He says it better than I ever could:
http://www.youtube.com/watch?v=94lW6Y4tBXs
Thursday, 26 March 2009
Friday, 13 March 2009
A quiz question
I don't normally gratuitously insult people I don't agree with - there's more effective methods than that. But this from today's Telegraph (via Guido Fawkes) appealed:
Q: What's the difference between Bernard Madoff and Gordon Brown?
A: One has drained fortunes from gullible victims, plundering their income and savings to create an illusion of prosperity. The other is going to jail.
Another difference: I met Madoff a few times many years ago. He was charming, switched on and positive. His misdemeanour was a genuine surprise. Brown's was obvious from the beginning.
Q: What's the difference between Bernard Madoff and Gordon Brown?
A: One has drained fortunes from gullible victims, plundering their income and savings to create an illusion of prosperity. The other is going to jail.
Another difference: I met Madoff a few times many years ago. He was charming, switched on and positive. His misdemeanour was a genuine surprise. Brown's was obvious from the beginning.
Thursday, 5 March 2009
Light Touch Regulation?
It is popular to say, in the financial field, that there was too little regulation.
The photo (of two colleagues) shows the amount of paper generated in a year by the UK's financial regulators in terms of new regulations, amended regulations ro consulations on regulation. Just think how long that would take to read, never mind understand and implement. And also - what good it did.
The problem hasn't been too little regulation, its been too much. And of the wrong kind. The mass of paper stopped regulators and firms from focusing on the real issues, but gave the impression of action. Bit like most of the Government's initiatives, really.
Tuesday, 17 February 2009
We know where you live
Not a comment about our surveillance society, but a concern about the balance of local responsibility for policies and a standard minimum acceptable level of service depending on where you live.
Today's Today programme featured two contrasting issues:
The Tories are about to announce plans for more local democracy.
John Suchet went public on the problems of Alzheimers, noting that some local authorities provide more care than others. The postcode lottery.
I don't have answers, but there is a real problem in this balance. At the moment most local authority funding is national not local, hence the imposition of central control. People chafe because central targets do not always match local priorities. BUT if you don't have them then postcode lottery problems get worse: we do not have national standards of service where people expect them. And this is particularly concerning as so many authorities have one dominant political party so the prospect of voter-led change is small. (Hence the argument for Mayors, but that seems a very unfortunate road to go down as it will just encourage outsize egos. My other worry with Tory proposals is I don't see how they will change the funding arrangements, and without changing that nothing will really change.)
I suspect the answer is to more clearly identify areas where national standards are needed, and to remove most other regional/central prioritisations. Also, to encourage dissemination of powers to Parish/Town Councils. And lastly to not allow councillors to stand for more than two terms. But that sounds like hard work rather than a quick announcement.
Today's Today programme featured two contrasting issues:
The Tories are about to announce plans for more local democracy.
John Suchet went public on the problems of Alzheimers, noting that some local authorities provide more care than others. The postcode lottery.
I don't have answers, but there is a real problem in this balance. At the moment most local authority funding is national not local, hence the imposition of central control. People chafe because central targets do not always match local priorities. BUT if you don't have them then postcode lottery problems get worse: we do not have national standards of service where people expect them. And this is particularly concerning as so many authorities have one dominant political party so the prospect of voter-led change is small. (Hence the argument for Mayors, but that seems a very unfortunate road to go down as it will just encourage outsize egos. My other worry with Tory proposals is I don't see how they will change the funding arrangements, and without changing that nothing will really change.)
I suspect the answer is to more clearly identify areas where national standards are needed, and to remove most other regional/central prioritisations. Also, to encourage dissemination of powers to Parish/Town Councils. And lastly to not allow councillors to stand for more than two terms. But that sounds like hard work rather than a quick announcement.
Monday, 16 February 2009
Worry of the Week
My biggest worry is not the economy, Palestine, Russia, Iran etc; it's this story from the BBC's website: the situation in Pakistan/India/Afghanistan seems very unstable and the development of an extreme State is a real possibility.
Sunday, 15 February 2009
Because I'm worth it
I worked for an investment bank for about 18 years, and was therefore a part of the bonus culture which is now rightly being criticised (although as a support rather than front line person my bonuses were never big enough to be a cause for concern, except to me). I think I can comment on why the culture grew as it did.
