It is good news that the Bank of England is thinking about its role in modern markets, and that the US and UK authorities are to review how to handle banking liquidity and regulation in future.

This agenda should include:

1. Have the Basel regulatory arrangements encouraged too much off balance sheet lending?

2. How can a market in securitised good quality loans be restored? Should the authorities buy in or accept as collateral more of these loans, whilst protecting taxpayers against losses?

3. Has the UK Government burdened British markets with too much off balance sheet borrowing of its own? Can this be curbed?

4. Do the leading Central Banks have enough capital of their own to keep markets liquid enough?

5. Shouldn’t Central Banks try to keep market interest rates in line with their announced main interest rate by open market operations?

There is nothing wrong with the idea of banks bundling up loans and selling them to others in the market. That is healthy and helps the growth of the world economy. The danger arises if the banks themselves continue owning large quantities of corporate bonds or securitised papers in conditions where they find they cannot sell or value these assets at a realistic price. Market seizure for bonds or loan packages forces banks to cut their lending and to write down the value of these assets on their balance sheets in moves which can become a vicious circle.

The Central Banks need to find a way of keeping the high quality bond and securitised paper market in line with their chosen interest rate generally. That should be the main issue facing the US/UK Committee.

Meanwhile, the UK Government needs to ensure rapid and orderly repayment of the Northern Rock loans and needs to consider whether that is sufficient to give the Bank of England the financial firepower it needs. It also needs to cut its own appetite for borrowing, which is now in danger of crowding out other borrowers from the market. The Bank needs some of its old powers - and information - back from the FSA so it can understand banks’ positions more quickly and respond in money markets appropriately.

Last night I heard the Wokingham choral Society sing Carl Orff’s Carmina Burana. The highlight was a brilliant rendition of the drinking song of the “Abbot of Cucany”, who boasts that if he drinks with someone all day in the tavern by the evening that person has lost his clothes. The baritone soloist was Grant Doyle. The next song in the cycle explains that in the tavern they gamble to excess as welll as drink too much, and that is where the money goes.
The songs are based on the poems of the wandering scholars or goliads of the Middle Ages, who sung of Fortune’s turns, of love, singing and drinking. The songs and the poems in Orf’s version have a life and a passion which is tremendous. The Choral Society did it full justice with their strong performance.
Listening to that medieval world recorded in verse is like peering under the seats in a cathedral at the misericord carvings to see those scenes of everyday life long ago. The Abbot of Cucany reminded us that just as our present condition drives too many to excessive drink and gambling, with government promoted gaming and high taxes on drink, so too did conditions in medieval Europe.

Press reports of large salaries paid to senior Council officials, and yesterday’s post on this blog about Chief Executives of Councils, has revealed the strong feeling that Council bureaucracies are out of touch and spending far too much on themselves.

We elect Councillors to direct and control these bureaucracies, and are about to see some of them on our doorsteps asking for our vote. It is a good time to remind them that above all we want them to seek value for money in what they do spend, and reduce the Council Tax they impose on us.

To do this, in many cases they could cut the Tax by:

1. Telling their officers that they are halving the budget for external consultancies, as they expect their professional staff at the Council to do more of the work themselves.
2. Impose a staff freeze on all administrative and executive posts, appointing to the ones that really matter from among the exisiting employees of the Council.
3. Design with the top officers a new structure for top officials, with fewer posts, to be implemented as and when senior officers leave. This might entail removing the CEO’s office, or requiring the CEO to undertake one of the functional roles as well.
4. Concentrate the work of the Councils on the main services that matter - schools, social care, planning and transport. Reduce the Council’s involvement in trying to run everyone else’s responsibilities through so called partnerships.
5. Cut the number of commitees and meetings, with Councillors concentrating on a limited number of issues that matter most.
6. Cut out all the expensive surveys - it is the job of Councillors to keep in touch with electors and to know the mood of the taxpayers and service users. Councillors should take an interest in the Complaints department, and seek to abolish it by managing down the number of complaints to remove the need for it.
7. Stopping the urge of some Highways departments to tinker endlessly and expensively with the network.
8. Review the assets of the Council and dispose of assets that are not being used and properly maintained in Council care.
9. Implement a policy to cut the Council’s use of energy by improving insulation, controls and building use.
10. Review the Council’s transport requirements and vehicle use to cut the cost.

Many Councils could save millions by following these simple approaches. Officers try to keep Councillors discussing “unavoidable commitments”, “partnerships”, “service obligations”, grant formulae and budgets based on the expectation of perpetual growth in resources. Councillors need to reply by talking about the cash people have to send to the Council to pay for everything, and the results they are getting for spending it all. They should remember that many people cannot afford an increase in their Council Tax and do not think it represents good value to them.

I am glad to see the Telegraph today giving front page prominence to the rise in mortgage rates this week. See yesterday’s blog on interest rates and the MPC for the background.

Sometimes it is events dear boy that land a Prime Minister in trouble.
This week we have seen the PM trying to cement an alliance between the UK and France. Listening carefully to Mr Sarkozy’s agenda it sounded more like the old Scottish-French alliance, as a strong and integrated EU is more SNP than English Eurosceptic. Gordon Brown followed that diversion with an address to the Labour Scottish Conference, reminding us all of the important Scottish influence over current UK policy.
Maybe this will bring forward the day when Labour, desperate to keep their nothern English seats, propose a change to the Barnett formula to redress the current imbalance in funding?

Since 1974 we have seen the introduction of the Chief Executive Officer in to the world of local government. They arrived with the hated new counties of Avon and the rest cobbled together out of smaller cities and rural areas with differing senses of loyalty. They were introduced in the naïve belief that they would make local government more efficient and better managed, drawing on a false analogy with business. The bogus Counties have now been swept away. It is time to review what the CEOs have achieved and ask if the idea has lived up to expectations?

I know some very good Chief Executives in medium and larger sized British businesses. They all earn six figure salaries, but they deliver great value for their customers and profits for their shareholders. They have the following main responsibilities:

1. To deliver revenue growth, by selling more things to more customers.
2. To control costs – in the case of manufacturing usually to reduce the costs per item produced each year
3. To recruit, motivate, monitor and control a team of senior managers to run the business and through them to keep up morale and achievement throughout the company.
4. To report fully to the Board on performance, and to take a leading role in consultation with the Chairman in developing the strategy for the business.

In order to do this modern private sector CEOs have to work very long hours. Most larger businesses are global or widely spread, with CEOs having to travel away from home regularly to meet customers, visit suppliers and control far flung factories, sales offices and administrative offices. They are often away at week-ends. Their rewards contain a substantial performance oriented element that depends on delivering the profits in the budget, and their jobs are on the line if performance falls too far.

In contrast, the CEO of a Council does not face many of these requirements.

1. The CEO does not have to bother about revenue and customers at all. Most of the revenue comes from national taxpayers in a pre-arranged annual grant, and the rest from a local tax. All the Council does is send out letters to reluctant payers reminding them they will put in prison or their goods seized if they fail to pay. Councillors deal with the “customers”.
2. Most Council executives present their Councillors at the beginning of the annual budget process with a long list of demands for extra spending, and claim that crucial and valued services will have to be cut if the higher administrative budget is not agreed to along with extra tax to pay for it. I have never met a Council CEO who thinks they can deliver as good or better service for less money (in the way industry has to to stay in business) and volunteers a cut in the Council Tax for the first budget draft. If cost control breaks down during the year in a particular service or area, the CEO simply presents a demand for revised budget amounts to be spent, raiding the contingencies fund and the Council balances to pay for it.
3. The CEO does help recruit the senior management team, and does have the task of guiding and chairing its meetings. However, Councillors are also involved and the responsibility is therefore more blurred than in a business. Council CEOs rarely in my experience monitor and manage absenteeism, one of the most obvious ways of watching morale. A CEO facing a problem of low morale is as likely to tell Councillors it is their problem than to fix it.
4. The CEO does not report to the Council in the way a CEO reports to a company Board. Individual Councillors have executive roles, and they are responsible for reporting to Council. The CEO is not usually allowed to speak at Council meetings, though in a way they ought to be meetings primarily reviewing the CEO’s performance at delivering the Council’s strategy. A well led Council does not need a CEO to craft or develop a strategy, as the strategy is the set of policy proposals and promises the majority group offered to the electorate when they secured their victory.

