What a fuss about nothing. If the Conservatives had taken money from a British company (legal) as a conduit for money from an overseas resident (illegal) that would have been an interesting story and a complex web to untangle. Fortunately we learn they showed judgement and took no such donation.

The Emmbrook School, the Holt, St. Crispin’s and the Willink all advanced to the semi-finals in the annual Wokingham Schools’ Debating Competition organised by the Rt. Hon John Redwood MP. The first round of the competition, held at the Emmbrook on Thursday the 9th October, saw the home team of Adam Connell and Florence Curtis join Anna Carter and Charlotte Lesbirel of the Holt go through to the semi-final. A week later, on Thursday the 16th October, Albert Bezman and Stephen Gillespie of St. Crispin’s and Lawrence Hill and Dominic Murray-Vaughan of the Willink also made it through.

The first two rounds were chaired by the former leader of Wokingham Borough Council, Mr. Frank Browne, who presided over proceedings. A panel of judges made up of Conservative Councillor Annette Drake, Liberal Democrat Beth Rowland and Wokingham News journalist Rebecca Johnson ranked the winners based on a number of criteria including the clarity of their arguments and the ability to think on their feet.

Speaking about the result, John Redwood said: “The judges probably had the hardest job of the evening as the standard of debating amongst all participants was very high. The participants demonstrated an ability to formulate their arguments and argue their case in front of an audience. These are valuable life skills that will be appreciated by any future employer”.

The semi-final of the debating competition will take place at 7pm on Thursday the 20th November at Wokingham Town Hall. The participating teams in the semi-final will be given the motions to be debated a two weeks before the event. The two winning teams will progress to the final on Friday the 28th November at Wokingham Town Hall, where the winning team will receive the John Redwood Cup for debating and the opportunity to spend a day in the House of Commons with John Redwood.

The debating competition was made possible by the generosity of the sponsors Royal Bank of Scotland, Classicstone Properties, Mr. Bill Clark, Clifton Ingram, 3M and Ticheners.

For more information and for photographs of the participating students, please contact Carl Thomson on 020 7219 4205.

Readers of this site will know that I last estimated government borrowings and pension debts at £1.5 trillion at the time of Northern Rock. Today a new publication estimates it at £1.8 trillion, reflecting the increase in debts to pay for the banking rescues, the further build up in pension liabilities, and the general overrun on public spending and borrowing this year so far. Brooks Newmark has compiled his figures from official sources where possible, and brought together official government borrowing, public-private partnership borrowing, Private finance initiaitive borrowing, borrowing to fund bank capital and loan books and pension deficits.

The BBC wanted to score a couple of points against him this morning. The first was to remind him that the Conservatives did not include pension liability in the figures they used to publish for government debt when in government. That is correct. Mr Newmark responded that this government made companies put pension deficits on their balance sheets, and is lecturing us all on the need for transparency, so they should show the way in their own figures. The second was any incoming Conservative government would not want to change the figures in this way. I trust any incoming Conservative government would immediately order a proper audit of the figures, and publish the true position of the government accounts. Having an honest statement of the starting position is going to be essential to clearing up the mess.

Borrowings and other debts at 120% of National Income represents too large a risk for taxpayers. It is even worse than those figures imply, if the government goes ahead and makes RBS a subsidiary of the state. RBS has a £1.9 trillion balance sheet, larger than our National Income, so the taxpayer would be on risk for a lot if the bank were to start losing money under nationalised management. Northern Rock has been loss making since nationalisation.

A programme to cut the indebtedness of the state would begin by finding other ways to recapitalise the banks than buying shares with public money. It would move on to offering a different deal on public sector pensions for new entrants, which at least entails employee contributions which are then invested in a fund – like the MP and Local government schemes – instead of the pay as you go approach of the civil service. It might also entail only offering new entrants defined contribution schemes rather than final salary schemes to cut the risks. It would certainly include proper controls over administrative and advisory staff numbers, to fight the battle of the bureaucratic bulge.

The government has spent too much and borrowed too much before the recession begins. Now the red ink starts to flow seriously owing to the recession it is going to cause big problems ahead for state finances.

(WRITTEN FOR GUARDIAN COMMENT)

I am asked if we can spend our way out of a recession? I write against a silly political background, where the left are trying to annex Keynes again, as if he were a left wing figure whose views had been buried by Conservative monetarists and deregulators. The truth is very different.

Margaret Thatcher kept her copy of the 1944 White Paper on employment, which incorporated some of Keynes’s perceptions. She used it in one of her big party conference speeches. Conservative economists working since Keynes have usually drawn on his insights as well as the views of others. It was a Labour Prime Minister, James Callaghan, who officially incorporated monetarist thinking into UK government economic policy making, when he recognised that more public borrowing in an inflationary era would make matters worse.

Of course in one sense you can only overcome a recession by more spending. A recession is insufficient demand chasing too many goods and services , leading to job losses, falling prices and cuts in output. The issue is not whether we need more demand or not, but how you bring that about. Confidence is a precious flower, and can be easily damaged if governments take the wrong decisions.

The priority is to encourage more private sector demand, because it is private sector demand which is falling sharply. You do that by cutting interest rates substantially. I have been calling for cuts to head off recession for many months. The authorities are far too slow, persisting wrongly in thinking inflation is next year’s problem when recession is next year’s problem. Lower interest rates feed through immediately to borrowers whose rates are linked to MLR, and later will benefit others as money markets start to function better.