People have written before about how the bonus culture works in banks; from the outside it is bizarre and worth a novella. The annual bonus round is a critical part of managing people and therefore the business. This is because rather sadly the bonus is how a generation of bankers came to value themselves: it was the principal measure of their worth as a human being. And this is how the current crazy position has come about. People think they deserve something even though they are part of an organisation which has massively destroyed value – and in some cases, requires tax-payers money just to continue to exist.
I’d distinguish bonuses for three types of people:
- The Board and top management. It is fair to motivate them by some form of long term bonus based on performance. Ideally this should be long term and based on long term increases in shareholder value. In this regard, they are no different to directors/top management of all companies. In 2008 most deserve nothing (a few banks globally, probably only one British one, have performed well and their management may deserve a reward for surviving). I say Bank boards are no different from other companies - but in one regard they are; as I discuss below, margins in banks and financial companies tend to be higher than normal companies. And perhaps schemes should not reward that extra profit.
- The front line people: traders, salesmen and so on. This is where there is most controversy. Traditionally they have been paid a bonus based on their performance - or the performance of their bit of the bank - each year. This is often a standard percentage of profit or revenue. This is like many salesmen or business getters in all companies: superficially it seems reasonable. But:
o Margins in banks tend to be artificially high;
o Many products sold are long term. It is not possible to tell whether or not they are profitable in just one year.
o Both bankers and banks underestimate just how much of the profit comes because of the franchise of the bank – its size, its customer base, its brand and so on. The real contribution by individuals is smaller than they think.
o Many banks see the profits made by more established ones and want to compete – and seek to recruit people to start new business areas. They offer inflated and often guaranteed bonuses to tempt them away. Usually, these new players never make their expected profits.
The problems at most banks have been caused by a small number of business units and a small number of employees. Most business lines have done reasonably well. Hence the temptation to pay some people. But most banks really don’t have the money: they have lost a fortune and depend on taxpayer support. There should be no bonuses at these banks.
(It’s not easy to implement this if there are contractual commitments. But if they really want, Governments can do things. The problem wouldn’t be there if the Government had been more decisive about nationalising the banks in a bad condition, transferring bad assets into a “bad bank” and putting the clean bank back into the private sector.)
- Junior and support staff. They have usually got a small bonus based on overall results and meeting individual targets. Effectively, this is part of their pay. But if it’s coming out of taxpayer money – as it is for a number of banks this year – it needs more justification than normal. Especially as those targets are often defined as selling products to customers who do not always need them.
The real problem of financial services in general and investment banking in particular is that, through the ages, the true value of their products are only known with the benefit of hindsight. And the time period is often long. But the bank usually has a much better idea of the price than the customer who will often therefore overpay resulting in the bank making above average margins, and then sharing that with their employees.
As it happens, in the last few years, the banks didn’t know the value of their products either; they misjudged the risks on the basis of flawed mathematics and artificially cheap money, and actually sold their products too cheaply and lost money when the truth became clear. This was made worse because they over-expanded – they borrowed and lent too much in relation to their capital, which meant that the losses have wiped out their capital. This over-borrowing was encouraged by regulators, supported by Governments. And in the UK, it made worse because the reorganisation of banking regulation in 1997 by our current Prime Minister removed a market focus from bank regulation.
The inherent problems were made worse by another factor which developed during the 1990s; the most profitable parts of banks appeared to be those that sold long term derivative products. Such products really could not be properly priced or even understood by many customers. They were frequently designed to create a false impression by ignoring the spirit and twisting the letter of laws by for example turning highly taxed profits into lower taxed ones, or delaying or bringing forward profits. Bankers engaged in such legalistic behaviour easily lost common sense and sight of the real world, and potentially their moral standards. The resulting culture of high hidden margins and payouts to employees trickled through to the rest of the banking system and also fuelled the "Master of the Universe" syndrome.
I’ve tried to explain why what at first seems reasonable grew into stupidity. This year, bonuses should be non-existent or small and certainly should not be paid by taxpayer supported banks. Going forward, shareholders can’t be relied on to control bank bonuses because of the lack of transparent margins and the incentives of competition and mis-pricing. The regulators need to:
- Restrict bank gearing so they cannot overexpand;
- Require capital to support "off-balance sheet companies"
- Separate investment from Retail banking. Customer deposits should not be used to fund high risk trading.