Some Council CEOs work long hours, because they may need to adjust their diaries to have time to talk to part time Councillors, and tbey may face difficult problems in particular services that need their help. I accept that many CEOs are hard working and well intentioned people. I just think the role they are in is ill defined and their actions largely governed by an ever tinkering central government. They do not have to travel abroad, find time for customers, and rarely work week-ends as Councils have all their meetings during the week. Many enjoy the benefits of public sector flexi hours, which allows the long week-end. Most CEOs now have CEO departments – to their salaries of £125,000 to over £200,000 we should add much more as pay for the staff who help them do their work. A typical CEO’s department is now spending several hundred thousand pounds and in many cases well into seven figures.

If Councillors wish to continue with CEOs to “run” their Councils, they need to get smarter at motivating and incentivising them. To some extent, with this government, the CEO will remain whatever the Council does a well paid clerk filling in forms and trying to meet box ticking requirements put on them in profusion by the central government. At the very least Councillors need to specify what the CEO’s responsibilities are, set some hard targets to hit, and to make some of the large payment to them only if they achieve the results. Surely, for example, the CEO could be set a tough target to cut the total administrative costs and outside consultancy budgets of the Council each year, instead of automatically budgeting for an increase? Most Councils start from a well padded budget in these areas. Those Councils which do offer some performance pay often adopt soft targets which do not stretch the executive concerned. It would be interesting to know how many CEOs have been denied all their performance pay for bad performance.

There are other models that could be used. A Council could dispense with a CEO’s department. The Council’s chief financial or legal officer could be made the chairman of the executive team, taking on the executive leadership role, whilst the Council’s strategy could be very clearly the responsibility of the Leader’s office. Alternatively, CEO departments could be slimmed down, and the different nature of the CEO role in local government from business recognised by suitable targets and monitoring of what the CEO can and should do.

The current system is not working. A rapacious central government keeps burdening local government with more and more things to do whilst often not offering sufficient grant to do them. At the same time local government can become careless about its own costs, resulting in unacceptable Council tax rises. Often a good Council is forced into extra administrative staff and extra external consultants to comply with the nit picking requirements of Whitehall.

Back in February, John Redwood had an article published in e-International Relations concerning the Lisbon Treaty, entitled Britain in Europe in 2008: Big World, Bad Europe, Ugly Consequences. This article was criticised by Professor Anand Menon of the University of Birmingham, who published a response under the title of Britain in Europe: A Response to John Redwood. Today, John responds to Professor Menon’s criticisms and argues that those who oppose EU integration are not “little Englanders”, but “big worlders” who wish to see Britain successfully respond to the challenges of US technology, and the economic and political rise of China and India.

It is such a pity that pro European Union apologists like Professor Menno demean their case by spiteful personal attacks and silly misrepresentation. His personal distaste comes out throughout the course of his casual remarks, as in his conclusion that “Redwood and his ilk should look beyond their narrow anti European prejudices”.

I have no anti European prejudices. Europe is my continent, and I admire many of its cultural, architectural, scientific and political expressions. I enjoy travelling, hearing the music and learning from the literature, admiring the great paintings and standing in the buildings that represent the European achievement.

I do have a point of view about government and regulation which is shared by the majority of my fellow countrymen and women. There is too much government, it is too expensive and too prescriptive, and too much regulation which often achieves the opposite of what it sets out to achieve. Like President Sarkozy, I admire the creation of a great democracy in the UK over the centuries, and the spirit of freedom and global vision which characterises the British at their best. I am not a little Englander but a big worlder, responding to the huge changes of economic and political power of our century that come from the excellence of US technology and from the rise of mighty India and China.

Professor Menon sniffs at Conservatives offering a referendum on Lisbon for no good reason. We have always said further transfers of power to Brussels need the consent of the British people. Why is the Professor so afraid to make the case for the Treaty if he thinks it is so good for us? Why do so many people in the UK disagree with him?

He denies my point that debates over constitutional change reveal how undemocratic the EU has become. What more evidence does he need than the way the French and Dutch governments ignored the results of referenda in their countries, or the breathtaking way the UK government denied us the referendum they solemnly promised to win a General Election? He says that was the national politicians, not the EU – but as he should know, the EU is a political elite made up of present and former national politicians, some of them now Commissioners, and some Ministers in national governments pushing the EU agenda. It is this elite which has become so cut off from popular opinion in the UK, and who lost the referenda in France and Holland.

The Professor claims Lisbon reinforces national control. He should try reading the full Treaty, which sacrifices 50 national vetoes, some of them over important areas of national policy, and pushes us further towards a common foreign and security policy and a common criminal justice policy. Those are legitimate aims for those who want a country called Europe governed to a greater extent at EU level, but proponents should make an honest case, not deny this is happening.

He complains that post Northern Rock I want less financial regulation not more, as if it was obvious we needed more. We already have masses of regulation – far more now than years ago when we did not experience runs on banks in the UK. The issue to ask is why should we believe all this regulation is good for us, when we survey the current mess created by the Basel global framework and the EU regional framework of regulation in recent years? We need less and better, not more, and more levels of regulation. It is best to have global agreements, as financial services and banking know no regional borders.

He also thinks an EU common market needs a strong regional government. You do not need a common government to trade with people. You need willing buyers and sellers, and World Trade Organisation rules, which are now good at policing more open markets at least in industrial products. Unfortunately EU rules block up agricultural markets in ways which damage the interests of UK consumers and developing countries and have not yet been dealt with by WTO engagement owing to the unhelpful stance taken by the EU in trade negotiations.

Professor Menon and his friends should understand that people like me want better living standards for all the peoples of Europe, and want Europe to make its contribution to a more prosperous and happier world. We do not find the protectionist and power seeking policies of the European federalist political class helpful in pursuing these goals which is why we want a freer gentler Europe with less government, not more.

Last night I heard a fascinating presentation from the President of Virgin Galactic about their plans to sell people a trip into space on their reusable plane and space ship. They are offering the opportunity to people to become astronauts, seeing the beauty of our planet from space and experiencing weightlessness.

The ambition and the simplicity of the project are both stunning. At a time when NASA and the European Space programme still spend huge sums on earth launched rockets, which require very expensive technology and huge amounts of fuel to propel them the first 50,000 feet against gravity and the atmosphere, Virgin proposes taking a smaller and more lightly fuelled rocket and space ship up on a carbon fibre plane, launching it from beneath the plane at 50,000 feet to make the rest of the climb out of the earth’s remaining atmosphere. The result is a project which offers a low launch cost, a small fraction of the launch cost of a conventional rocket after adjusting for the different payloads the official machines can currently handle.

I find this interesting for several reasons. The first is the private sector is now taking on the challenge of space travel, a province that has ever since the 1930s and Wernher Von Braun’s pioneering steps with rockets been government controlled and financed. The second is the private sector is able to handle a project of this complexity with a very small team of people, to a budget that represents a sensible business bet for a reasonable sized company. The third is the private sector has come up with a very different way of solving the complex problems of launching a heavier than air machine and hurling it into space.

It is always difficult for governments to have the vision and the parallel thinking necessary to make major advances. In Second World War Britain, when innovation was at a premium in matters relating to warfare in order both to keep up with the enemy and to try to get ahead, many of the important breakthroughs came from private sector companies taking a chance on small budgets, and in some cases occurred despite official discouragement. The official machine can often develop just one house approach to a problem. Churchill’s scientific adviser, Professor Lindemann, thought it impossible for the Germans to make the V2. When he was shown the first reconnaissance photo of one on the ground he denied it could be a missile, because it was not large enough to hold all the solid fuel he calculated it needed. He could not bring himself to believe that the Germans had mastered liquid fuel technology for such a rocket and could therefore produce a much smaller effective weapon.

It is easy to criticise in retrospect, as we know the answer. Clever, well educated well intentioned people like official scientific advisers can make mistakes, because government can easily be gripped by a single way of looking at a problem, reinforced by its command hierarchy. We all know how difficult sometimes it is to find something for someone else, as we do not often know what we are looking for, as their description misses out the characteristics that our eyes and brain pick up.

That is why it is exciting that generations brought up in the belief that if you want to go further in space or take more payload you just need to build bigger and bigger ground launched rockets with more stages should now see another more fuel efficient , lighter cheaper option – taking the rockets well up on a plane before the final launch into space. It will be interesting to see how long it is before NASA and the European Space Agency look seriously at Virgin’s breakthrough. The Virgin craft comes back to earth, I was told, with less risk than the re-entry of conventional space vehicles, because it reconfigures its shape to “feather” into the atmosphere before converting back to a glider shape to land. Safety as well as a greener way of getting into and out of space is high up the commercial agenda.

