Archive for October, 2008
31st October 2008
Back in business….and business, sadly, as usual
Just a short blog to say thank you for all those who sent messages of support after last weekend went a little awry for me and my family. Diolch o galon, dwi wir yn ei werthfawrogi fe a maddeuwch os na fedra i ateb pob un yn bersonol.
One of the things in my intray was this written parliamentary reply:
Adam Price: To ask the Chancellor of the Exchequer what consideration he has given to the remutualisation of (a) Northern Rock and (b) Bradford and Bingley. [230107]
Ian Pearson: There has been no consideration of remutualising Northern Rock or Bradford and Bingley.
I am quite astonished that the Government is not at the very least prepared to consider remutualisation as it mulls over its long term options as regards Northern Rock. Especially since all of the demutualised building societies have now gone belly up or been swallowed up because of their incompetence. The mutuals by contrast are paragons of prudence and stability. Surely we should be encouraging the presence of more mutuals in the market rather than returning Northern Rock ( together with Bradford and Bingley’s mortgage book) to the very banking sector that screwed up in the first place. Even worse would be to merge them with existing instituions (as we partially did with B&B’s savings business and Santander) compounding the already serious problems of concentration and all that will mean for consumer interests and future financial crises.
23rd October 2008
Colofn Golwg: Galw am arian papur dwyieithog: Calling for bilingual bank notes
Wales is the only part of the British Isles which hasn’t endured a banking crisis. England has seen Northern Rock being nationalised in Newcastle, and Bradfod and Bingley in Yorkshire. Edinburgh is still coming to terms with the shock of HBOS and RBS. And in Ireland, one bank has been made bankrupt - a sub-company of a German bank which wasn’t protected by the Republic’s guarantee. In Wales, we only have one bank - as a result of the late Julian Hodge’s imagination. The real banking crisis in Wales is the fact that we don’t have a banking sector in the first place.
Wales is also the only part of the Kingdom which doesn’t have its own banking notes. There is a symbolic strength to this. Of the four countries, Wales was the least successful is building its own business class and institutional infrastructure. Its some kind of anachronism that all our Celtic cousins are able to print their own money. Hong Kong is the only other place in the world where private banks are allowed to do this. But there is also a financial loss to this. Banks such as the Clydesdale in Scotland or Ulster Bank in Northern Ireland make a profit on the basis of the pounds that they produce - a seigniorage worth around £65 million in Scotland’s case, according to the Treasury.
But in Wales, its the Bank of England that has the monopoly ever since the North and South Wales Bank was swallowed up by the Midland union a hundred years earlier (which has since been swallowed up by HSBC which do produce their own money, but only in Hong Kong). We, of course, have the Royal Mint which produces its own seigniorage of over £100 million a year. But the Treasury own this profit, unfortunately.
As a symbolic declaration of national confidence, as a push for the tourism sector and as a cheap international marketing plot, why don’t we insist that the Bank of England produces bi-lingual versions of its five, ten, twenty, and even fifty pound notes? After all, they are an official bi-lingual body under the Welsh Language Act. And why not add the nationalised banks to the list - aren’t they now part of the public sector? In the real economy there’s a need for a Welsh banking presence: a real investment bank, not a shadow bank to Welsh Revenue - a People’s Bank created by the Welsh Government from the remnants of Halifax and the Rock.
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Cymru erbyn hyn ydi’r unig ran o ynysoedd Prydain sydd heb brofi argyfwng bancio. Mae Lloegr wedi gweld gwladoli Northern Rock yn Newcastle a Bradford a Bingley yn Swydd Efrog. Mae Caeredin yn dal i ddygymod a sioc cyflafan HBOS ac RBS. Mae un banc wedi mynd yn fethdalwr ar yr ynys werdd – is-gwmni i fanc Almaenig oedd heb ei ddiogelu gan warant y Weriniaeth. Yng Nghymru un banc sydd gyda ni – cynnyrch dychymyg y diweddar Julian Hodge. Yr argyfwng bancio Cymreig ydi’r ffaith nad oes gennym sector bancio i brofi creisus yn y lle cyntaf.