We need more confidence and cash in the system. That is why the Conservative leadership has backed the banking package in its entirety, to give it the best possible chance of succeeding. Until there is more confidence there will be insufficient private sector demand. The gap will be too large for an overborrowed public sector to be able to fill, even if the government took the risk of expanding public borrowing even more than they are already doing.

If the government presses ahead with borrowing £37 billion for bank capital its scope for further borrowing to undertake counter cyclical works will be even more limited. I think they should spend some time amending the package, to get as much of the new banking capital from private sources as possible. This would leave them with a little more flexibility.

As it is, we are facing a huge overrun on borrowing compared with budget. The downturn itself and other policy changes announced so far have probably boosted borrowing by £20 billion this year, on top of the £37 billion for the banks. This means a borrowing requirement forecast at £43 billion could exceed £100 billion. Government needs to keep confidence in its own powers to raise money. These figures are large. Given the delay in trying to get new larger capital projects off the shelf and into action, and given the high borrowing requirement, I do not see a lot of scope for the government on its own to spend us out of recession on this year’s budget. It has to find other ways of allowing the private sector to pick up.

I am asked if we can spend our way out of a recession? I write against a silly political background, where the left are trying to annex Keynes again, as if he were a left wing figure whose views had been buried by Conservative monetarists and deregulators. The truth is very different.

Margaret Thatcher kept her copy of the 1944 White Paper on employment, which incorporated some of Keynes’s perceptions. She used it in one of her big party conference speeches. Conservative economists working since Keynes have usually drawn on his insights as well as the views of others. It was a Labour Prime Minister, James Callaghan, who officially incorporated monetarist thinking into UK government economic policy making, when he recognised that more public borrowing in an inflationary era would make matters worse.

Of course in one sense you can only overcome a recession by more spending. A recession is insufficient demand chasing too many goods and services , leading to job losses, falling prices and cuts in output. The issue is not whether we need more demand or not, but how you bring that about. Confidence is a precious flower, and can be easily damaged if governments take the wrong decisions.

The priority is to encourage more private sector demand, because it is private sector demand which is falling sharply. You do that by cutting interest rates substantially. I have been calling for cuts to head off recession for many months. The authorities are far too slow, persisting wrongly in thinking inflation is next year’s problem when recession is next year’s problem. Lower interest rates feed through immediately to borrowers whose rates are linked to MLR, and later will benefit others as money markets start to function better.

We need more confidence and cash in the system. That is why the Conservative leadership has backed the banking package in its entirety, to give it the best possible chance of succeeding. Until there is more confidence there will be insufficient private sector demand. The gap will be too large for an overborrowed public sector to be able to fill, even if the government took the risk of expanding public borrowing even more than they are already doing.

If the government presses ahead with borrowing £37 billion for bank capital its scope for further borrowing to undertake counter cyclical works will be even more limited. I think they should spend some time amending the package, to get as much of the new banking capital from private sources as possible. This would leave them with a little more flexibility.

As it is, we are facing a huge overrun on borrowing compared with budget. The downturn itself and other policy changes announced so far have probably boosted borrowing by £20 billion this year, on top of the £37 billion for the banks. This means a borrowing requirement forecast at £43 billion could exceed £100 billion. Government needs to keep confidence in its own powers to raise money. These figures are large. Given the delay in trying to get new larger capital projects off the shelf and into action, and given the high borrowing requirement, I do not see a lot of scope for the government on its own to spend us out of recession on this year’s budget. It has to find other ways of allowing the private sector to pick up.

Most of us have to accept we are going to lose from this financial crisis.
Here in the UK the financial losses are going to be large. All homeowners are going to lose a substantial part of the capital value of their home. Some homeowners will lose their home, as they give up the struggle to pay the mortgage. Anyone with shares held directly, or through an investment fund or through a pension fund has already lost a lot. People owning businesses will find it more difficult to make a good living in the year ahead, and the value of their business will fall.

The issue for the authorities is simply this. How big a crash do they want? The Central banks triggered all this, by first allowing an overexpansion of credit and debt, and then deciding they wanted to bring the borrowing party to an end. Some of the banks lent too much to the wrong people on a large scale. Now we need to know how much they want to cut total debt by?

Meanwhile the UK is having one of its idiotic arguments about whether we need more or less regulation, as if this were the issue. I know of no serious commentator on money, credit and the economy who thinks the authorities should wash their hands of responsibility for controlling total money and credit in the system. The issue is not whether to do it, but how to do it. Clearly the method chosen in the last ten years did not work. Credit was not properly controlled on the way up, and is now imploding dangerously.Large amounts of new mortgage regulation did not regulate the main things that matter – how much credit is lent in total, and how much to each individual in relation to the home value and income.

Concerted interest rate cuts on a big scale would help a recovery . It would also take some of the pressure off borrowers. To those that say this in unfair on savers, I say it is necessary for savers protection. As the Icelandic banks have shown, it does not help to offer savers a good rate of interest if the borrowers that pay the interest to the banks can’t afford it and the bank runs out of money to pay the savers.

On Wednesday 8th October at a little after noon the Prime Minister announced a 50 basis point cut in UK interest rates to the Commons. He told us the Governor of the Bank had decided it. The decision came a day before the Monetary Policy Committee had completed its usual monthly processes to settle their view of interest rates. The statement did not say rates were being cut in order to hit the inflation target, but to take part in concerted action around the world to help with the banking crisis. I agreed with the need to take urgent action to cut rates, and am glad the authorities did it.