- Ensure bonus schemes are linked to long term profits; if they are not then capital required should be incresaed for that business unit (so less business can be done).
And customers should only buy what they understand and borrow what they can afford. I remain convinced that the finance industry has on balance done more good than harm – it has enabled the increase in wealth in the last few years – but at a cost much higher than it need have been. Regulators and bankers have a part to play in behaving more sensibly in future, but so do customers.
People have written before about how the bonus culture works in banks; from the outside it is bizarre and worth a novella. The annual bonus round is a critical part of managing people and therefore the business. This is because rather sadly the bonus is how a generation of bankers came to value themselves: it was the principal measure of their worth as a human being. And this is how the current crazy position has come about. People think they deserve something even though they are part of an organisation which has massively destroyed value – and in some cases, requires tax-payers money just to continue to exist.
I’d distinguish bonuses for three types of people:
- The Board and top management. It is fair to motivate them by some form of long term bonus based on performance. Ideally this should be long term and based on long term increases in shareholder value. In this regard, they are no different to directors/top management of all companies. In 2008 most deserve nothing (a few banks globally, probably only one British one, have performed well and their management may deserve a reward for surviving). I say Bank boards are no different from other companies - but in one regard they are; as I discuss below, margins in banks and financial companies tend to be higher than normal companies. And perhaps schemes should not reward that extra profit.
- The front line people: traders, salesmen and so on. This is where there is most controversy. Traditionally they have been paid a bonus based on their performance - or the performance of their bit of the bank - each year. This is often a standard percentage of profit or revenue. This is like many salesmen or business getters in all companies: superficially it seems reasonable. But:
o Margins in banks tend to be artificially high;
o Many products sold are long term. It is not possible to tell whether or not they are profitable in just one year.
o Both bankers and banks underestimate just how much of the profit comes because of the franchise of the bank – its size, its customer base, its brand and so on. The real contribution by individuals is smaller than they think.
o Many banks see the profits made by more established ones and want to compete – and seek to recruit people to start new business areas. They offer inflated and often guaranteed bonuses to tempt them away. Usually, these new players never make their expected profits.
The problems at most banks have been caused by a small number of business units and a small number of employees. Most business lines have done reasonably well. Hence the temptation to pay some people. But most banks really don’t have the money: they have lost a fortune and depend on taxpayer support. There should be no bonuses at these banks.
(It’s not easy to implement this if there are contractual commitments. But if they really want, Governments can do things. The problem wouldn’t be there if the Government had been more decisive about nationalising the banks in a bad condition, transferring bad assets into a “bad bank” and putting the clean bank back into the private sector.)
- Junior and support staff. They have usually got a small bonus based on overall results and meeting individual targets. Effectively, this is part of their pay. But if it’s coming out of taxpayer money – as it is for a number of banks this year – it needs more justification than normal. Especially as those targets are often defined as selling products to customers who do not always need them.
The real problem of financial services in general and investment banking in particular is that, through the ages, the true value of their products are only known with the benefit of hindsight. And the time period is often long. But the bank usually has a much better idea of the price than the customer who will often therefore overpay resulting in the bank making above average margins, and then sharing that with their employees.
As it happens, in the last few years, the banks didn’t know the value of their products either; they misjudged the risks on the basis of flawed mathematics and artificially cheap money, and actually sold their products too cheaply and lost money when the truth became clear. This was made worse because they over-expanded – they borrowed and lent too much in relation to their capital, which meant that the losses have wiped out their capital. This over-borrowing was encouraged by regulators, supported by Governments. And in the UK, it made worse because the reorganisation of banking regulation in 1997 by our current Prime Minister removed a market focus from bank regulation.
The inherent problems were made worse by another factor which developed during the 1990s; the most profitable parts of banks appeared to be those that sold long term derivative products. Such products really could not be properly priced or even understood by many customers. They were frequently designed to create a false impression by ignoring the spirit and twisting the letter of laws by for example turning highly taxed profits into lower taxed ones, or delaying or bringing forward profits. Bankers engaged in such legalistic behaviour easily lost common sense and sight of the real world, and potentially their moral standards. The resulting culture of high hidden margins and payouts to employees trickled through to the rest of the banking system and also fuelled the "Master of the Universe" syndrome.
