Britannia Radio

The first here is so contrary to the endless sub-Keynesian theories  
now reaching us daily that it needs “quiet calm consideration” to  
“disentangle every knot” !

In the second Rees Mogg takes Gordon Brown and nails him to the floor  
right next to a  [as-yet unerected] placard reading RESPONSIBILITY.
This makes a good postscript to Trevor Kavanagh's in "Are you  
listening, Brown? "

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THE TIMES                    9.3.09
1. Believers in free markets are fighting back
Regulation not greed has pushed banks to the edge of ruin
    
    Eamonn Butler

“If you bound the arms and legs of gold-medal swimmer Michael Phelps,  
weighed him down with chains, threw him in a pool and he sank, you  
wouldn't call it a ‘failure of swimming'. So, when markets have been  
weighted down by inept and excessive regulation, why call this a  
‘failure of capitalism'?”

That view, expressed by the George Mason University professor Peter  
Boettke, found much favour among the free-market eggheads who  
assembled in New York this weekend to discuss the financial crisis.  
Up to now the Keynesians have made the running. Greed, they say, has  
brought down the world economy. Only massive public spending can  
revive it. And with the Masters of the Universe now gasping on the  
floor, the G20 summit in April will give them a final kick in the tax  
havens. That'll teach them.

But now the believers in free markets and small government have  
regrouped. The meeting was called by the Mont Pelerin Society,  
founded in 1947 to preserve liberal ideas. Early members included  
Milton Friedman, F.A. Hayek and George Stigler. Their view - as  
expressed by The Ascent of Money author Niall Ferguson - is that  
capitalism isn't dead, though the global banking regulations embodied  
in Basle 2 should be. It took regulators ten years to perfect Basle  
2, but far from making things safer for bank customers, it pushed  
banks to the brink of ruin.

When the banks discovered that their “assets” were riddled with junk,  
everyone ran scared. Nobody knew exactly how “toxic” it all was, so  
the banks couldn't unload it on to anyone. Their “assets” became  
worthless. Under the Basle rules, they had to stop lending. Hello,  
credit crunch.

“This is a balance-sheet crisis,” the billionaire and former  
presidential candidate Steve Forbes told the gathering. “If you had  
to sell your house today, you wouldn't get much for it. That doesn't  
mean it's worthless.” Banks are largely solvent - it's regulation  
that threatens to bankrupt them.
“We need to sell off, split up or close down the zombie banks,” says  
Bill Beach, senior policy boffin at Washington's Heritage Foundation.  
Next, he says, we need to encourage business, not load it, like  
Michael Phelps, with burdens. That means lower taxes, particularly  
business taxes, and less of the regulation that discouraged firms  
employing people.

Occasional crises are the cost of the prosperity that entrepreneurial  
capitalism brings. Try to eliminate risk, and you eliminate  
entrepreneurship itself.
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- Dr Eamonn Butler is director of the Adam Smith Institute. His book,  
The Rotten State of Britain, is published this month
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2. Brown cannot shirk the blame for Lloyds
The Prime Minister and the two top men have ruined a good bank by a  
failure of due diligence

    William Rees-Mogg

Some years ago I served on the board of a well-run bank, with a  
traditional view of the way to avoid bad debts. I learnt that we  
should not take any step without first looking at the books. That is  
“due diligence” and is the essential safeguard. We now know that  
Lloyds Bank bought Halifax Bank of Scotland after only a cursory view  
of the books; little or no “due diligence” occurred.

Such inquiries as Lloyds made failed to detect what are now known to  
be over £200 billion of potentially toxic debts, far more than Lloyds  
could afford to carry. As a result Lloyds has had to buy £260 billion  
of reinsurance from the Government. The bank had lost its  
independence; the Government will own up to 77 per cent of its  
shares; the shareholders, including pension funds, have lost up to 90  
per cent of shareholder value; the Government has acquired another  
£260 billion of contingent liabilities.

Three people share the main responsibility for this financial  
disaster: the chairman of Lloyds Bank, Sir Victor Blank, the chief  
executive, Eric Daniels, and the Prime Minister Gordon Brown. One  
would naturally expect Sir Victor and Mr Daniels to resign their  
posts. Whether or not the purchase of HBOS eventually proves  
profitable, the immediate consequences have been catastrophic.