I have long argued there can be no such thing as a truly independent Bank or Monetary Policy Committee in a democracy. Parliament – or Congress and President – can leave an “independent” body free to do these things as long as they like. However, this freedom will only be extended for as long as the “independent” body does it job well and the system still pleases the people and elected politicians. Once there are worries, concerns or doubts, it is likely the elected officials will reassert their direct power, or change the system. The US system has always required the Fed to support the economic policy of the Administration. Mr Darling has reminded us that the Bank of England too has another duty as well as curbing inflation.

You could argue that the lack of independence of the MPC was obvious as long ago as December 2003, when the government changed the inflation target from RPI to CPI and from 2.5% to 2%. This in effect encouraged the MPC to set lower interest rates, as the CPI was going up much less quickly than the RPI. You can argue that the lack of transparency over who gets reappointed to the MPC and who does not was another weakness in its structure. Surely no sensible person after yesterday can say the MPC is independent?

I do not mourn the passing of the “independent” phase of the MPC. This is the body which kept rates too low in 2003-6. Its main aim was to keep inflation down to 2%. It has shot up to two and a half times that. It failed in the good years to be tough enough. It failed to control prices as advertised.

Now we are on the threshold of bad years it has been too tough. Its actions in keeping rates high as we peer towards recession will increase the number of people who lose their jobs and their businesses during the downswing. Once again the MPC seemed to be driving by looking into the rear view mirror, to capture the inflation it has already allowed, rather than looking through the windscreen to see the crunch ahead.

Let us hope we now can have a more intelligent debate about how to control money in a democracy. It is a great pity that the “independent” MPC did not succeed in curbing excess money and credit growth in the good years. We need new people or a stronger system that will control inflation next time round, when the extent of public debt will lead some to hanker for more inflation to reduce the liabilities. In the meantime we need an MPC and Bank fully committed to countering deflation.

I am urging the government to take more action to head off the worst of the downturn. If interest rates stay too high, if banks are starved of cash, the rest of us will feel the pinch. It will mean expensive overdrafts, reduced or cancelled bank facilities, more pressure on small businesses, and far less turnover in the shops, hotels, restaurants and other service businesses in our area.

A recession starts when a Central Bank puts up interest rates and signals less credit is to b e available. This one began with higher interest rates and money difficulties hitting the mortgage banks. House prices have now dropped by at least 12.5%, and new housebuilding has been severely affected. Car prices are now falling, house sales and purchases are well down and people are feeling the pinch in their daily budgets. It is going to be an uncomfortable few months ahead. Let us hope the government’s huge package for the banks will stabilise them as a beginning. Then we need all the power of the state to be directed to limiting the damage for all the other businesses that will be feeling the cold winds of winter.

Mr. John Redwood (Wokingham) (Con): I welcome a Bill on this subject, and I am glad that my right hon. and hon. Friends on the Front Bench are in a collaborative spirit because this is a case where working together might improve the Bill, but it needs a lot of improvement because the main things that have gone wrong in the past 11 years stem from the grave weakening of the Bank of England that occurred in 1997.

I would like the Bill to go much further than the current draft in giving back to the Bank of England the powers that it had before 1997. I would like the Bill to make it clear that the Bank of England needs to see and understand all of the business in the money markets. The Bank needs to have powers and duties so that it is the prime driver of the money markets. I would like to see the Bank have those powers back so that it is a better judge of the amount of cash and liquidity that we need in the system at any given time, and so that it is more able to enforce its interest rates in the marketplace, which it has been unable to do during the recent, extraordinary breakdown of the markets.

Like my hon. Friend the Member for Stratford-on-Avon (Mr. Maples) and others, I believe that this is not just a story of big banking error—although it is clearly such a story—but a story of massive regulatory failure. I would highlight three regulatory failures, in a different way from my hon. Friends so as not to bore Members or repeat things that have already been stated. The first failure is the regulatory failure of the Monetary Policy Committee of the Bank of England. In the early part of the decade, the committee kept interest rates far too low. It seemed unaware of the power of low interest rates to drive ever more credit, lending and borrowing in the system, and it ignored all the warning signs in the asset markets and the credit bubble that was emerging in the banking figures. Worse than that, the committee is now making exactly the same mistake in reverse. Now that there is a need to fight the problem of recession and deflation, the MPC is driving the car by looking in the rear-view mirror. It is shocked at how much inflation has got out of control, so it is keeping interest rates far too high for current conditions, and way out of line with those in the United States of America, for example.

David Taylor (North-West Leicestershire) (Lab/Co-op): The right hon. Gentleman talked about restoring powers to the Bank of England. Is he about to make the point that monetary policy decisions on interest rates should be taken away from it, almost as a quid pro quo? In the example that he gave of interest rates being set far too low in the early years of this Government, to which I infer he refers, surely the Bank was in pursuit of the target that it was given by the Chancellor of the Exchequer on inflation.

