS and the Lloyds Banking Group, public sector
net debt as a percentage of GDP reached 47.5%, the highest since 1978
– two years after the humiliating IMF bailout.
Today’s labour market data were also shocking. The claimant count
alone was up 78 thousand in December and it is quite clear that
unemployment, on the wider ILO measure, will reach at least 3 million
during this recession. The preliminary estimate for fourth quarter
GDP is due on Friday and is expected to show a drop of around 11/2%,
thus officially confirming the British economy is in recession. The
economic news is unremittingly appalling.
Now it is true that even the most pessimistic of us (and I was on the
pessimistic side of “consensus”) simply did not expect the severity
of the recession in which we now are. This is a chastening experience
for all of us. But perhaps we are in good company. As Nils Bohr,
Nobel laureate in physics, is alleged to have said, “prediction is
very difficult, especially if it’s about the future.”
And economic forecasting during this recession is especially
problematic because most economic models (and hence forecasts) have
an inbuilt assumption that the banking sector functions effectively
and efficiently, lubricating the economy with the necessary credit.
In the current recession, this crucial assumption has been
spectacularly and uniquely (certainly post World War Two) violated.
The British banking system is malfunctioning and such malfunctioning
is especially difficult to quantify.
Indeed a chastening experience – but one man seems untouched by
humility as the economy slides and people lose their jobs. I am of
course talking about the man who had put an end to “boom and bust”,
whilst presiding over the mother and father of all “booms” – in the
housing market, in easy credit, in an unsustainable explosion of
personal sector indebtedness and in British banks’ increasing
dependency on borrowing, much from abroad. These were all potentially
dangerous developments which are now bursting spectacularly. Someone,
surely, in the Treasury was pointing out to the then-Chancellor that
these were dangerous developments. But, as the greatest Chancellor
the country had ever seen, he knew better.
Even now Gordon Brown does not offer a smidgeon of apology. I suppose
he cannot. Even now he blames the world for our problems that are
uniquely the consequences of his disastrous stewardship of the
economy. I’m aware that the following quotation is already doing the
rounds in political circles, but I cannot resist it. Back in 1992
after the pound’s welcome departure from the ERM, he said “a weak
currency arises from a weak economy which in turn is the result of a
weak Government.” There is simply no better way to encapsulate our
current economic woes.
------------------------------------------------------------
Ruth Lea is director and economic adviser at the Arbuthnot Banking
Group and a governer of the London School of Economics.
========================
ECONOMIC ‘Shorts’ 22.1.09
TELEGRAPH
=Barclays may lose control to Gulf investors
Government dismay as state bail-out plan hamstrung by capital-raising
clause that saw Gulf investors pump £5.3bn into bank.
[Under the terms of the deal, the investors have to wait seven months
for delivery of the shares, which convert at 153.276p. - now at
66.1p However, if at any time until June 30 Barclays raises more
capital at a lower price, the Middle East investors are able to take
their stake at that lower level.]
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