The monthly tea party for academic economists at the Bank of England - the regular meeting which Gordon Brown claimed meant he had “made the Bank of England independent” - looks more and more irrelevant. The other changes Mr Brown made to the Bank, taking crucial powers away, have exposed the Bank to torrid times trying to run the markets.

This week some mortgage rates have gone up, because market interest rates have gone up. The MPC has not met. It has not wanted rates to go up. It has expressed no view on the way money market rates these days may be up to 1% or 100 basis points higher than the rate they recommend.

It should be the Bank of England’s job not merely to host a meeting to settle what rates should be, but to spend the rest of the month making sure that decision is reflected in market rates. If they do not do so, the system breaks down and the MPC looks unimportant.

When market rates first started deviating from MPC rates last year we were in the high noon of the moral hazard period, when the Bank seemed to think it was fine that rates were higher than MPC rates. This week it looks as if the Bank of England does wish to bring rates more into line with MPC recommendations, but is finding it difficult to do so.

A central Bank can control market rates through its open market operations as a main player in money markets. The Bank has not been willing to commit sufficient funds to markets to get market rates down to its proposed rates. One of the reasons may be that the Bank has too much committed to Northern Rock and is short of fire power itself to deal with the shortages in the markets. It reinforces the case for securing earlier repayment of the money advanced to that institution, so the Bank of England has a freer hand to sort out money market rates.The MPC itself could meet and lower its recommended rate to offer a signal that it does not want market rates to rise.

Listening to President Sarkozy yesterday was a salutary experience. The setting was both splendid, and redolent of more difficult times in Anglo-French relations. Maybe the organisers had a sense of humour, asking our guest to address us in a room dedicated to British royalty and dominated by the hanging of magnificent tapestries of the battles of Trafalgar and Waterloo. The President spoke with passion, seeking to woo his new friends. He sidestepped the pitfalls of the place brilliantly, referring to times when we had been rivals rather than allies, and valuing the differences in our approach to monarchy, whilst showing understanding and enthusiasm for our democracy.

The address was divided into two parts. The first was all Duke of Alencon – it was 2008 going on 1579. Mr Sarkozy wooed us, praising England and English virtues. He spoke movingly of the sacrifices many British people made to save liberties in Europe in the two world wars. He told us how much he admired our independent freedom loving spirit, and how much it meant to him to be speaking in the Mother of Parliaments to Lords and Commons assembled. He explained how important the UK had been to Europe’s past, and how much he wanted a new alliance or friendship for Europe’s future.

He had in mind a new romance that was not exclusive. He freely confessed his continuing commitment to the Franco-German axis that has been the centrepiece of the EU for many years, and said he understood we would wish to continue our special relationship with the USA and would not wish to sever links with our Commonwealth. His general vision was of us both reforming world institutions together in the name of democracy. He wooed well.

Then I felt we shifted to 1802, and we heard echoes of a different leader of France. Sarkozy came over as a peaceful Napoleon, pursuing French interests with a strong eye for the diplomatic opportunities.It was the spring of peace of that year, with many British politicians rejoicing at the new friendship they had negotiated with Napoleon, travelling to Paris to see more of the powerful phenomenon that had emerged from French political turmoil. Months later Napoleon was frustrated by his unflattering portrayal in the British press, whilst Britain did not feel France’s leader had kept to his promises.

Sarkozy’s vision was not our vision of greater freedom for individuals, companies and institutions. It was not a call to free trade and less regulation, nor a shared passion for less government and less central intervention. His ideas were more Euro socialist than free enterprise democratic, with the French view of Europe gaining a new ally to project it further on the Euro stage. He wanted Britain to join him in an agenda of reform, but not the reforms many of us would want.

Many MPs and peers loved the speech, and heard the President say he now recognised the need to reform the Common Agricultural Policy. They did not reflect on what he went of to say. To him the main problem with the CAP seemed to be that we let in too much agricultural product from outside the EU, not too little. He wants stronger controls over quality and cleanliness to keep out “unwanted “ product. I did not hear him say the CAP is an affront to the developing world and a scandal for domestic consumers, so it should be swept away.

Some heard him say he was much more of an Atlanticist than previous French leaders, and keen on fighting the Taliban. But he did not say France would definitely send more troops to the hottest part of the conflict, and seemed to want to press on with a European defence alliance between the two greatest military powers in Europe on a basis that might not be a strength to NATO.

His language was more Euro protectionist than free trade and free enterprise in the passages that contained any detail at all. He believes in national champions, sector strategies, and all that panoply of governments picking winners that we had to challenge and change in the UK many years ago. He seems to want more laws on employment in the belief that these offer worker protection rather than destroy jobs. He voices the usual EU agenda of solidarity, intervention and protection.

He had studied the views of our Prime Minister well. He played on his wish to join the PM in a Euro drive against climate change, and constantly stressed the Brown catchphrase that the UK has to be engaged in the EU. He reassured us that the era of institutional change in the EU is over and now we can see what can be done with the “reformed” EU of the Lisbon Treaty. There was no institutional changes left showing above the parapet whatever might be going on behind closed doors in Brussels. He offered those of who want less European government nothing, other than his casual admission that Europe is a “difficult” subject on this side of the Channel, and that he had been on the losing side in the permitted French referendum on the EU constitution, which clearly had not phased him. There was no sense of irony in the way he put the two parts of his speech together. The first longer part, was brilliant praise of the different British temperament and interests, seeking an independent freedom loving democracy. The second part was a request that we commit ourselves to a centralised over governed European project that limits and damages those very freedom loving democratic virtues for which we at our best have stood.

My worry is we will as a country pay too high a price for fine French words without seeking delivery of the true reforms for freedom and free enterprise that the UK should expect of its European partners. We should judge the new French President not by his address – it would be wrong to complain that it was too long or too inflexible, or to praise it too highly for its fine sentiments and moving passages about our more recent past together. We should judge him by whether or not the French are now willing to reform the CAP in a way which cuts its costs to consumers and taxpayers and helps the developing world.

Yesterday in Parliament, John Redwood asked the Foreign Secretary how he intends to police the protests when the Olympic torch comes to London. The exchange, taken from Hansard, follows.

Mr. John Redwood (Wokingham) (Con): When issuing instructions on the policing for the progress of the Olympic torch in Britain, will the Government take the view that the police should allow placards to appear in any picture of the torch passing—the protestors’ view—or will they take the Chinese view that the event should be policed in such a way that no protest placards and posters will be on display?

David Miliband: If the right hon. Gentleman believes that we control the pictures that people take, he is perhaps giving greater credence than is deserved to stories about the Government’s prowess in controlling the media. Obviously, the operational matters will be taken forward by the policing authorities. I am sure that the spirit of the whole House is summed up in the idea that we want to ensure not only security for the torch and a proper celebration of the Olympic spirit, but that our own history and our own commitments to democratic rights and freedom of protest are properly respected.

Later on, Mr Redwood asked the Justice Secretary and Lord Chancellor how the Government plans to ensure its proposals for reforming the Lords will be anything more than an empty gesture. The exchange, taken from Hansard, follows.

Mr. John Redwood (Wokingham) (Con): Do the proposals for the reform of the House of Lords, which the right hon. Gentleman referred to in his statement, entail the abolition of all or most of the unelected places in that House? If so, how would a Government deal with the likely No vote in the Lords to such changes?

Mr. Straw: The basic terms of reference, so to speak, of the cross-party group are the decisions of this House last March in favour of an 80 per cent. or wholly elected Chamber and against any alternatives, so as faithful servants of the House, that is what we are seeking to deliver. The proposals will, of course, have to go in legislative form to both Houses. We will have to see what happens, but I hope very much that when we present proposals, they will be approved.