Mr. Redwood: It clearly was not because the target was to keep inflation to 2 per cent. Inflation is currently 5 per cent., so it is 150 per cent. over the target. I am afraid we have to judge that the MPC got it comprehensively
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wrong. I am not suggesting taking the ability away, or putting the matter back under ministerial control; I am making a plea for a much stronger Bank of England that sees all the market activity and Government debt, which was taken away from it and nationalised into the Treasury, and which sees all the day-to-day transactions of the banks because it is regulating them. It would then understand the money markets, and if bankers, alongside academic economists, were trying to produce a total package on how we intervene, how much money we supply and at what price we supply money, the institution would have a better chance of making those independent judgments in the interests of the whole economy. I do not think that anyone in this House can allege that the MPC has been a success because inflation stands at two and a half times the target, the money markets are in meltdown, and interest rates are now far too high for most borrowers. That increases the likelihood of default on loans and further undermines the asset base of the banking system, which is in a very fragile condition.

The second set of errors that were made by the regulators relate to money market liquidity. Perhaps things were too integrated on this occasion, but in the early part of the decade the Bank of England reinforced the message of the MPC by making large amounts of cash available—the markets were too liquid. More recently, the Bank started to withdraw liquidity and every time it did so in 2007, and even in 2008, it exposed more financial institutions to difficult pressures, which we have seen bubble up from time to time. The lesson has been learned there, and while I regard the MPC as still making the same old mistakes, the Bank is now doing exactly the right thing, with Government help, by making huge amounts of liquidity available. There have been statements that it intends to carry on doing so while the fragility continues, and I am pleased we have got to that point, but if we look at the record of the previous seven years, we see—because the Bank did not have the knowledge and powers it used to have—that it was too easy in the easy times and that it withdrew too much liquidity at times of stress and difficulty.

The third set of problems has arisen in the way that banking capital and banking caution have been regulated, as my right hon. and learned Friend the Member for Rushcliffe (Mr. Clarke) and my hon. Friend the Member for Stratford-on-Avon said. There is no doubt that, again, we had pro-cyclical regulation. In the easy money times, the regulator did not seem too worried about banking capital and the gearing. Indeed, we saw the gearing of institutions massively increase over the levels of the ’80s and ’90s. I am afraid that those Members who say that such problems date back to the ’80s do not understand the situation. The gearing in banks is far higher today than it was allowed to be under the system in the ’80s and ’90s.

Now we see, at this rather late stage, the regulatory pressures towards having more banking capital relative to the stock of debt, at exactly the point where the system is extremely fragile. I urge the Government to be careful not to go in for more pro-cyclical regulation, so that they do not increase the deflationary forces at exactly the wrong time, just as the regulatory system seemed to increase the inflationary forces during the days when money was far too easy.

I would like the Bank of England to be reconnected, by being the agent for Government debt, by being the
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supervisor of the banks, so that it sees all the money market transactions, and by being given more opportunity to manage not just the price but the quantity of money, so that we can have a smoother progression. We have lurched from boom to bust and from unacceptably high inflation to what I think will prove to be a lot of disinflation, as we see the impact of the credit implosion come through in prices.

When I was first invited into government, I was given the job of insurance regulator for the then Secretary of State for Trade and Industry. The two main duties of the insurance regulator, which was then a ministerial role, were to ensure that the insurance companies were solvent and to ensure that they were run by fit and proper people. That regime was rather similar to the kind of regime that applies in broad outline to banks and it was perfectly sensible. Coming from a financial background, I had a great fear that conditions would get tough in the early ’90s and that there could be a casualty or two in the list, so I asked for proper information from my regulatory team. It took me a little while to get it in the form that I wanted, but we had the powers to procure it.

Once I had on my desk the balance sheet and the profit-and-loss risk, as we saw it, of those institutions, I managed it. If I saw an institution that I thought might be short of cash or in some other difficulty in six months or a year, I would get on the phone to the chairman of that company privately and say, “I am your friendly regulator. I do not have a power to instruct you to raise money, but it seems to me that it would be very helpful if you did raise some money.” In each case the chairman was very obliging and said, “Actually, it’s a good idea,” or, “Yes, we’re going to do it.” In each case they raised money and those institutions got through what was a fairly unpleasant insurance downturn with no problem.

It is not that difficult for a regulator to do that, because they have access to the information, but it is most important to follow this fundamental principle: they must always act in private. They must never name the institution or seek any credit at the time, because we are talking about incredibly price-sensitive information. If any wind or whiff gets out of the office that the regulator has even a scintilla of doubt about an institution, there could be a run on it and a lot of negative journalism about it. The regulator’s task will then be 10 times greater, because the institution will be on the slippery slope downwards and it will be damaged.

I therefore urge the Government to ensure that there are no leaks or running commentary to us and the public as such difficult and sensitive discussions are under way. Those occasions are ones when it is best if things are done in private and as speedily as possible, and if we are told only when the decision has been made and the proper authorities can be notified.
Apart from greater powers for the Bank and whatever powers the regulator needs to regulate intelligently in the way that I have described, I would also like to see some kind of control in the Bill of the ability of the Government and the Bank to use the special powers of acquisition. I strongly believe that in practically every case, if not in every case, it should be possible to solve such problems with private sector solutions, such as
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through private sector fundraising or by cancelling the dividend, cutting costs, shedding some assets, having some disposals or ensuring that capital can be found from sources outside over a reasonable time period.

Those are some of the panoply of ways a business can try to get its capital ratios into shape and get the cash that it needs to continue its business. It should be in the interests of all well-meaning people in the House to keep those things in the private sector, to make businesses accept the disciplines of the private sector, to blame those in charge of them when they get it wrong and to ensure that the new management sort things out as quickly as possible.