The remaining private shareholders are furious. It is only possible  
for the chairman or chief executive to remain in office because they  
have the support of the Government. If they had not destroyed their  
bank's independence, they would have had to go already. As it is,  
they can hang on, but they are unwise to do so. They have lost their  
professional reputations as prudent bankers, and all banking depends  
on trust.

It is the Prime Minister's position that is hardest to justify. He  
played a vital part in the negotiation of Lloyds purchase of HBOS and  
in the Government's negotiation of the asset guarantees. In mid- 
September 2008, at the same time as the collapse of Lehman Brothers,  
Sir Victor met Gordon Brown at a reception at Spencer House in London.

The two men, who are old friends, discussed the possible purchase of  
HBOS by Lloyds Bank, including the possible waiving of the monopoly  
rules by the Government. On September 17 Lloyds announced the merger.  
The Prime Minister no doubt saw the merger as a way of protecting  
HBOS at moderate expense to the Treasury. On October 3 the Treasury  
announced a £17 billion bailout divided between the two banks. This  
was essentially a government-approved and government-sponsored act.

Before that fatal conversation Lloyds was still in pretty good shape,  
despite the crisis. Only about £50 billion of the toxic debt that had  
to be guaranteed arose from the Lloyds Bank business; more than £200  
billion is the responsibility that Lloyds took over from HBOS.  
However, with the collapse of Lehman Brothers, it was apparent in  
September that the global crisis was acquiring a dangerous new momentum.

From the point of view of the Lloyds' shareholders, the Lloyds board  
or even the Government, it was already far too risky for Lloyds to  
take on the significant new obligation. Whether or not they knew how  
large the HBOS liabilities might be, the Lloyds management were very  
rash to take on any new liabilities in September 2008, let alone £200  
billion of dubious debts, more or less sight unseen.

The Government had a responsibility to support the British banking  
system. Lloyds on its own was a big asset; Lloyds plus HBOS proved a  
huge liability.
It is usually a mistake for a prime minister to intervene in a  
commercial negotiation. The political point of view is not the same  
as the commercial. Gordon Brown was trying to solve the political  
problem of HBOS, which was partly a Scottish issue. He wanted to find  
a quick and cheap way out of the HBOS problem, though he could not  
have had any idea how serious that was. Lloyds did very little due  
diligence on HBOS; there was no evidence that the Prime Minister or  
the Government did any.

In these circumstances, the facts were not known and false  
assumptions were not challenged. The Prime Minister was most unlikely  
to have considered whether the purchase of HBOS would be in the  
interests of Lloyds' shareholders, yet once he had intervened he  
acquired a responsibility to them. Sir Victor is thought to have been  
eyeing HBOS already as a possible acquisition. As with Sir Fred  
Goodwin's purchase of ABN Amro, which destabilised the Royal Bank of  
Scotland, the purchase of HBOS was a temptation for Lloyds Bank  
rather than an opportunity; it was a bank too far.

It is bad enough that Gordon Brown has helped to destroy the value  
and independence of Lloyds Bank. What is even more serious is that he  
has massively increased the contingent liabilities that will face  
future governments.

We do not know their eventual size, but they are already  
disproportionate to total national expenditure. They will overshadow  
every over payment in future budgets until they have been worked off.  
Future governments [- and the present one if it ever gets as fat as  
another budget -cs]  will not be free to set their own budget  
expenditures; they will always have to consider the risk of a call on  
these banking guarantees. There will be less money to spend on all  
other requirements, including the National Health Service, education,  
welfare and our underfunded defence forces.

What the Prime Minister has done is to open his door to personal and  
political blame, the one thing he was determined to avoid. On his  
visit to the United States, he is reported to have suffered a spasm  
of anger or anxiety in front of some British journalists. “You want  
me to go on television and apologise, but I am not going to do it. I  
have nothing to apologise for. It is not my fault. Get in the real  
world.” In the real world, the disaster that has befallen Lloyds Bank  
is Gordon Brown's fault and his responsibility.