We feel worse off today, because we are worse off. It’s that time of year when we feel especially harried by our rapacious government. The Council Tax bill comes as a nasty shock, when you discover just how much money they want to take off you for emptying your dustbins. For all those who who do not have Council street lights, who do not have children at school and who never get time to go to the local library to borrow a book, the Council tax is not much of a deal. You just have to accept it as part of the requirement to help pay for the neighbours who use these local services. What is especially annoying is the perpetual wish of many Councils to spend more and more of our money limiting road space and making travel more difficult, and the growing army of Council officials that are needed to deal with the stifling central bureaucracy in Whitehall watching and motitoring their every move.
As a motorist I feel especially punished. If I try to park in parts of London, I need to spend time trying to decipher what the rules are that apply to each few yards of street, as they are often different and complex. The other day one stretch of road was red lined – urban clearway from 8 am to 7 pm Monday to Friday– which seemed to imply you could park free at other times. Nearby in the side road there was pay as you display parking which seemed to require payment from 8.30 am to 10 pm Monday to Friday and for part of Saturday, whilst in the same side road there was residents parking with different times of application. As it was a bank holiday the rules were not specified. Did a bank holiday count as a Sunday – in which case I could apparently park anywhere I liked for free – or did a bank holiday Friday count as a normal Friday, in which case I was snookered? I decided it was all too difficult and waited for a pay and display space to become available so I could send more money to a Council. The last thing I wanted was to fall victim to the predatory clampers or vehicle removers, who hover in parts of London waiting to pounce on anyone who dares leave their vehicle for a few minutes in the “wrong” place and who has not obtained an A level in advanced parking rules.
A couple of weeks ago I needed to go to Ipswich. I decided to go by train. It was an eco disaster. There were only two of us in the carriage I chose, and the other carriages on a long heavy old train were equally empty. We must have caused much more pollution per passenger journey than if we had gone by fuel efficient car. The train was electric powered, meaning energy loss on a big scale at the power station to generate the electricity, as well as substantial energy loss when converting the electrical energy into motive power at the engine. Getting to the station was not easy either in the rush hour, although fortunately my destination at the other end was in walking distance of the station. Coming back there was a half hour delay. Our driver told us it would be a ten minute delay owing to a broken down freight train. It meant it would have been quicker by car after all, as well as cheaper, and greener at least on the outbound. They really do need to raise the railway’s game if it is to be environmentally friendly, and customer friendly as well.

This morning the FSA takes the regulatory blame for Northern Rock and admits it made mistakes.
I think it is a case of mistaken identity. It was the Chancellor and the Bank of England that presided over the collapse of Northern Rock, not the FSA.
Remember what happened. In the summer of 2007 money markets dried up in an unprecedented way. Some of us went hoarse telling the Bank of England they needed to make more money available so the money markets could function.
Instead, in September, knowing Northern Rock could not borrow all it needed from the money markets, the Chancellor and the Governor of the Bank made speeches saying banks had lent too much and if they got into trouble it served them right. There would be no bail out.
There was then a run on Northern Rock, as small depositors sought to take their money out. (All this was obvious at the time – see the tab on Northern Rock for my contemporary comments on the Bank’s inaction and the Chancellor’s moral hazard speech).
Fortunately for Northern Rock, after huge damage had been done, the Chancellor and the Bank changed their minds and intervened to protect depositors.

I would not conclude from this that the FSA had got its stress testing wrong – or that the FSA needs more staff. I would conclude that both the Directors of Northern Rock and the FSA did their jobs in the belief that money markets would continue to function, and that the Chancellor would avoid comments that were damaging to regulated banks. These beliefs were not unreasonable. Northern Rock raised money in three main ways – from the money markets, from retail depositors and from securitisation. So do most banks, to differing degrees. As we have seen, other institutions can get into difficulties if money markets seize up, as with Bear Stearns.
What was wrong was that the Bank of England kept the markets so short of funds in August and September, and what was wrong was the speech and interviews of the Chancellor blaming the banks at the very point where a crisis of confidence was about to erupt.

The correct response to this crisis is not to appoint more staff at the FSA and let the FSA take the blame. The correct response is to strengthen the banking arm of the Bank of England, and reconnect the Bank more directly to the full working of the money markets, with a remit to keep the markets reasonably liquid. The Bank has as its main responsibility the setting of interest rates. In recent months the rates it has set have often become academic, as market rates have deviated from them under the pressure of the credit crunch. The Bank needs not only to set rates, but to enforce them.

The questions to be asked today are not about the FSA but about the Chancellor and the Bank.
Does the Chancellor now accept that his no bail out speech was a mistake?
Does the Bank now think it should have made more liquidity available to markets last summer?
What action is the Bank going to take now to ensure that the rates it sets are the rates the market follows?
Will the government restore the powers and duties in banking and money markets to the Bank of England that it took away in 1997?

The oddest thing about this slowdown and credit crunch is the delayed reaction – or the lack of reaction – of the UK housing market. Shares have slumped. Commercial property prices have fallen substantially. Retailers have complained about the squeeze on their customers. Yet house prices are still slightly up on a year ago, and the last few months have seen only small declines in the national house price figures.

High Stamp duty, Home Information Packs and higher mortgage and transaction costs must be encouraging people to sit tight and not move. The market has been short of homes to sell, just at the point when otherwise it might have gone down. Fortunately unemployment has not been shooting up, and most people have been able to meet their mortgage payments even though their budgets are under more pressure. There has been an uneasy equilibrium created by inertia and the new impediments to selling and buying.

We may still, however, be in a for a slow but painful decline in house prices. There is plenty of evidence that new buyers are finding it more difficult to obtain a mortgage. Gone are the deals offering total borrowings in excess of the house price, and gone are the days when you could get by without much of a deposit. US interest rates may be plunging, but UK general rates are much stickier, and banks and building societies are keen to rebuild margins by charging more for a mortgage relative to the general level of interest rates.

There are those who say they do not think lower interest rates will make any difference to the Credit Crunch – indeed that seems to be the fashionable position. They link this with fears about inflation in the UK getting out of control if any action is taken to cut rates. This is a strange misunderstanding of the position.

Lowering the general level of interest rates could be crucial to avoiding the slowdown of the housing market becoming something worse – a price crash. As part of the Credit Crunch is the banks’ unwillingness to accept mortgages when lending to each other, anything that makes it more likely more people can pay their interest on the outstanding mortgages would be good news. Surely more people will be able to afford the mortgage if the mortgage rate comes down, than if it stays up or even goes higher? In the USA the authorities have grasped it. They are fighting the battle of the bulge of the sub prime. If too many sub prime mortgage holders give up on the mortgage, then the losses will multiply through the banking system and more credit will be destroyed. The UK may not have had such an extreme version of sub prime lending as the USA, but similar dynamics apply in our housing market.
If the UK house price slide gathers pace, then more people will be in negative equity where the home is worth less than the mortgage. If more people lose their jobs, more will struggle to pay the high mortgage bills they currently face.

Meanwhile, many people are struggling with an inflation rate much higher than the official figures suggest. There is the shock at the petrol pumps, the increase in Council Tax, the surge in electricity and gas bills and the hit on bread and meat. The public sector is at last taking a tougher line on public sector wages. There is no evidence of inflationary pressures building up on private sector pay, as the market for goods and services is still competitive enough to make passing on big cost increases difficult. Private sector bonuses, especially in the financial sector, will be well down, deflating total remuneration. All this makes it uncomfortable for many people to pay the bills and get to the end of the month with something to spare.

It also means the UK authorities should not worry too much about inflation. We are living through the worst of it now. They should worry much more about slowdown and credit squeeze, which will curb price increases in due course but could do lots of other damage if allowed to get out of control. I urged the government to do more to relax the squeeze in my speech during the Budget debate.

On this day 51 years ago 6 continental countries signed the Treaty establishing the European Economic Community in Rome.
This document has bedevilled UK politics ever since. It was the subject of a referendum in 1975, when a Labour government asked the UK people if they wished to remain within the framework of this Treaty. The government led by Harold Wilson recommended a “Yes” vote, claiming throughout the debate that it was just about a common market, which would create and guarantee more jobs for the UK. We were told that our sovereignty was not at risk, that our Parliament could continue to make the main decisions for our country.

This very one sided presentation of the case began the long tension between public and politicians on the subject of Europe. The political classes gambled correctly by holding a referendum asking for endorsement of the status quo – the fact we were already in the EEC – and assuming most people would not bother to read the Treaty of Rome. Any cursory reading of that Treaty showed it was not just about a common market as UK politicians liked to state.

You only had to read the Preamble to the long Treaty of Rome to see it was about something much grander than just a common market. It stated:

“Determined to lay the foundations of an ever closer union among the peoples of Europe….
Anxious to strengthen the unity of their economies and to ensure their harmonious development by reducing the differences existing between the various regions….
Intending to confirm the solidarity which binds Europe…”

There were some of the overarching themes that were to be given harder form in subsequent Treaties. They always had in mind a Europe of the regions, with regional policy to try to reduce the differences between them. They always had in mind solidarity to the greater good of the greater Community, and always intended to achieve a high level of policy and legislative control over the EEC economies.

The second article pledged the EEC to “an accelerated raising of the standard of living and closer relations between the states belonging to it.” The crucial Article 3 committed the members to the elimination of trade barriers, the establishment of a common customs tariff and external trade policy, freedom of movement for persons, services and capital, a common agricultural policy, a common transport policy, a common competition policy, “the approximation of the laws of the member states to the extent required for the proper functioning of the common market”, a social fund, and the association of overseas territories. In addition it promised a system to remedy disequilibria in member states’ balance of payments.