However, my worry about the proposals before us is that the taxpayer is being asked to take on too much risk. The three banks to which public capital might be subscribed—I say “might” because a number of votes have to take place and there are still opportunities for private shareholders to come forward with money—have, in aggregate, balance sheets of almost £3 trillion. That is twice the country’s national income and around five times its annual tax revenue. If something went wrong and just 1 per cent. of those assets had to be written off, the owners of those banks would collectively lose £30 billion.

Thirty billion pounds is a very large sum of money, even for the British taxpayer. It is 5 per cent. of tax revenue in a single year. Are we sure that there could not be a 1 per cent. loss on the assets of those banks when they come into public ownership? I know that some of those assets are as risk free as one can get, and include Treasury bills and that sort of thing, but some of them are not. Some of them are the mortgages and the loans to companies that we have been worrying about. We are being asked to absorb those assets as we go into recession, when it will not be just the mortgage book that deteriorates in quality, but the loan book to companies, as I fear that we are about to enter a period when companies will find it difficult to keep going. In some cases they will find it difficult to earn a profit or generate cash and will look to their bankers for more support. In some cases, businesses will stumble and be incapable of keeping the payments going.

I would therefore like a reminder in the legislation, and perhaps a requirement to come back to the House in an emergency, that there must be some limit. Just as we are now preaching to the private sector that banks should not get over-geared and over-borrowed, should we not be preaching to ourselves that the Government and the public sector should not get too over-borrowed and over-extended? I hope that the Government will go away over the next two or three weeks, work with those banks that have given an indication that they might like public capital, go through the figures again and ask, “How can you get the demand down? How can you generate more cash for yourself? How can you get more private sector capital coming into your bank to cut the taxpayer risk?” Otherwise, the British state will be left in a weakened condition, which is not what we want at this juncture.

The decision of the Dutch government to put more capital into ING is strange. A week ago when ING took on deposits from a failed Icelandic bank,and on October 17th in a press release, we were told that ING was in a strong financial position. Now we are told it will have extra taxpayers capital. The governments and Regulators have raised the bar over how much capital a bank should have, and are now having to pay up to meet their own higher hurdle to appease the markets. Meanwhile a French bank loses substantial sums in “unauthorised trades” so the three bosses of the bank resign. One wonders why the top people have to resign at a bank if employees broke the rules, but not at all the banks which got into financial difficulties by doing what the Directors asked or authorised.

It is good news that many in the political and media classes reckon we have now lived through the worst of the banking crisis and think it is now all on the mend. A return of confidence in banks is a necessary part of recovery for the rest of us. However, the authorities have to understand that you cannot have strong banks without a stronger economy. They need to do more to ease the recessionary forces, otherwise banks will face much larger losses right across their portfolio of loans. The issue now is whether we can stave off a corporate loan problem to run alongside the sub prime mortgage problem being experienced on both sides of the Atlantic.

It is also worrying that the main property specialists, who were very complacent going into the housing downturn, forecasting a very shallow decline in prices, are all now telling us to expect another year of substantial falls in UK house prices. If they are right this time round that means more grief on the mrotgage books for the banks, as well as many individual tragedies as the nation plunges more into negative equity.

Early on in Obama’s campaign for the nomination I drew attention to the excellent speeches and the new model of fund raising he was using. I praised both on this site and raised a few eyebrows. I said I thought they were going to be successful.

I went on to say I did not like Obama’s policies, to the extent that he then had any, and doubted they would measure up to the challenges ahead. People ignored that part of the comment. I now feel the same about McCain’s.

Now we have seen most of what both candidates are offering, the thing which comes across is how conventional in their thinking both these “Change” candidates are. They both want to commit more forces to the war in Afghanistan. They both have plans to increase spending and cut taxes at a time of high government budget deficit. They both agree with the Paulson/Bush plan for tackling the banking crisis. Neither have come up with anything new on how to fight recession. Neither have radical plans to slim central governemnt down and make it more responsive to electors.

It is strange that Colin Powell throws his weight behind Obama, offering us just slogans as reasons. He tells us we need change, and we need a new generation to take charge. It is time that he and other heavyweight backers started spelling out what change we need ,and how Obama is going to deliver it. It is obvious we need change, obvious the Bush policies of military intervention and economic management have run their course. The issue is how quickly can you change them, and how funadamentally, to put the West back on the road to freedom and prosperity.

I went to the shops today. In one leading retailer there was a queue at the returns counters where staff at three tills were busy refunding the money. Many tills in the leading stores were unmanned, and there was no queue at most of the other tills that were being used. There were not that many people out on the High Street, and those that were bnought a coffee and maybe ended up with just one bag of goods, or none. Lots of staff were standing around with nothing to do.

I bought some glasses because they were marked down by 60% from their usual price, putting them below the 50% off sale offers I have paid for in the past for similar merchandise. I had in my mind the question would there be further price cuts in the next sales? The deflationary psychology puts people off buying, as you think if you leave it it might get cheaper.

It is usually dangerous when the Establishment unites behind a single policy and says there is no alternative. The last time that happened in the UK we were lumbered with the Exchange Rate Mechanism which gave us a rapid inflation followed by a recession.

Recently in the USA the Republican and Democrat leadership united with both Presidential candidiates behind the Paulson plan. That plan turned out to be bad politics, failing its first vote in Congress, and bad economics, leading to subsequent modification by its own author.