I’ve tried to explain why what at first seems reasonable grew into stupidity. This year, bonuses should be non-existent or small and certainly should not be paid by taxpayer supported banks. Going forward, shareholders can’t be relied on to control bank bonuses because of the lack of transparent margins and the incentives of competition and mis-pricing. The regulators need to:
- Restrict bank gearing so they cannot overexpand;
- Require capital to support "off-balance sheet companies"
- Separate investment from Retail banking. Customer deposits should not be used to fund high risk trading.
- Ensure bonus schemes are linked to long term profits; if they are not then capital required should be incresaed for that business unit (so less business can be done).
And customers should only buy what they understand and borrow what they can afford. I remain convinced that the finance industry has on balance done more good than harm – it has enabled the increase in wealth in the last few years – but at a cost much higher than it need have been. Regulators and bankers have a part to play in behaving more sensibly in future, but so do customers.
Thursday, 12 February 2009
The Road to Hell
Chris Rea’s song was reportedly based on the M25, but the title could fit the A1 north of Newcastle. Not because it goes to Scotland (or indeed to Newcastle; both are worth a trip). But because it is hellish to drive on: mostly single carriageway, dangerous bends, traffic moving at very different speeds. Lots of delay, bad temper and death. I get a kick out of my hamlet (adult population: 3) being signposted directly from the A1. But I’d give that up for a decent road. (The picture isn’t actually the A1 but its close).
Dualling the A1 would be one of the most significant things which could help this area, by making it accessible and confirming it as main route to Scotland. The local MP, Sir Alan Beith has spent over 30 years in the job; he has certainly helped individuals but I can’t see any sign of him doing anything significant for the constituency. My own view is that he cannot because as a Liberal Democrat he has no influence. During his period Labour and Conservatives have been in power for roughly half the time each. They have not had to take this area seriously. To paraphrase the Liberal Democrat slogan in 2008: A Liberal Democrat vote is a wasted vote. It’s critical at the next election to get someone who can achieve something.
This point is made even more relevant by the Liberal Democrats’ latest economic policy announcement. It makes it clear that they would not spend money on upgrading the UK’s road network. So the Liberal Democrat support for the recently re-initiated campaign to dual the A1 is actually misleading: they do not want such projects to be funded. I hope Berwick upon Tweed electors both realise and remember that at the next election.
Dualling the A1 would be one of the most significant things which could help this area, by making it accessible and confirming it as main route to Scotland. The local MP, Sir Alan Beith has spent over 30 years in the job; he has certainly helped individuals but I can’t see any sign of him doing anything significant for the constituency. My own view is that he cannot because as a Liberal Democrat he has no influence. During his period Labour and Conservatives have been in power for roughly half the time each. They have not had to take this area seriously. To paraphrase the Liberal Democrat slogan in 2008: A Liberal Democrat vote is a wasted vote. It’s critical at the next election to get someone who can achieve something.
This point is made even more relevant by the Liberal Democrats’ latest economic policy announcement. It makes it clear that they would not spend money on upgrading the UK’s road network. So the Liberal Democrat support for the recently re-initiated campaign to dual the A1 is actually misleading: they do not want such projects to be funded. I hope Berwick upon Tweed electors both realise and remember that at the next election.
Thursday, 5 February 2009
Why bother?
The Bank of England's half percent cut in its base rate last week is irrelevant in the real world. It will have minimal impact on borrowers, deter savings and do nothing to help get bank credit moving.
When the history of the "credit crunch" is written I believe the Bank will carry a lot of blame. Less than six months ago, it was still talking about the risk of inflation and the possiblke need to increase interest rates. It did not provide sufficient help or liquidity to banks when they needed it last Autumn, and it has still only done so reluctantly. Like the Government it has reacted too little too late.
This whinge was prompted by the Governor's refusal yesterday to apologise for being slow to act: I agree fake apologies aren't worth having but if he hasn't recognised the need in this case then there is a real problem
When the history of the "credit crunch" is written I believe the Bank will carry a lot of blame. Less than six months ago, it was still talking about the risk of inflation and the possiblke need to increase interest rates. It did not provide sufficient help or liquidity to banks when they needed it last Autumn, and it has still only done so reluctantly. Like the Government it has reacted too little too late.