Cymru hefyd, wrth gwrs, ydi’r unig ran o’r Deyrnas heb ei phapurau punt ei hun. Mae yna rym symbolaidd i hyn. O’r pedair gwlad, Cymru fethodd fwyaf i adeiladau dosbarth busnes cynhenid a’r isadeiledd sefydliadol sydd ei angen ar ei gyfer. Rhyw anachronistiaeth efallai ydi’r ffaith bod banciau ein cefndryd Celtaidd yn medru argraffu eu harian eu hunain. Hong Kong ydi’r unig fan arall yn y byd sydd yn caniatau banciau preifat i wneud hynny. Ond mae yna golled ariannol fan hyn hefyd. Mae banciau fel y Clydesdale yn yr Alban neu’r Ulster Bank yng Ngogledd Iwerddon yn gwneud elw ar sail y punnoedd maen nhw yn cynhyrchu – seigniorage gwerth tua £65 miliwn y flwyddyn yn achos yr Alban, yn ol y Trysorlys.
Ond yng Nghymru Banc Lloegr sydd a’r monopoli byth oddi ar i’r North and South Wales Bank gael ei lyncu gan y Midland union gan mlynedd cynt (wedi ei lyncu ei hun gan HSBC sydd yn cynnyrchu eu harian eu hunain, ysywaeth, dim ond yn Hong Kong). Mae gennym y Royal Mint, wrth gwrs, sydd yn cynhyrchu elw seigniorage ei hun o dros £100 miliwn y flwyddyn. Ond y Trysorlys biau yr elw hwn yn anffodus.
Fel datganiad symbolaidd o hyder cenedlaethol, hwb i’r sector twristiaeth a fel marchnata rhyngwladol rhad, pam ddim mynnu bod Banc Lloegr yn cynhyrchu fersiynau dwyieithog o’i papurau pump, deg, ugain, a pham ddim, pump deg punt? Mae nhw wedi ei ddynodi, wedi’r cwbl, yn gorff cyhoeddus o dan y Ddeddf Iaith. A pham ddim nawr ychwangeu y banciau gwladoledig at y rhestr – ond ydyn nhw nawr yn rhan o’r sector cyhoeddus? Yn yr economi real mae’r gwir angen am bresenoldeb bancio Cymreig: banc buddsoddi go iawn, nid cysgod-fanc Cyllid Cymru - a Banc y Bobl wedi ei greu gan y Llywodraeth Gymreig o weddillion yr Halifax a’r Rock.
20th October 2008
Some thoughts on strategy
I think it was the former Irish Prime Minister Garret Fitzgerald who once criticised the Government of the day’s policy as good in practice, but not good enough in theory. I think that probably just about sums up where we are with the Government’s response so far to the economic crisis. The Government has staved off the meltdown of the banking system by eschewing the kind of neoliberal dogma it once espoused as part of the Washington Consensus and offering to nationalise large chunks of the banking sector. What is less clear is where the Government wants to go from here and why it thinks we are in this mess in the first place. Asking those kinds of questions are, of course, uncomfortable for incumbents as John McCain has found out on the other side of the Atlantic. What we desperately need now - and pretty urgently - is, to dust down a phrase from the past, an Alternative Economic Strategy to lead us out of this morass and to help form the building blocks of a new Washington Consensus as the wind of change begins to blow down Pennsylvania Avenue.
The Chancellor has begun to make some reflationary noises, and hinted that he has dropped Friedman and rediscovered Keynes. But he doggedly refuses to change the monetarist terms of the Bank of England’s remit. So what might an alternative strategy look like. Here’s a first stab:
1. An immediate cut of 2% in base rates. This should, under normal circumstances, raise disposable income and business investment. A repayment mortgage of £200,000 would, by a rough estimate, be on average £200 a month cheaper. Businesses that were facing bankruptcy would be saved. And the banks’ balance sheet would not be looking so bad as the terms of some of some of their dodgier investments would start to look not so madly optimistic after all. All of this is contingent on the banks passing these rate cuts on , of course, which might need some strong-arming from the banks new owners: us. There are inflationary risks to all of this and other worries like a redistribution of wealth away from savers which is not good if we are trying to get people to change their financial habits. But in an emergency we have to prioritise, and the immediate priority is preventing a deep and long recession more commonly known as Depresssion. Or a Great Depression, which always sounded like an oxymoron to me, unless you beling to the Austrian school of economists who actually appear to enjoy this kind of thing.