It ws therefore a relief that this week David Cameron and George Osborne signalled that they do intend to be critical where criticism is warranted, and to offer an alternative. That is called democracy. Criticism of George Osborne is fashionable and unfair. It was George who thought up “Tax con not tax cut” to characterise the unsuccessful 10p tax band budget. It was George who rightly pointed out that the government did not mend the roof when the sun was shining, and George who is now using colourful language about a house burning down to draw attention to the problems.

The Opposition now needs to flesh out its alternative strategy to see us out of the current severe dfficulties. They can draw on the Economic Policy Report they commissioned. We called for a stronger Bank of England, making better decisions over banking capital, liquidity and interest rates.We warned against lurching from too easy an approach to credit and money to too tough an approach. We sought better control over public spending, an effciency drive throughout government, less useless regulation, and concentration by government on a limited number of things that government did have to regulate well – especially money and credit levels. We recommended a big increase in infrastructure spending, mainly privately financed.

Today I suggest a threefold aproach to the crisis.
The first is to amend the government’s way of handling its approach to the banking crisis.
I fully support the privison of liquidity and longer term loans to the banks. They must take full security for these advances to protect the taxpayer. The withdrawal of too much liquidity at times over the last fifteen months has intensified the crisis.
The government should not spend £37 billion it cannot afford on buying bank shares. It should refuse to finance the HBOS/LLoyds merger, leading to LLoyds going it alone in the private market for its capital needs. The Regulators should give HBOS and RBS time to increase their capital ratios, whilst the government makes it clear it stands behind both banks with loans and cash if needed. They could both improve their capital ratios by stopping dvidend payments, cutting very high pay and bonuses, reducing staff through natural wastage and other cost reducing measures, and reducing their loan books. It should be their choice which combination of these measures they adopt.
The government and Bank are right to experiment with other ways of lending and using guarantees to get the banking markets moving again.

The second is to get control of the public finances. Cancelling the £37 bllion will help. There are many other ways of starting to control pubic spending, whilst keeping every nurse, teacher, doctor and teacher and other important public service workers.

The third is to take action to stimulate the private sector, which is crashing downwards rapidly. That means cutting interest rates by 200 basis points or 2% immediatey, with the prospect of more to come if needed. It means working with the energy, water and transport industries to see which larger investment projects can be brought forward to provide some work for the construction industry. It means redoubling efforts to help people back into work who lose their jobs as the redundancies build up this winter.

I am glad the Prime Minister has reaffirmed his support for free enterprise and markets, whilst calling for proper regulation. This echoes our calls in the Economic Policy Review for better regulation of banks and the credit they extend by the Bank of England, when we warned of the dangers stemming from the loose monetary controls exercised in the early years of this century. We need the Bank of England to get its old powers back that this government removed. Then it might be better able to judge conditions in money markets, and avoid the excesses of easy money and tight money we have witnessed in recent years.

We also need to call today for proper control of government. The government should not have stepped in so clumsily with new capital for a couple of Scottish banking groups. If the government and Regulator wanted a bank or two to increase the capital required because it thought one or two banks were in a weak position, it could have done so through private discussion with the affected banks without letting their share prices suffer through leaks. If the Regulator wants to raise the minimum required capital for all banks it should make a statement about it, and give banks a period of time to adjust.They could do much more to remedy their own positions, without having to rush to the state as their new paymasters.

Any bank short of capital should as a high priority take action to keep more of the cash it is generating from its operations. Dividends should be cancelled. Bonuses to staff should be cancelled if the bank is running out of cash and capital. People on high salaries – say over £200,000 a year – should be asked to take a pay cut in a bank in need of state aid. If they prefer to move on that helps cut the costs. There should be a staff freeze on new recruitment, and discussions with staff about smarter working to see the bank through the troubled period. There are many ways of conserving cash and generating more profit in a large business. In the UK it is wrong to expect the taxpayer to finance a big merger between two banks. If the banks concerned can only do the merger with public money, they should be told they cannot do it. It is no business of the taxpayer to finance huge deals to reduce the amount of competition in the banking market. The total dividends paid by the three banks seeking public funds amounted to a massive £7 billion in 2007.

If the government presses on with its plans to nationalise RBS I can only see problems ahead. The pay levels, lending policies, attitudes to customers and much else will become legitimate matters of public debate. The rest of the public sector will be jealous of the special treatment highly paid bank workers receive.Taxpayers will be bemused at what is happening to their tax money.We will all be angry if the nationalised bank then proceeds to large write offs and losses. These banks are too big for the taxpayers to own and sleep easily at nights.

Any bank in need of help should receive loans and assistance in the normal way from the Central bank. The taxpayer should be protected by taking sufficient security for such lending.

Some analysts and commentators think there are two different problems, the banking crisis and the threat of recession. Now large sums of public money have been offered throughout the western world to increase bank capital they imply that the first crisis is on the mend, and maybe sometime we can start thinking about the second problem.

Unfortunately these two problems are all part of the same crisis. The banking crisis began when people in the USA were unable to pay their mortgages, and in the UK when a mortgage bank was unable to meet the demands of its depositors. The banking situation deteriorated this summer as forecasters came to see that it was not just US sub prime mortgages that could destabilise banks.