This whinge was prompted by the Governor's refusal yesterday to apologise for being slow to act: I agree fake apologies aren't worth having but if he hasn't recognised the need in this case then there is a real problem
Wednesday, 4 February 2009
Choice is good for you
Sometimes I wonder if I am cut out to be a Conservative: I was disappointed to hear the Competition Commission had forbidden BBC ITV and Channel 4 from launching Kangaroo, a one stop portal to view their programmes over the internet. Because something so useful and popular would prevent competition.
Why wouldn't consumer usefulness come first?
I'm not sure that competition and choice is always helpful, particularly where consumers have much less information than suppliers. Competition authorities for example took directory enquiries and made it a disorganised mess; and just how many types of orange juice or Ribena does a supermarket shelf really need? And are mobile phone tariffs a consumer benefit? And the Competition Commission has over the years given backing to Tesco's monopolistic control of our shopping and destruction of high street services.
I'm probably just a grumpy old man.
Why wouldn't consumer usefulness come first?
I'm not sure that competition and choice is always helpful, particularly where consumers have much less information than suppliers. Competition authorities for example took directory enquiries and made it a disorganised mess; and just how many types of orange juice or Ribena does a supermarket shelf really need? And are mobile phone tariffs a consumer benefit? And the Competition Commission has over the years given backing to Tesco's monopolistic control of our shopping and destruction of high street services.
I'm probably just a grumpy old man.
Tuesday, 3 February 2009
Protectionism 1,2,3
Hard times make people more selfish, even if selfishness indirectly harms them more. It’s a live topic at the moment which has prompted three thoughts:
What shall we do?
Nick Robinson in his blog, and John Humphrys in his interview with Lord Mandelson yesterday morning highlighted an apparent difference of thinking between cabinet ministers Alan Johnson and Peter Mandelson on how to deal with the “British jobs” issue. This was taken as important – the interview often focused on it. But why does it matter if two people disagree? It surely must be normal for people to have different views and there should be no shame in such disagreements being public until a final line is decided and implemented. Much of what has gone wrong in politics is the spin and tightly controlled flow of information. Different thinking is good.
Four legs good, two legs better
I was going to comment on the “drafting for sale” scandal at the House of Lords: that although politicians criticise the old fashioned nature of the House of Lords, suggesting that it should therefore move to an elected chamber with rules similar to the House of Commons, the alleged offenders were in fact elected MPs who had been transferred to the House of Lords to get them out of the way. And that having a wholly elected upper house would be more likely to create even more legislators divorced from the real world and with no experience of real life.
Then I discovered Rachel Sylvester had said this, much more eloquently than I could, in the Times today.
So I will just express concern about one of the ideas - to ban MPs from having outside jobs. I can see that a good MP should be busy. But MPs today live in a protective bubble with an increasing number never having had a proper job. Having MPs with outside experience can be a good thing.
Any restriction on outside jobs should be accompanied by a restriction on the amount of time MPs can serve – perhaps 2 terms. And perhaps that term restriction would be a good thing anyway. It would make MPs more independent and likely to hold the Government to account.
Any restriction on outside jobs should be accompanied by a restriction on the amount of time MPs can serve – perhaps 2 terms. And perhaps that term restriction would be a good thing anyway. It would make MPs more independent and likely to hold the Government to account.
Lessons of history
The “great depression” was made worse because of protectionism. This is well know. The “Smoot-Hawley Act” is a watchword for the perils of protectionism, a foolish act by short sighted Congressmen. And yet... Democratic Representatives have inserted similar terms into the Obama stimulus programme. So far, the President has not said he will veto these terms*. If enacted as is, much of the good of the programme will be restricted. Why do people not remember the lessons of history?
We see similar short sighted actions by Labour unions in the UK, complaining about foreign workers. Fortunately so far all three parties have correctly pointed out the benefits of the free movement of labour in Europe. But as the Government’s poll ratings continue to be bad I wonder if they will hold the line?
* Although about an hour after writing this he started a round of interviews to say that he did not like the Buy American clauses. I'm sure there was no connection: he was trying to get his Presidency back on track after his picks for Cabinet started fading away. It's good he has accepted protectionism is unhelpful. It will be interesting to see if he can continue to command the high ground, and the debate, now that the first flush of euphoria is over, he has admitted mistakes in Cabinet selection and the Republicans are being stupidly unco-operative. I hope so.
We see similar short sighted actions by Labour unions in the UK, complaining about foreign workers. Fortunately so far all three parties have correctly pointed out the benefits of the free movement of labour in Europe. But as the Government’s poll ratings continue to be bad I wonder if they will hold the line?