Of course, these are not normal times as banks are exhibiting some of the money-hoarding behaviour traditionally associated with a liquidity trap. Even a 2% cut might not be enough to get the economy moving as seen from the experience of Japan in the early 90s. The key as Graham Turner argues is to act quickly and decisively enough to provide a kind of psychological jump-start to people’s expectations. The longer we leave it , the less likely it will work.
2. Force nationalised banks to lend to each other. Restarting interbank lending is the first step in rebooting the entire banking system. Unless banks start lending to each other through the wholesale market there is little chance they will start lending to you, me and Dai-the-Plumber on the retail side of the sector. Since many if not most of the banks in Europe soon will be part-owned by Governments then the risk of lending between those nationalised banks at least should be minimal. In order to reduce the risk even further we should force banks to go open-book with each other, as suggested by Richard Murphy. They should co-operate rather than compete.
3. Agree a Social Contract with the banks. All the major banks should be required to agree policies on arrears, repossession, responsible lending and the provision of debt advice in return for any financial assistance from the Government or the Bank of England - not just the recapitalised banks but also those seeking Government guarantees for loans and short-term liquidity. The Chairman of Resolution, Clive Cowdery, for example, has called for banks to commit £50 million to help fund advice services like the CABs. This is the least they should do under the circumstances. We cannot allow tens of thousands of people be made homeless unnecessarily, causing them misery, driving property prices down even more and, ironically, further undermining the banks’ balance sheet in a vicious debt-deflationary circle.
4. Create a National Housing Corporation. I and others have argued for this before but now is the time to do it. This would have two functions: taking into social ownership properties that are about to be repossessed and renting them back to the tenants thus keeping them in their own home (either as a social housing property or as a rent-to-buy lease) and unsold buy-to-let properties; building new social housing for rent, meeting the massive unmet demand demonstrated by ever lengthening council house waiting lists. The Welsh Assembly Government would probably need emergency Westminster legislation to be able to do this on its own. This might be feasible as the Spanish national public radio station RNE1 was reporting over the weekend before last that Gordon Brown, in a private meeting with Jose Zapatero, had talked of “the possibility of buying homes and creating a new mortgage system to revitalize the property market”
5. Break Up the Banks. The financial crisis has led to the creation of bigger, more interconnected institutions. This may make sense in the very short term as big banks help shore up their smaller, weaker counterparts. But it could result in an even bigger crisis further down the road. The creation of mega-banks that are literally “too big to fail” may lead to even more reckless risk-taking by banks that know they are too important to be allowed to go under by Governments. The answer is to make banks smaller - by de-merging existing institutions - and less inter-connected by reintroducing barriers between what used to be called in this country higher-risk ‘merchant’ and lower-risk ‘retail’ banking’. As a first step, we should not allow the merger of HBOS and LloydsTSB - no longer needed now because of nationalisation - that would create a banking behemoth with 29% of the UK mortgage market, to go through. The kind of restructuring we need will take a long time to work through not least because of the massive amount of opaque financial liabilities that some of the banks may hold. In order to bide some time in dealing with this and to insulate the system from further waves of destabilisation we should create a UK version of the Swiss ‘bad bank’ idea to park the so-called ‘toxic assets’ which have come back to bite the banks with a vengeance.
6. Create a 21st century investment programme. I have already suggested a major programme of capital investment and a green jobs recovery programme to provide fiscal stimulus. It looks as if the Government is conceding some ground on this one.
7. Give public money back to the poor. People who are struggling financially - pensioners, those on low incomes, families -are more likely to spend in the current climate than anyone else. Even the wealthy are tightening their belts if the Frieze art fair is anything to go by. We should do what the Australian Government has just done and create a package of benefits and tax cuts targeted at low and middle income groups equal to 1% of GDP. How about extending the winter fuel allowance to everyone in receipt of child benefit, raising the tax threshold and increasing the Basic State Pension?