It is now important to make sure that the measures taken to restart the inter bank and money markets do not make handling the recession more difficult. If the economies of the west fall too far and stay down for too long, the banks will lose a lot more money on bad loans. It will not just be the UK and US mortgage books that cause problems, but the outstanding loans to companies will also be a source of weakness.

It is also important to ensure that public finance does not become overextended. In the days of the credit boom the UK government helped stoke the fires by its own activities. It borrowed huge sums under the Public Finance scheme and through Public Private partnerships, as well as through traditional borrowing. It added the loans of Network Rail to the taxpayer’s account. It is now about to add further huge sums through its bank nationalisation scheme.

The problem with a sharp slowdown or recession is that it damages the financial position of most people in the country and it greatly increases the strains on public budgets. Tax revenues fall. In this downturn Stamp Duty has been hit severely as the housing market dries up. Taxes on company profits, especially those on financial sector companies, will be greatly reduced in due course. Income tax on high incomes and bonuses will fall as a result of the job losses and lower profits. Spending on unemployment benefits, housing support and other government measures to handle the human misery that comes from a downturn will rise.

Gordon Brown used to call such spending the “costs of economic failure” which he rightly wished to reduce. Containing its increase should now be the prime concern of the government. Public finances are in a weak shape going into the downturn. We need to limit its depth and duration to keep government borrowing in some check.

My critics still complain about my support for lower interest rates. Savers understandably do not want their interest rate reduced, and tell me that we need to encourage savings because we have saved too little. Encouraging more savings by higher interest rates would have been an excellent policy three years ago to reduce the extremes of the boom, but is not the right measure now. Today we need to limit the downturn. That requires more spending. The danger now is there will be too little spending, cutting the money people pay to companies for goods and services. That leads to a bigger downturn, a more expensive burden on the state and more people out of work. In the end it also damages savers, because in the end in a big downturn interest rates have to be slashed to very low levels to try to get activity going again and to save some businesses. Savers cannot earn a high return with no risks. If savers want too high a rate of interest there will be more bank and savings institutions struggling, as the borrowers will be unable to cope. There are limits to how many risks the government can underwrite and how many financial institutions it can take over.

This crisis began because the banks lent too much to the private sector as well as the government borrowing too much. Between them they created a debt mountain. The Central bank and Regulator allowed this to happen, and even encouraged it by keeping interest rates low and drawing up easy going rules on the capital banks need. The Crunch began when the central banks decided to tighten conditions, with higher interest rates and less money available for the banks. Now the authorities seem to want to cut private sector lending sharply, by requiring more banking capital for a given volume of loans. Some of the strain will be taken by cutting bank lending to the private sector. If this has to be more than matched by more borrowing by the public sector to keep the banking system going and to pay the costs of recession, it is difficult to see what we have gained.

Two news items today -

The Audit Commission (public body dedicated to getting value for money for taxpayers) placed £10 million in a couple of Icelandic banks and tells us this accorded with its investment guidelines. Wouldn’t an apology and a mea culpa have been more in order?

We learn that they might close the Commons for up to three years to spend lots of money on modernising it! That would a fitting tribute on this government’s grave – “We closed Parliament so we could spend more of your money on modernising it”. They do say we might be able to meet somewhere else – that’s quite a concession! They have also sent out the Parliamentary holiday dates for next year. They amount to some 145 days.

It would be helpful to have a positive statement from the authorities about banking capital. I assume all banks currently trading have enough capital. That after all is one of the main tasks of the Regulator, to ensure they do. It appears that recently the government has required banks to have more capital, leading to the discussions over whether taxpayers should put up some of this. It would be helpful to be told by how much the government has decided to lift the capital requirement at this juncture. It is an odd time to seek to increase capital ratios with a public dialogue implying the banks do not have enough capital, when we need to increase confidence in the banking system. If individual banks are thought by the regulator to need more capital in case of future losses, that should be done in strictest confidence.

I am distrubed to hear the government use its current support for the banks as part of its political argument with the SNP. The two main recipients of taxpayer cash for capital happen to be the Royal Bank of Scotland and Halifax Bank of Scotland. We are now being told by a triumphant government that the large sums proposed for these banks show why an indepednent Scotland would not work, because such sums would be too much for Scottish taxpayers’ pockets without the help of English taxpayers. As the Glenrothes by election hoves into view we can expect more of this sabre rattling rhetoric for the Union.

It is in the national interest for the government to go back to the commercial banks in private and seek to work out how they can meet higher capital standards without recourse to taxpayers funds. This may well include telling them firmly the taxpayer will not finance a bank merger. It is not good for taxpayers that this matter is now connected by some in politics to a Scottish by election.

My theme for many weeks has been simple – the authorities should fight deflation, not inflation. recession is the new enemy, just as inflaiton and excess credit was the enemy two years ago. Every word and aciton of government and regulators should be examined with this in view. So how are they doing?

In order to fight recession you need to have low interest rates, provide plenty of liquidity to the banking system, ensure all statements are positive and confidence building, and use what public spending you can afford to maximise the beneficial impact on people’s employment and incomes.

The UK authorities are giving a very mixed performance judged by these simple standards.

They have kept interest rates far too high for too long. They should cut them to 2% today, which would still leave scope for further cuts if the economy does not respond well. Market rates are well above the indicated rate and will remain so. That’s all the more reason to cut the indicated rate, to relieve some of the pressure. If interest rates remain too high more people and companies will default on their payments, leaving banks in a weaker position and savers worried about the security of their funds.