* Although about an hour after writing this he started a round of interviews to say that he did not like the Buy American clauses. I'm sure there was no connection: he was trying to get his Presidency back on track after his picks for Cabinet started fading away. It's good he has accepted protectionism is unhelpful. It will be interesting to see if he can continue to command the high ground, and the debate, now that the first flush of euphoria is over, he has admitted mistakes in Cabinet selection and the Republicans are being stupidly unco-operative. I hope so.
Sunday, 18 January 2009
Sunday news comments
1. Saving the (banking) world. Again.
As always, the news is full of another set of initiatives to help the banks lend. And, as always, the BBC's Robert Peston seems to be fully briefed by the Treasury in advance about what is going to happen. This must be news management: it obviously can't be a leak otherwise the Met would have arrested him for endangering the security of the country.
I don't like to comment on anything without seeing the details but it does look as though this will be yet another largely ineffective but complex initiative. It does not seem to tackle the main problem - making the banking system free of doubt. This can only happen if the bad assets are removed, and in a way which is not up to the banks to fudge. This might wipe out bank's existing capital - which would punish shareholders rather than taxpayers - but what remains will be good enough to enable new capital to be raised and would leave a banking system invetors can be confident in. Why hasn't it already happened? I would guess a combination of bank lobbying and Gordon Brown not wanting to admit that his Autumn exercise was a waste of time.
One part of the initiative, reducing the cost of the capital already injected will be helpful - but only by making what had previously been done effective. As always, too little too late.
2. Ken Clark.
Its very tedious to read about "senior conservative activists" objecting to Ken Clark's return. He may be lazy - Tebbit's view - but he's also credible, smart, a proven effective chancellor who bequeathed a good economy to Brown in 1997 and most of all someone who can relate to people. Who cares if he wants to join the Euro or sign up to a European constitution? Most people don't want to and the Tories won't follow that approach.
It can't be right to lock out good people simply because they occasionally say something embarassing or have different views.
As always, the news is full of another set of initiatives to help the banks lend. And, as always, the BBC's Robert Peston seems to be fully briefed by the Treasury in advance about what is going to happen. This must be news management: it obviously can't be a leak otherwise the Met would have arrested him for endangering the security of the country.
I don't like to comment on anything without seeing the details but it does look as though this will be yet another largely ineffective but complex initiative. It does not seem to tackle the main problem - making the banking system free of doubt. This can only happen if the bad assets are removed, and in a way which is not up to the banks to fudge. This might wipe out bank's existing capital - which would punish shareholders rather than taxpayers - but what remains will be good enough to enable new capital to be raised and would leave a banking system invetors can be confident in. Why hasn't it already happened? I would guess a combination of bank lobbying and Gordon Brown not wanting to admit that his Autumn exercise was a waste of time.
One part of the initiative, reducing the cost of the capital already injected will be helpful - but only by making what had previously been done effective. As always, too little too late.
2. Ken Clark.
Its very tedious to read about "senior conservative activists" objecting to Ken Clark's return. He may be lazy - Tebbit's view - but he's also credible, smart, a proven effective chancellor who bequeathed a good economy to Brown in 1997 and most of all someone who can relate to people. Who cares if he wants to join the Euro or sign up to a European constitution? Most people don't want to and the Tories won't follow that approach.
It can't be right to lock out good people simply because they occasionally say something embarassing or have different views.
Thursday, 15 January 2009
The time for action is NOW! (initiative no 245)
Clearly we are in an economic mess. It’s not immediately relevant as to whose fault it is, and of course there are many causes: it’s not just “America” and the occupants of No 10 Downing St are not innocent. But the focus should be on helping the situation.
I can’t understand why so many presumably smart people in the Government, the Treasury and the Bank of England are doing so little (although talking so much). I talked about the irrelevant budget a couple of months ago. And until today nothing has happened since. Although there have been plenty of commitments, presentations and initiatives.
Lots of things are wrong. But the really critical point is that the banks are unable to lend money. Not because they don’t want to – it’s how they make money, it’s how they can rebuild their capital. It’s because they haven’t got enough money to lend. Yes, the Government has put money into some banks and nationalised a couple of others. But (understandably) it wants that money back and it’s charging a lot for it. So it’s not really any help. In addition, it was designed to cope with expected losses on the existing assets banks had, not to support new lending. So it’s really misleading for Ministers to express anger that banks aren’t lending having been given public money. They knew from the beginning that it wouldn’t help. And I’m a bit surprised the LibDems have started to say the same thing.