Article 235 was a catch all which allowed member states to vote to do anything else under the framework of the EEC if they wished by unanimity to do so. So was born the idea of an institution which would grow its own powers as time passed.

In 1975 I read this document prior to deciding how to vote in the referendum. The gap between what the Treaty envisaged and what the government was telling us about the intent was so huge I felt I had to vote “No”. The irony of the Treaty was that some of its most detailed provisions were not going to be enforced. I remember writing to the Commission to complain that the UK was running a very large balance of payments deficit with the rest of the EEC, and should surely benefit from the Treaty provisions that allowed or required action to bring the balance of payments into better balance. I was told in a delphic reply that not all the Treaty provisions could be enforced when it came to the UK’s balance of payments deficit!

One of the reasons the UK is still so unhappy with its relationship with the EU is that many who voted “Yes” in 1975 did so on the advice of politicians without reading the Treaty. They feel they were misled. Many others are too young to have had the chance of a vote, and understand that the EU is now much changed from the EEC that people voted on in 1975.If the government wants to improve our feelings about the EU it should give us a vote now, so all these issues can be properly aired and the public given a choice.

Two weeks ago I faced another one of those moments MPs and public figures should worry about.
I was unable to park in the free space behind the Wokingham Conservative office, so I went to the Town Centre Borough Car Park. As I was about to get out to pay my parking fee, a friendly constituent I did not know offered me one hour of unexpired time on his parking ticket. He meant it kindly.
I had just a few seconds to respond. Should I accept gratefully and save my money? (No, I was not going to reclaim it!). Should I offer the white lie that I needed longer than one hour to avoid the dilemma? Or should I explain that as an MP I had to pay the local Council their dues?
It was clearly not a set up, as my parking there on a Monday morning was a freak event. There were no Borough officials watching my every move. There is no car registration system on the ticket. It is clearly against the rules of the car park to transfer tickets. The constituent was being very friendly and thought it the most natural thing to share it with someone and thwart the ever grabbing Council. Only the constituent and I would know, and he was not going to tell anyone.Maybe he knew I had opposed the increases in car park charges when they had last gone up.
I decided I had to follow the third route, refuse kindly and explain I had to obey the rules.

I would be interested in your honest responses to the following:
Would you have accepted the offer of the free parking?
If you became an MP do you agree you could no longer accept such an offer?
What would you think of your local MP if he were caught fiddling the local car park charges?

There has been a lot of comment on the state of the economy, the Credit crunch and the banking problems over the week-end. It is time to re-examine the views of this blog, and the responses from many of you.

I have argued:

1. The US and the UK will avoid recession but will experience a slow down, sharp in some areas and sectors. Some are trying to talk us into recession, by claiming the US is already in one, but the numbers tell us otherwise. It is quite clear that the Fed, the Treasury Secretary and the President will do everything they can to avoid recession in the US.
2. Inflation will remain unpleasant for the first part of 2007, but in a year or so will have reduced. Most of you disagree strongly, believing the current inflation will persist, and if the authorities do too much by way of cutting rates and making money available will trigger a faster one. I see no evidence that inflation is passing from energy and commodities into wages. We instead seem to be entering a period when real wages will be squeezed, limiting the second round inflationary effects.
3. The authorities need to do more to make the markets more liquid to ease the banking problems. So far the Fed has been very active, doing all it can. The Bank of England seems to be reluctantly coming round to the same conclusion. The ECB is half way there, making cash available but not cutting interest rates. Many of you dislike the advice I am giving, but the authorities seem to be moving in the direction I think is right.
4. The banks will gradually be recapitalised by rights issues, new share issues, and money from the cash rich parts of the world – Asia and the commodity producers. This is gradually happening.
5. UK house prices will fall, along with commercial UK property prices and US house prices. Some think UK residential property price falls unlikely because we are building so few new houses whilst new household formation is greater. I still stick to this view, because the mortgage market is tightening substantially. I accept there is no need for Florida style falls as we do not have the same over building problem and did not have the same degree of excess in sub prime mortgages.

Today Anatole Kaletsky has written one of his thoughtful pieces. He states that the banking crisis is a liquidity crisis, not a solvency crisis. A liquidity crisis is when banks need more cash to pay out depositors and other creditors than they have readily available, and find it difficult to sell their other assets quickly enough to raise the cash. A solvency crisis is when banks do not have enough total assets to meet all their liabilities, so they need to raise substantial new capital.

I agree with him that Northern Rock and Bear Stearns both were liquidity crises – depositors and creditors lost confidence in the institutions and demanded more cash than the institutions could immediately lay their hands on without official help.
The one thing we have to remember, however, that is not in his article, is that a liquidity crisis if badly handled by the banks and the authorities can become a solvency crisis. If Institution A is experiencing a run on its cash, it needs to sell assets quickly to raise more money. This, in poor markets, can drive the price of these assets down to unusually low levels. All banks then have to mark down the value of their assets on their balance sheets, as even high quality assets can no longer be sold for good prices in such conditions. This can lead to some institutions no longer having sufficient assets to cover all their liabilities, so they need to raise more capital or they get into trouble.

This is why some of us recommend that the authorities should help the markets by intervening to keep the price of high quality financial assets up to realistic levels. If the Central Banks stand by and watch as well run institutions are forced to sell high quality assets for well below their normal value, they are allowing more serious problems to emerge in the banking system as a whole. It is in everyone’s interest that high quality mortgage debt, high quality bonds and corporate debt should sell at realistic prices, related to the current structure of interest rates. In a liquidity crisis the price of good quality assets can be driven down too far, putting pressure on well run financial institutions.

Today Christians unite to celebrate the resurrection of Christ. The Good Friday story was a bleak one. Worshippers hear of the betrayal of Jesus by Judas, the denial of Christ three times by Peter before the cock crowed, and the Gospel story of how the Jews demanded the crucifixion of Christ from Pilate. The sorry discovery of Christ in Gethsemane, the denial in the Temple and the endless trials by the Jewish and Roman authorities make grisly reading. Easter Sunday replaces all this sombre news with the joy of the knowledge that Christ is risen. The Sunday story tells of the three women preparing to go to the tomb – Mary Magdalene, Mary the Mother of Jesus and Salome, only to find the entrance stone rolled away. They hear the news that Jesus has risen.

Today Easter takes place in Britain in a largely secular country, where a majority do not believe Jesus was the Son of God, and do not think he rose from the dead. Easter has been overwhelmed instead by commercial interests celebrating the new life of spring through Easter bunnies and Easter eggs in chocolate.

It is a testament to the power of the Christian message and the enduring nature of the Christian story that so much of our secular debate 2000 years on from those events in Palestine should still be about the values of love and justice that Jesus stood for, recorded by his disciples through the Gospels and the Acts of the Apostles. It is a testament to the deep rooted Christian values that we still have an established Church of England, and see the growth of the Catholic and non conformist Churches alongside the official religion. Whilst a majority do not believe, a majority will sit through the occasional Church service at times of need or for the bigger events in their lives, and most will have some understanding of the Easter story.

Indeed, more will have a view on the events that befell Jesus than will understand what their Easter egg is about. There are arguments over the origins of the Easter egg. Some think it was always Christian – a blood red painted egg to celebrate the new life inside, purified by the blood of Christ. Some think the egg was allowed as part of the diet again only after the end of Lent, so Easter Sunday was the day to celebrate the change of menu. Some trace the eggs back to a pagan goddess, Eostre. In several places there are ancient ceremonies of egg rolling hard boiled varieties with or without painted shells. Faberge took the art of the egg to new heights with their amazing jewelled precious metal eggs given to lucky recipients as Easter gifts.

All agree that the egg is a symbol of new life and hope. The Easter hare, who transposed into the Easter bunny, is a symbol of fecundity and spring activity. Many celebrate with a meal of Spring lamb; some remember the Simnel cake with its characteristic chicken and egg decorations over marzipan. Simnel cakes probably date from medieval times, when they would have eleven marzipan balls around their top to represent the eleven true disciples of Jesus. It is a delightful story that Lambert Simnel, the pretender to Henry VII’s throne, devised them when he was given work in the royal kitchens as his punishment for rebellion.

A happy Easter to all my readers.

I would like your thoughts on what is reasonable and unreasonable conduct for an MP. In a series of Moral mazes I am going to pose some everyday dilemmas that could face an MP. I do not have any particular MP in mind for any particular scenario, but these are all possible scenarios that could arise.