8. Create a People’s Bank. With the banks stubbornly sticking to a policy of credit contraction, we need to find other ways of offering credit to people, especially first-time buyers unable to take advantage of lower house prices because of excessively stringent lending criteria. I have already floated the possibility of expanding local authority mortgages - possibly backed by a Government guarantee. An alternative would be to turn the Northern Rock and Halifax network into a new remutualised building society.
9. Introduce price controls on energy. The Government has annoucned that it may reintroduce the price controls on gas and electricity abolished by OFGEM in 2002. It needs to do this immediately and impose a windfall tax to fund an energy bill rebate which would pump money back into people’s hands at a crucial time. The Government should extend this, through the creation of a fuel regulator, to petrol and diesel where lower oil prices are not filtering through into pump-prices as quickly as could be expected. Finally, the abolition of VAT on electricity and gas and the introduction of a fuel price stabilisation mechanism (lowering duty in response to any future price increase) should guard against the negative effects of any action on oil supply by OPEC.
10. Government should take a stake in small businesses. It’s not just the banks that could drive perfectly sound companies under because of short-term cash-flow problems but the Government too through Her Majesty’s Revenue and Custom’s habit of posting a petition in the London Gazette advertising to the world said company’s financial difficulties and rendering it nigh on impossible to get any credit thereafter. The Conservatives have suggested a six month holiday on VAT. A better idea might be for the Government to take a temporary equity stake in companies with a solid order book to help them overcome any short-term problem with liquidity.
These ideas are work in progress. Let me know what you think.
18th October 2008
Arc of Hypocrisy
Labour has blasted the Tories’ ‘“juvenile political games” over the economic crisis. This hasn’t stopped them using Iceland’s woes and the nationalisation of Scottish banks as a stick with which to beat the SNP. There is a slight element of schadenfreudein all of this which is predictable from the London media - including the BBC who have taken up the theme with gusto - but it’s a little odd coming from a Scottish-born Prime Minister even if he has a by-election to win in Glenrothes.
There is an ism that begins with an ‘N’ that is discredited by the current crisis, of course: but it’s not nationalism, it’s neoliberalism. Any country, large or small, that has worshipped at its altar over the last few years has had to suffer the consequences as the huge global roller-coaster of debt has juddered into reverse. Hugely over-leveraged Iceland and the flat-tax enthusiasts of the Baltic States are now found wanting. But so too are the US and the UK, the largest and fourth largest economy in the world, that led the trend for deregulated and over-bloated banking sectors fuelling an asset bubble that has now spectacularly burst.
Size is pretty irrelevant here. Small states like Norway and Finland or larger states like Spain that had their banking crisis earlier and re-regulated as a result have emerged relatively unscathed from this financial crisis though they will, of course, have to cope with the effects of the global downturn. The Republic of Ireland - accused of beggar-thy-neighbour policies by British politicians and the British press as if the decision to guarantee all domestic deposits was somehow the Potato Famine in reverse - pulled off an international coup which insulated their banking sector from the crisis. The only bank to go bust in Ireland was the Dublin-based subsidiary of the German bank Hypo Real Estate. Both Angela Merkel and Gordon Brown were angry with the Irish, but Dublin actually exposed the dithering that forced London and Berlin to do something to protect their own banking systems. Lord Jones - formerly of the CBI - even went on the radio to explain the UK couldn’t follow Ireland’s plan because only small countries could afford to provide a total deposit guarantee. An independent Scotland - bolstered like Norway by a sovereign wealth fund - would almost certainly have done the same.
What would an independent Wales have done? Well, I think it’s pretty certain that we wouldn’t have gone warp-speed from a banking sector of one (the diminutive Julian Hodge Bank) to a sector whose liabilities amounted to six times our national income (the putative Iceleandic level of leverage). We would have a relatively small and well-regulated sector which would mean the collateral damage to the Welsh economy would be pretty limited. As it is, we are joined at the hip to a City-dominated London-centric economic system which means we are going to pay heavily for risks we didn’t take and whose up-side we hardly profited from in the first place - unless you believe in trickle-across economics.