Last week’s reduction in interest rates by 1/2% was just silly. After the major reductions so far the impact on business will be minimal, as it will be for households because of the cap on rates reductions. But further reductions will harm both savers and the rebuilding of bank capital, both critical for the long term success of the country. The major problem is, as noted above, the supply of loans, not the price. The Bank and the Government seem blind to this. (They are not alone: a coherent view opposed to mine was set out by Kaletsky in the Times: I think he misses the point that savers are prudent: if you fine them or even just reduce rates to nil, they won’t rush out to spend all they have. In fact they will probably save more because the economy must be so bad).
How do you increase the supply of loans? I have written before on the need to cleanse the banking system by setting up a bad bank to absorb the rubbish assets. And at last people seem to be talking about it.
But in the short term, providing a series of loan guarantees would probably help the most. This was suggested by the Tories ages ago....and at last the Government has announced a plan for something similar. But to me it’s another misguided effort, too little too late. It’s focused on small businesses so it won’t help small businesses with big customers or suppliers. It’s bureaucratic, by demanding too much information and process, obviously having been developed by people without business experience. My guess is it won’t work well.
It’s not helped by the focus on presentation. Tuesday evening’s news and comment was all about the plans – as were early Wednesday morning’s, because of leaks and briefings to favoured journalists. But the details weren’t announced until Wednesday morning. So all the commentators could do was talk about what the Government had wanted leaked. And now the details are out, its old news. Especially as by co-incidence the decision on Heathrow’s third runway was announced this morning. So the inadequacies of the guarantee scheme aren’t properly explored. Just why do the media fall for this? Why don’t they wait to see the real story?
I can’t understand why so many presumably smart people in the Government, the Treasury and the Bank of England are doing so little (although talking so much). I talked about the irrelevant budget a couple of months ago. And until today nothing has happened since. Although there have been plenty of commitments, presentations and initiatives.
Lots of things are wrong. But the really critical point is that the banks are unable to lend money. Not because they don’t want to – it’s how they make money, it’s how they can rebuild their capital. It’s because they haven’t got enough money to lend. Yes, the Government has put money into some banks and nationalised a couple of others. But (understandably) it wants that money back and it’s charging a lot for it. So it’s not really any help. In addition, it was designed to cope with expected losses on the existing assets banks had, not to support new lending. So it’s really misleading for Ministers to express anger that banks aren’t lending having been given public money. They knew from the beginning that it wouldn’t help. And I’m a bit surprised the LibDems have started to say the same thing.
Last week’s reduction in interest rates by 1/2% was just silly. After the major reductions so far the impact on business will be minimal, as it will be for households because of the cap on rates reductions. But further reductions will harm both savers and the rebuilding of bank capital, both critical for the long term success of the country. The major problem is, as noted above, the supply of loans, not the price. The Bank and the Government seem blind to this. (They are not alone: a coherent view opposed to mine was set out by Kaletsky in the Times: I think he misses the point that savers are prudent: if you fine them or even just reduce rates to nil, they won’t rush out to spend all they have. In fact they will probably save more because the economy must be so bad).
How do you increase the supply of loans? I have written before on the need to cleanse the banking system by setting up a bad bank to absorb the rubbish assets. And at last people seem to be talking about it.
But in the short term, providing a series of loan guarantees would probably help the most. This was suggested by the Tories ages ago....and at last the Government has announced a plan for something similar. But to me it’s another misguided effort, too little too late. It’s focused on small businesses so it won’t help small businesses with big customers or suppliers. It’s bureaucratic, by demanding too much information and process, obviously having been developed by people without business experience. My guess is it won’t work well.
It’s not helped by the focus on presentation. Tuesday evening’s news and comment was all about the plans – as were early Wednesday morning’s, because of leaks and briefings to favoured journalists. But the details weren’t announced until Wednesday morning. So all the commentators could do was talk about what the Government had wanted leaked. And now the details are out, its old news. Especially as by co-incidence the decision on Heathrow’s third runway was announced this morning. So the inadequacies of the guarantee scheme aren’t properly explored. Just why do the media fall for this? Why don’t they wait to see the real story?
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