The first series of issues arise with the MP’s ability to offer refreshments to guests in the pleasant Commons dining rooms looking out over the Thames in the historic Palace of Westminster. Which(if any) of the following should be a) permitted b) against the Commons rules c) against the Criminal Law?

1. The MP decides it is too dangerous to invite friends and relatives, preferring to be sure by not using the facility.
2. The MP invites a rich acquaintance from the constituency to dinner. They do not discuss party funding, the guest turns out not to be a donor, and the MP pays for the meal himself.
3. As 2 above, but the guest says at the end of the meal he has enjoyed it so much as he earns so much more than the MP he will pay the bill. The MP allows him to do so.
4. As 2 above, but two weeks after the dinner the guest is approached independently by the MP’s party, and willingly gives a donation to the party. The MP is unaware this has happened.
5. The MP invites a rich acquaintance from the constituency to dinner and does mention during the course of the dinner the poor state of his party’s finances.
The guest makes an independent donation without telling the MP after the dinner.
6. The MP invites a rich guest to dinner who has already given to his party, to say thank you to him.
7. The MP invites a rich person to dinner, tells him of the poor state of party finances during the course of the meal, and follows up 2 weeks later to ask for a donation.
8. The MP’s party organisation offers a meal with the MP at the Commons as a raffle prize in an expensive raffle to raise money at a fund raising event. The MP hosts the dinner for the prize winner.
9. The MP offers a meal for two at the House with him as host to a local charity. They sell the offer as a prize to raise money.
10. The MP allows his family to come to dinner at the Commons to celebrate a private family event, and pays the bill himself.
11. The MP allows members of his family to come to an event at the Commons, and allows another family member to pay the bill and act as the effective host.
12. The MP acts as a host for a company from his constituency who want to lay on a dinner for themselves and leading customers in the Commons. The company pays the bill. The MP attends as official host and receives a free dinner for his trouble.
13. The MP acts as host for a private sector body or lobby group to hold a drinks reception in the Commons to put their point of view to other MPs and Ministers.
14. The MP acts as host to a public sector quango to present its case to MPs over a meal in the Commons.

There is much debate about moral hazard. If the Bank of England offers more money to the clearing banks when they need cash, isn’t that bailing out banks who have lent too much to the wrong people? Won’t they just do it again and again?
No, that is not the case. The money markets have frozen. The banking system cannot sell good quality debt on to others at times in current conditions. If the Bank of England steps in if needed and buys some of the highly rated corporate paper and the better mortgages, it is not underwriting poor loans to people who cannot repay. It is keeping the system going when the markets generally have failed, owing to the fear that dominates and the flight to quality by the banks themselves.
I don’t want the Bank of England taking onto its own books poor quality loans that may turn out to be worth less than the deal price. I do want it to make cash available to good banks if and when it is needed, in return for good quality assets that would in normal times be easy to sell in the market close to their face value.
That seems to be what is emerging from the Bank. That will be most welcome, and will reflect what the Fed has been doing for the US banks for sometime.

Let me wind you up this morning, by supporting a Labour Minister who is thought to have made a gaffe.
Jim Knight dared to say he saw a very good lesson being taught by a charismatic teacher to a large class – I think he may have said as many as 70 pupils.
He did not say he wanted all classes to be that size. He did not say small classes were bad. He merely offended against the iron law of the British public sector – things can only get better if productivity falls. Quality is said to increase as you apply more teachers to the same number of pupils, or more nurses and doctors to the same number of patients. The public sector cannot, according to it own rules, do more with less or better with fewer.
It was especially rash of the Minister to give this errant opinion just before the main Spring teachers’ conferences. It leaves him and his view open to easy ritual denunciation.
It would be welcome instead if the intelligent people charged with the duty to educate our young would apply some of their own thought to the conundrum of class size.
Of course it is often good to be able to teach a small class, offering more individual attention. But isn’t it also sometimes a good idea to have a very large class, so more can hear the brilliant lecture, the person with unusual experience or the challenging point of view?
I am often invited into schools or universities to give a lecture about economics or politics. Quite often I am asked to teach far more than 30 in one go rather than the more normal 20-30 in a typical class. No-one thinks that is wrong, or suggests I am wasting my time because so many have come to hear. It is still possible to take questions from those who are most interested and have a point they want me to consider.
So why can’t trained teachers sometimes do the same to good effect? Jim Knight is for once right. He now needs to be brave enough to think it through with the teachers – and maybe ask why standards of literacy are so good in some overseas countries where average class sizes are bigger than here in the UK.

Today the Regulators start their search for the bear raiders who spread false rumours yesterday.
Meanwhile, the Bank of England should repeat that as the apex of our large and strong banking system, it will make enough liquidity available on a continuing basis so the markets function better and bear raiders have less chance to peddle their unpleasant trade. The authorities must use all their powers to protect decent institutions from false rumour and from artificially frozen markets.
The US authorities have responded postively and quickly. The Bank of England and the ECB are also important players. A strong united front from the Central Banks, facing the bears down and reassuring depositors by showing that they will do whatever it takes to support the many good banks there are in the system is what is now needed.
The UK government needs to act with and through the Bank of England. Ministers took the decision to throw so much resource into saving and nationalising Northern Rock, so they need to show the Bank of England that it by areement work with Treasury resources to keep the rest of the banking system liquid if needed. We do not want the authorities restricted in their actions because of the amount of Northern Rock support already on the books.

Yesterday the Commons debated Post Office closures. This century the Post office has been struggling to make a profit on both its counters businesses, and in its main mail delivery activity. The former has been damaged by the government’s decision to switch a lot of its business away from Post Offices to automated systems using the internet, the latter by the growing competitive challenge mounted by competitors. As the Post office confessed in its own Report for 2006-7, the competitors are 40 more efficient than the Post office putting its business under considerable pressure.

It is sad to see the decline of this once proud and profitable nationalised industry. The Counters business lost £99 million on revenue of £868 million last year, a painful level of loss. The government has agreed a staggering £4 billion package of financial support for the business, and has managed to keep that within state aid rules. The 2007 balance sheet shows the Group in net deficit to the tune of £2.2 billion – in other words the liabilities of the Post office exceed its very considerable assets by that amount. The Post Office may have many properties, a big fleet of lorries and vans, a vast array of sorting and delivery equipment, yet add it all up and it’s not enough to cover all the future liabilities. That’s why it needs the government funding package and revenue subsidy.

The main reason is the pension fund.It is the crowning riony that the government’s attack on pension funds by tax and regulation should have brought the main fund of a principal nationalised industry so low. Future employees will get a less good deal, as the management wrestles with the huge deficit. The company has to show the £5 billion deficit on the fund on its balance sheet, and has to make large payments each year into the fund to try to repair the damage. It still employs over 200,000 people directly, as well as the franchisees that run its still substantial network of sub Post Offices. The management is currently battling to cut the future costs of the pension scheme, against Union objections.

The debate in the Commons was largely about the consultation process itself, and the way the management and government go about identifying the 2500 Post Offices they think they need to close to cut the losses. The problem is that closing too many all in one go can make it more difficult in the short term to return to profitability and generate the cash the Group needs. Closures entail costs, whilst they reduce revenues. Unless the Group cuts its overheads more than proportionately it can struggle to get to profit by the negative approach of cutting.

The middle and senior line management of the Post office is not trusted to run their own assets or to grow their own businesses in the way that would be common in private sector activities. Finding new business activities that would adapt well to sales over the Post office counter would be a better model than trying to close too many offices all at once. Trusting managers to redevelop valuable property sites for other uses and to use the cash they free from that to buy or build purpose built facilities in more accessible locations would be a help. If the Post office insists on closing lots of smaller offices, it needs to understand that many of the larger offices are not big enough or modern enough to handle their existing business, let alone the extra business that will be visited upon them following the closures.

The Directors last year between them received over £7 million of pay and bonus, so they have plenty of incentive to get it right. There need to be more and better incentives further down the line, and more power to individual managers to make a difference. I find that the Post office is gripped by the incapacity to change because it is a highly centralised operation, where the measure is cut costs, rather than grow the business.

The oddest thing about this slowdown and credit crunch is the delayed reaction – or the lack of reaction – of the UK housing market. Shares have slumped. Commercial property prices have fallen substantially. Retailers have complained about the squeeze on their customers. Yet house prices are still slightly up on a year ago, and the last few months have seen only small declines in the national figures.