They are now supplying large amounts of liquidity, which is good. Previous attempts to withdraw liquidity from markets have been disruptive. They need to supply as much as it takes for as long as it takes, ensuring the taxpayer is protected by taking proper security for the loans.

The authorities have made too many statements and allowed too many stories to escape that undermine confidence. If they think any bank needs more capital, they should sort that out in private with the bank concerned. We should know nothing about it until the bank announces to the market how it is raising the money, when the problem is largely solved.

Douglas Craswell MP and Daniel Hannan MEP have produced an interesting book enttitled “The Plan. Twelve months to renew Britain” I recommend it to anyone who wants to see democracy restored and people empowered in these islands.

The Plan includes a proposal for a big repeal Bill, to get governemnt off our backs in those many areas where it has strayed without good reason. The authors want us to reassert Parliamentary sovereignty by clarifying the power of Westminster vis a vis Brussels. They want to legislate to make every school independent, to give schools, parents and pupils more freedoms. They want to transfer more power to local government, and more power to families and private institutions.

It is gripping material , and well worth a read.

Click here to go to the book’s website and purchase a copy.

I have opposed bank nationalisation in any circumstances, and have asked authorities to work with the banks to recapitalise themselves through private money rather than public. I find it bizarre that Mr Paulson is going to require US banks to take public share capital when some of them have not asked for it and do not need it.He himself expresses his distaste for the policy. He should follow his instincts.

A bank can boost its capital in many ways. It can raise new share capital from existing shareholders or from new shareholders. It can sell assets or businesses accumulated within these large groups. It could pay its high earners a lot less for a year or two to keep more of the cash. It can cut its dividend payments to shareholders. It can reduce the numbers of employees, sell branches, increase the amount of fee earning business it does or otherwise boost its profits and cashflow. I do not believe for one moment that the banks of the world have done all these things as much as they might where they need stronger balance sheets.

In the UK it is unclear why the government wants to allow the merger of Lloyds with HBOS. That just adds more risk to taxpayers, as Lloyds could go it alone like Barclays without the merger. It is unclear how much of the extra capital proposed for RBS and HBOS is now a regulatory requirement, and why the regulatory requirement should suddenly have increased. If ever there were a time for the government and Regulator to be working quietly behind the scenes with these two banks to ask them to raise more capital through any of the ways open to them over a realistic time period, this was it.

At a time when governments are correctly preaching to banks that they should not borrow too much and be overextended, they should be ensuring that governments themselves do not become similarly overextended and over borrowed. There are limits to what the US and UK taxpayers can afford. Giving banks too easy an access to public money is not a good idea. What we need is tough regulation, in private , to get the weaker banks into shape. If some of them need loans and gurantees to tide them over until they have raised more money privately, so be it. That is what a Central Bank is for , as lender of last resort. The taxpayer should always take full security for loans, and charge a fee for guarantees. That would be a much better way forward than requiring all main banks to take taxpayers money, or encouraging mergers which then leave a large bank that needs taxpayer support.

To many people the bank share purchases by the government is the last straw. They see it this way: the government takes money off us in taxes, gives the money to the banks, who then might lend some of it back to us for interest and a fee if we are lucky.

Yesterday in Parliament I pointed out to the Chancellor that the 3 banks he is considering buying shares in have combined balance sheets of £3 trillion. Yes, £3 trillion. That’s twice our national income for the year, and five times our annual tax revenue.

I urged the Chancellor to try to get more private capital into these banks, to cut the risks of the taxpayer. If the taxpayer is to stand behind £3 trillion of bank assets, it puts us at great risk. If the assets turn out to be worth just 1% less than the current value, that loses the taxpayer their share of £30 billion of loss.

As readers of this site will know, I have supported the proposal to put more cash into the markets. That certainly worked yesterday. I have supported the proposal to lend more money for longer to the banks to tide them over, as long as the taxpayer is given full protection with proper security for the loans. I also support the efforts made to increase the banks capital from the private sector, and am glad that 5 of the 8 banks concerned now have more than enough capital or can raise it privately.

That leaves us with RBS, HBOS, and Lloyds. When the government acted as midwife to the birth of a new mega bank through the merger of HBOS and Lloyds, that was to provide a private sector solution to their financing. Both now have access if they need it to public capital. The shareholders of both HBOS and Lloyds have to vote on the merger before it can happen, and have to vote their approval to seek new capital from the government. Some Lloyds shareholders may now take the view that it would be better not to merge, and that Lloyds could go it alone without government share capital.

Yesterday one bank announced it would cut its dividend, and raise more capital from existing shareholders. Its share price went up. RBS announced it would (subject to shareholder approval) raise capital from the government and its share price fell.

The government should do some more work on the capital raising part of its package, with a view to cutting the risks to the taxpayer and cutting the requirement for taxpayer funds. Banks have many ways they can use to increase their cash and their capital to lending ratio. They can cut their dividends to keep more of their profits. They can sell assets. They can reduce costs and retain more of their income as profit.They can reduce their lending activities. The meetings need to be reconvened to see how they can do more of these, to cut the burden on the taxpayer.

Three weeks ago the Regulator was happy with the capital adequacy of the major banks. It appears that in the last three weeks it has demanded more capital to support existing lending. It is more evidence that our regulators are tightening long after the credit bubble has exploded. They should have done that several years ago to choke off the growing bubble.