In this age of uncertainty, I think it would be best if Labour politicians avoided an air of triumphalism when contrasting Britain’s economic fortunes with anyone, for the moment, small or large. The UK has run large trade and budget deficits for the last decade and a half. While the Russian Government may end up bailing out Iceland, we have funded our mountain of corporate, household and government debt through Russian oligarchs, Asian banks and Middle Eastern sovereign wealth funds. Even the £37 billion bank bail-out touted by Brown as evidence of the strength of the UK was funded by yet more borrowing on the international money markets. Is it any wonder that the credit default swap rates (the cost of insuring against default) for UK Government debt has doubled in the last month or so to three times the cost of ‘little’ Norway. Incredibly, buying insurance against the prospect of default by the Campbell’s Soup Company is now cheaper than insuring against the bankruptcy of British Government. Campbell’s Soup was founded by a Scottish Presbyterian. Enterprising people the Scots. Mr Brown is in no position to criticise, less still to write them off.
14th October 2008
Devolution lite
The House of Commons Welsh Affairs Committee has just published its long awaited report (OK, maybe I need to get out more) on “The proposed draft National Assembly for Wales (Legislative Competence) (Housing) Order 2008″. The Welsh Government is seeking the power to revoke tenants’ automatic right to buy council properties in order to protect and enhance the stock of social housing, particularly in areas of high housing need. The WAC has opined that the proposed LCO is too broad and, bizarrely, that it should include an explicit clause setting out what the Welsh Government cannot do: a kind of devolution-denied clause. The Committee goes on to say that the LCO should specify that the right could only be temporarily revoked on an application by a local authority, subject to a specific time limit and subject to regular review, in areas where there is extreme housing pressure (I am sure that the lawyers would have a field day on the inclusion of that last particular phrase).
The Welsh Affairs Committee is, of course, to use the language of its own terms of reference for this inquiry, acting beyond “the spirit and the scope of the devolution settlement”. The pre-legislative role of Parliament is not set out in the Government of Wales Act 2006. But let’s remind ourselves what the accompanying White Paper actually said:
“The consideration (of draft Orders) could be informed by understanding the use the Assembly might propose to make of these powers in the immediate future. However, as the power would be a general and continuing one for that particular policy area, this would only serve as an example of what could be done; the issue for the Committee and for each House would be the appropriateness in general of delegating legislative authority to the Assembly in the particular policy area specified in the draft Order in Council”
In other words it is not the role of the Welsh Affairs Committee or for Parliament in seeking to amend an LCO restrictively to attempt to draft an Assembly Measure by proxy. That is for the Assembly (that’s why it’s called devolution). Parliament’s role is simply to decide whether procedure has been followed, whether there are any wider constitutional implications and whether it is content to devolve an area of legislative competence (in this case the right to buy) to the Assembly.
It is particularly outrageous that the Welsh Affairs Committee should recommend that “the proposed Order should not proceed” unless its demands are met.
This is to be expected from the Tories on the Committee (the two Davids and an ex-officio Englishman). It’s also hardly surprising from Wales’ answer to Erich Honecker, Alun Michael (deposed by a popular uprising, in case you were wondering). But to see Albert Owen, Sian James, and Hywel Francis and Nia Griffith, all of whom I like and respect, lining up behind the politics of the Westminster veto fills me with a certain kind of despair.
Is this about the bruised egos of a Welsh parliamentary party in the twilight of its days seeing power slipping away as the tide of devolution sweeps inexorably westward. Goodness only knows. But we can expect a lot more of this “parliamentary cretinism” (to use a phrase of Lenin’s that Hywel Francis will surely know) over the next year. If anyone needs proof of why the present system doesn’t work then read the patronising tone of this report.
“The full scope of the power to be transferred under a proposed Order, rather than just the current policy intention, should be clearly expressed in the Explanatory Memorandum. Proposed Orders should be drafted so as to transfer only those powers which are required and for which a clear purpose has been established”
What kind of democracy are we that a committee of our compatriots (and the odd token Englishman) can sit in another country’s capital and deign to deny our elected Government the right to decide on our future as a nation? Why don’t you let the Committee know your feelings and send them a message on [email protected]. Please be polite.