When I last wrote about this I ventured that high Stamp duty. Home Information Packs and higher mortgage and transaction costs were encouraging people to sit tight and not move. The market was short of supply, just at the point when otherwise it might have gone down. Fortunately unemployment has not been shooting up, and people have been able to meet their mortgage payments even though their budgets are under more pressure. There has been an uneasy equilibrium created by inertia and the new impediments to selling and buying.

We may still, however, be in a for a slow but painful decline in house prices. There is plenty of evidence that new buyers are finding it more difficult to obtain a mortgage. Gone are the deals offering total borrowings in excess of the house price, and gone are the days when you could get by without a deposit. US interest rates may be plunging, but UK general rates are much stickier, and banks and building societies are keen to rebuild margins by charging more for a mortgage relative to the general level of interest rates.

There are those who say they do not think lower interest rates will make any difference to the Credit Crunch – indeed that seems to be the fashionable position. They link this with fears about inflation in the UK getting out of control if any action is taken to cut rates. This is a strange misunderstanding of the position.

Lowering the general level of interest rates could be crucial to avoiding the slowdown of the housing market becoming something worse – a price crash. As part of the Credit Crunch is the banks’ unwillingness to accept mortgages as good assets when lending to each other, anything that makes it more likely more of the outstanding mortgages can be serviced and repaid by their owners would be good news. Surely more people will be able to afford the mortgage if the mortgage rate comes down, than if it stays up or even goes higher? In the USA the authorities have grasped it. They are fighting the battle of the bulge of the sub prime. If too many sub prime mortgage holders give up on the mortgage, then the losses will multiply through the banking system and more credit will be destroyed. The UK may not have had such an extreme version of sub prime lending as the USA, but similar dynamics apply in our housing market.

If the UK house price slide gathers pace, then more people will be in negative equity. Once the house is worth less than the mortgage, more people are inclined to give up on it. If more people lose their jobs, more will struggle to pay the high mortgage bills they currently face.

Meanwhile, it is difficult to see how we can become alarmed by inflation against the current background. The public sector is at last taking a tougher line on public sector wages. There is no evidence of inflationary pressures building up on private sector pay, as the market for goods and services is still competitive enough to make passing on big cost increases difficult. Private sector bonuses, especially in the financial sector, will be well down, deflating total remuneration. We have a few more months of bad figures to live through from the impact of raw materials prices and energy. The authorities need to be fighting against too sharp a slowdown from the Credit Crunch, rather than fearing an inflation that seems unlikely to get out of control.

Please find below the text of John Redwood’s speech to the House of Commons from yesterday’s Budget Resolutions and Economic Stuation debate.

Mr. John Redwood (Wokingham) (Con): It has been interesting to be present at this debate, which is a bit like “Groundhog Day”. We had a themed debate rather like it as part of the European scrutiny process, and we will doubtless have a similar debate on Second Reading of the forthcoming Climate Change Bill.

We have seen the three Front-Bench spokesmen all tiptoeing towards the proposition that people should have to pay more for their energy but understanding, as politicians, that that is an extremely difficult thing to sell to them. We have three variants. The Government’s view is that this is probably the least bad excuse to use for raising more money, because they are desperately short of money; Conservative Front Benchers are saying that green taxes should be entirely balanced by other tax cuts so that people would be able to afford them, assuming that the distribution was fair; and the Liberal Democrats are in their usual muddle saying that there is a bit of this and a bit of that, but undoubtedly wanting to tax people more—rather more, I suspect, than the Government.

The tragedy of all this is that those who want to redistribute income cannot guarantee to do it effectively by this particular route. People on low incomes need access to energy and transport just as people on high incomes do, so the Government are driven back on proposals in the Budget to have a one-year increase in the amount of fuel payment assistance for pensioners. That goes a little way towards helping, and other methods will need to be developed if the political classes decide to carry on with accelerating the progress of the market and having ever-dearer energy. We have already seen in recent months a huge energy price signal sent by the big increase in oil prices and the attendant changes in gas prices, coal prices and so forth. If the political classes want to accelerate that process even further by separate carbon levies, carbon trading with artificial prices and other regulatory and tax costs, more work will have to be done on how to do something about the fairness of distribution of those tax rises and cost rises, and there will have to be ways of offsetting those so that people on low incomes do not feel that they are taking a disproportionate share of the burden and are the ones who are deprived of transport and home heating.

Kelvin Hopkins: The right hon. Gentleman seems to be putting forward a rather socialist message, which I welcome, in suggesting that tax should be progressive rather than regressive. What about taxing the rich a lot more and insulating poor people’s houses?

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Mr. Redwood: I think that the hon. Gentleman knows me well enough to be aware that that is not my view of the world. More people can be got out of poverty and into work by moving generally towards lower taxes than towards higher taxes. However, I was making a specific point on the content so far of today’s Budget debate and reminding all those involved in policy formation that one cannot simply carry on with the idea that extra taxes, extra levies and extra regulatory costs can be heaped on to energy without having consequences not only on the rich but on the poor and without needing to have some kind of alternative package. If we are not careful, we just end up with massive administrative churn costs because of the imposition of a lot of administrative costs in raising the levy, the charge and the tax, and then a lot more administrative costs in giving money back to people so that they can afford the levy, the charge and the tax, and we do not achieve what we are trying to achieve. I rather like green promotion in the form of lower taxes for better behaviour. It is good that we have already heard that that worked, as it did very quickly, when we did it for unleaded petrol, which showed that people prefer an incentive to tax increases.

It is important that people listening to our debates, as I hope that some still do, understand that we know that a very big financial crisis is under way in the world and that that crisis has moved on at breakneck speed during the course of the Budget debates. We heard a few brief remarks from the Prime Minister in his statement earlier, but we have not yet had the benefit of Treasury Ministers explaining in this House how they responded to the Bear Stearns catastrophe and the rescue that has been mounted so quickly and successfully in the United States of America, nor have we had from them proper comment on the actions being taken to co-ordinate putting liquidity into markets and seeing the market through the crisis.

In the Budget speech, the Chancellor rightly had a paragraph or so of reference to the world financial background, explaining that it was bleak, but he also claimed, with a hint of complacency, that the UK is uniquely best placed to deal with this crisis. We should try to ensure that the Chancellor and his colleagues have thought through the gravity of the world situation in which we find ourselves and the way in which, in some circumstances, the UK is not uniquely well placed but has its own home-grown problems, which we need to take very seriously. After all, it would be foolish to be complacent given that it was the United Kingdom that had the first run on a retail bank—and, I am pleased to say, the only run; let us hope that it turns out to remain so—whereby retail depositors were so worried that they were rapidly pulling out their deposits, which is what finally triggered the intervention and action over Northern Rock. Bear Stearns is a different kind of run by a different type of investor and depositor—equally lethal but not as telegenic and not affecting people on low incomes as the Northern Rock run visibly and clearly did.

We should ask why, over that long and difficult, and rather cold and wet summer, the British authorities were unable to take pre-emptive action of a kind that might have prevented the Northern Rock crisis developing as rapidly as it did. I am not jogging backwards—I was writing and saying this at the time.
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It was clear to the markets in London in August, if not July, that there was not enough money in circulation, and clear to those watching the markets that there was the potential for a financial disaster or a banking problem. I did not write down the names of the banks that were being mentioned at the time, but Northern Rock was the one that people most feared for, and it was widely rumoured in the markets. It would have been crass to mention it because the last thing that one wants to do is to play any small part in helping to undermine an important institution, crucial as Northern Rock has been to the success of the north-eastern economy and crucial as it is to all the small shareholders and depositors particularly concentrated in the Newcastle and wider north-eastern region.

The Bank of England was placed in an extremely difficult position in August and September. The reforms of 1997 had left it ill placed to understand the nature of such a banking crisis and to be able to respond positively to it. My first recommendation is that the Chancellor urgently look again at the regulatory and banking control framework that he inherited from the 1997 reforms and that he come to this House rapidly to introduce proposals for their improvement and updating.

A central bank is more than a regulator. A good central bank is more, even, than a hands-on referee in a free-flowing game. It is a player in the money markets that it has to supervise, and has to keep liquid, honest and successful. The problem for the Bank of England in August and September, when the money market participants could see that there were difficulties, was that, since 1997, it has lacked two important flows of information that most central banks regard as normal. First, a central bank needs to know everything that the Government are doing.

The Government are usually one of the biggest operators in the money market—particularly a heavily borrowing Government like the present one—and the timing and nature of debt that the Government issue is crucial to the functioning of the market. In 1997, the then Chancellor nationalised the function of running the Government’s debt by taking it out of the Bank of England and putting it into the Treasury. The modern Bank does not have the same minute-by-minute detailed sight of or responsibility for Government business in the market that it had prior to 1997.

The second big problem that the Bank of England has is that prior to 1997, it was the day-by-day banking supervisor of all commercial banks, particularly the main credit-creating clearing banks that run our system. The Bank could see all of that business, and knew about it day by day, hour by hour and minute by minute. It had a close relationship with those banks—the famous Governor’s eyebrows would rise wisely or angrily if anything went wrong. The Bank knew whether they were liquid enough, whether they had squared their positions early enough in the day and whether they were taking a sensible position in the markets, so the banking system worked well.

That responsibility was lifted from the Bank and given to the Financial Services Authority, and is now handled through a tripartite arrangement with the Chancellor and the Bank of England. When the crisis
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struck, it was always likely that it would be more difficult to control and resolve because the principal central bank player did not have all the regular information or history and knowledge of marketplace activity that a central bank should have. That is why I warned, in an economic policy report that I wrote for the Opposition, that we had a weak structure in Britain, and that when there was a financial difficulty—I did not forecast Northern Rock, but I had something like that in mind—things would go horribly wrong because the Bank no longer had those important powers.

The next curious matter is that just prior to the run on Northern Rock, the tripartite system clearly misread the situation very badly. Both the Chancellor of the Exchequer and the Governor of the Bank of England made fierce speeches in which they said that the banking system in Britain had made lots of mistakes by lending too much money to the wrong people, and that it had to meet the consequences of those mistakes—there would be no bail-outs. That would be a heroic thing to say at the best of times; in practice, no Government can allow a major bank to go bust in our global system because many poor and rich people would suffer badly, and there could be a systemic crash throughout the world. It was particularly odd, however, to make such statements when they must have known that they were on the verge of a difficult crisis over Northern Rock, with a possible run on the bank. They had to eat their words a matter of hours later when the run got out of control and the Chancellor said not only that he would guarantee all the deposits in Northern Rock—big though that task was—but the deposits of any bank found in a similar position, leading some to speculate who else in the markets he might have in mind. There was a worry that the run on Northern Rock would lead to a run on other institutions, which there is no need to name here. It is good that we are through that part of the crisis, that there is such a guarantee and that the tripartite system understands that it has to stand behind the banking system.

The guarantees, offers made and the nationalisation of Northern Rock now going ahead have not solved the problem, however. We are now in what some call the second leg of it. I do not think that the problem has legs; it is a continuing problem that will take some time to resolve, and we have just had another nasty chapter in the story—or drama, if you like—with the collapse of Bear Stearns on the other side of the Atlantic.

Mr. Bellingham: My right hon. Friend speaks with a great deal of expertise, but would he agree that one of the interesting features of the scenario is that the business models of Northern Rock and Bear Stearns had one item in common? The level of deposits in both were low compared with the amount of money lent out to customers and the wider market. But in the American case, the Federal Reserve intervened incredibly quickly and expeditiously, without any fuss at all, which stands in stark contrast to what happened here. In this country, the taxpayer, as my right hon. Friend rightly points out, is still heavily exposed.

Mr. Redwood: The speed of reaction shows an important contrast. I am pleased that the Bear Stearns rescue took place as quickly as it did because the scope
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for further collapses and bear raids on other American banks was considerable, and it is good that the American authorities responded strongly and positively because there would have been knock-on effects across the Atlantic on British institutions.

The American authorities are behaving rather differently from those in the UK. The American authorities believe the crisis to be so serious that they need to do two things: first, they need to keep driving interest rates down, and secondly, they need to continue making large sums of money available to keep the banking system liquid. In the UK, the authorities seem reluctant to move interest rates down because of the persistent but historic inflation we have to live through because of past monetary excess and difficulty, and they are making little money available—although they do occasionally make a co-ordinated effort to help to keep the banking system a little more liquid, as we saw in recent days. We need to ask why the matter is being dealt with in different ways, and which is right.

Critics of the Americans say that it is crass to lower interest rates because there is still an inflationary problem, and they go on to say that lowering interest rates will not make any difference because it is not that kind of crisis. Of course lowering interest rates makes a difference; the crisis is due to the fact that some people cannot afford to pay the interest on their debt and repay their loans. If the cost of the loans is lowered through a lowering of the general interest rate—a lot of the loans are linked to that rate—the process would be a bit easier. Some people will not go bust and some will still be able to afford their homes.

It is a bit odd that people are down on sub-prime lending. I would have thought that some in this House would have been overjoyed that people had come up with a way of letting the poor buy a home. Is that not rather a good thing to have done? It is a great pity that the process was overdone and that those involved did not back off sooner and realise that they needed controls that were a bit tighter, but we do not want to bring the whole edifice down and say that poor people can never borrow money to buy a home. Surely it is good news if the lower interest policy in the United States can see some people through this difficult period.

Martin Horwood: Is not one of the problems with the sub-prime business model that it factors in the cost of debt recovery? In other words, it is based on an assumption that many of the people they are targeting will not be able to afford the repayments that they are being offered. Does that not border on the immoral at times?

Mr. Redwood: All banking factors in the probability that some people will not be able to repay. There is not one single sub-prime business model, but lots of different business models for those making loans to people who are a bit hard up. Of course making loans to those who are hard up is more difficult than making loans to those who are rich, but there are not enough rich people, and there are not enough rich people who want to borrow, so it is necessary to lend quite a lot of money to those who are hard up. The art of banking is in deciding how much one can offer and under what conditions. If the authorities can see more of those poor people through by making sensible interest rate adjustments, I say, “Thank goodness for that”, rather
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than, “Serves them right—let’s keep the interest rates high, push more of them under and put them back into the trailer park.” That is not a particularly nice thing to do.

Will the policy be inflationary? I find it difficult to understand how people can say that the American authorities are irresponsible to cut interest rates because that will cause inflation, while at the same time they say that America is already in recession—a questionable proposition—and that it will have a hard landing in a very bad recession. If America is going into a bad recession, bankruptcy, unemployment and falling prices, not inflation will be the problem. The crash in house prices will extend to other goods and assets. I am therefore in favour of lowering interest rates in the conditions that we are considering to try to save something from the mess.

Should more money be made available to the banking system? The answer is simple: of course it should. Whatever people think of bankers—I know that several hon. Members are not best friends with bankers or have various political causes on which to fight them—one cannot live in a modern, sophisticated economy without them. We need people who assess risk, make loans and so on. If they get it catastrophically wrong and we push them all under, we simply make our lives worse, too. There must be moderation in the response, and understanding that we must see enough banks and lending through the crisis so that, if we handle it properly, normal life can be resumed and reasonable economic growth can continue. Money must therefore be made available to the banking system.

That brings me to my next policy recommendation to the Government. One reason why UK authorities cannot do much to make the system more liquid is that too many of the resources of the Bank of England and the Treasury have been expended on nationalising Northern Rock. The sooner the Northern Rock position is unwound, the better because our nation and our monetary authorities cannot afford to have so much tied up in a single, medium-sized—by international or even national standards—mortgage bank. Although the sum of money is small in relation to world financial markets, it is large in relation to the British taxpayer and the Government, and certainly in relation to the Bank of England.

When the Bank of England mounted its rescue of Northern Rock, the former was only 40 per cent. of the size of the latter. It was therefore impossible for the Bank of England to mount a full rescue by itself and that is why—I presume—the Treasury got involved and there had to be proper Treasury guarantees and promises. Taking on something the size of even Northern Rock—a relatively small bank by international standards—required the whole weight of the consolidated fund of the UK and the Government’s money-raising powers. The Government therefore need to accelerate the process of either running off the business or developing new business under whatever model the managers can devise so that we get the £25 billion back as quickly as possible. The Bank of England would thus have a better profile of assets and liabilities again, and more money with which to play in the markets.

In the meantime, perhaps the Government should consider the financing of the Bank of England money market operations because I do not believe that it is
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playing with enough money, and it needs to have a bigger cash reserve available to keep the banking system more liquid during the difficult times. It will not be easy. I am an optimist and I believe that we can get to the other side, but it will require a more intelligent approach by the British authorities than they employed in August and September, and more weaponry in the form of lower interest rates and cash availability in the UK, just as enormous firepower is required in the United States as it, in the eye of the storm, tries to make its way through it more quickly.

The general problem is over-indebtedness worldwide, especially in the American, British and similar economies. The good times were a period of easy credit, when the authorities on both sides of the Atlantic kept interest rates a bit lower than was sensible and either encouraged or turne