I am a natural optimist. I like to see the opportunity and the possibilities in life. The background as we travel through the end of the old year and into the new is not auspicious. The news background threatens worse to come on jobs, company failures, house prices and much else. Just to make it all worse, violent war breaks out in the Middle East.

Last year I urged the authorities to try to stave off recession. I explained how “If the authorities cut interest rates and make more cash available to the banks we can avoid too sharp a downturn.”

This year I am forced to write about how they could limit the damage of what is likely to be a severe downturn in the UK.

It took them nine months to recognise the dangers of the high interest rates and tight money they were offering in 2008. All too late in the day they started to shower the banks with cash and bring the interest rates clattering down. These changes will have an impact, but not in the early months of 2009. The authorities seem to have forgotten that it takes a year or more for changes in interest rates and changes to money market liquidity to work through the system. In the meantime there is the remaining problem that the banks themselves are still weak, need to write off more from their assets, and are under regulatory orders to strengthen their balance sheets at the moment of greatest difficulty.

So how can I cheer people up? There is the outside chance that Mr Obama meant it when he said he would bring change. If only he would change the US approach to the Middle East that would help. If he would seek to spend the cash the US government is borrowing to good effect that would be a miracle.

The UK authorities could start to get a grip on their banks, and start to make better decisions about helping nurse them back to health so the wheels of borrowing can move the vehicles of commerce again. We need a government to understand that their regulatory and monetary policies need to reinforce each other, not struggle against each other, a government which finds a way for banks to pass on some of the cash it is now tipping into the system, and then controls the amount of that cash, before we start up another damaging inflationary cycle.

Last year at this time I went hoarse asking them to cut interest rates immediately. This year I say the rates are low enough. The problem now rests elsewhere. Indeed it is savers now who need the better deal, and I would like the government to help them.

They could afford to do so, and to lower taxes on income and jobs, if only they would forgo their foolish cut in VAT. We need now intelligent and affordable tax cuts, rather than clumsy and expensive ones which are not going to lift us out of recession.

I wish you all a happy and prosperous New Year. You will need the agility of a gazelle and the solidity of the ox to survive in business in 2009. It’s the year when savers are asked to share the misery of the borrowers, as we continue to sift our way through the debris of the Credit Crunch. I just hope you and yours have jobs that survive and enough cash to see you through.

John Redwood has expressed disappointment at the Government’s announcement that they will not be publishing their response to the Ombudsman’s report into Equitable Life until later in the New Year. During Business Questions in the House of Commons last week, the Leader of the House announced that the Government would give their response to the Ombudsman’s recommendations into how Equitable Life policyholders could be compensated in January. This is despite their previous promises that they would announce their plans “before Christmas”.

John has been following this matter with interest as he has had some Wokingham constituents contacting him over the last few years to outline how they have suffered losses at the hands of Equitable Life, and pressing for a compensation package.

In a letter to many of the constituents who have written to him about this matter, John said: “I do find these repeated delays most unsatisfactory. The Ombudsman’s report took an unprecedented four years to complete because the Treasury decided to submit 500 pages of ‘evidence’. Although the report was published in July, the Government would have seen a draft version some months earlier. Had they been so minded, they could have responded straight away, but during the summer they told us they would do so ‘in the autumn’. Meanwhile, thousands of Equitable Life policyholders are waiting anxiously to see if they will be given recompense for a regulatory failure that took place through no fault of their own”.

Now government and media are blessed with 20/20 hindsight about the property and commodity price bubbles, they should ask themselves when and how they want to puncture the latest bubble – that in government bonds. Or do they wish to do exactly the same with this as they did with the property and commodity bubbles – supply the cash to fuel them, create the regulatory rules to allow them and sit back and watch until it is really painful to burst them?

The government bond bubble is currently growing large. The government probably wants this to happen, as it knows it has a lot of government debt to sell. But at some point investors and regulators will wake up and see it is not healthy for too many institutions and people to be lending to the government for tiny rates of interest, especially if the government’s aim is to inflate their way out of the crunch in due course. For the moment the government can inflate the bubble more – after all there is still a positive rate of interest on longer bonds, and short term interest rates are still above zero.

So why does the bubble matter? Lending too much to any company or institution, as we have seen in the private sector in recent years is not healthy and at some point has to be corrected. All the time they can get easy credit they are happy and the system looks stable. Once they cannot get the credit any more people are amazed at how much they were allowed to borrow on such good terms in the good times. The private sector went to the borrowing party in 2005-6. The Bank of England supplied the drinks, and the banking regulator organised the tickets and watched as they arrived for the binge. They are all now living with huge hang overs.

Now the government has invited itself to a similar party. The drinks are once again being supplied by the Bank, with help from the other banks and pension funds. The regulator has not merely issued the tickets but has told the banks to bring more booze so the party goes really well. Banking regulations are being changed to make commercial banks lend more to the government (to improve their liquidity). The authorities have dreamt up a new policy called “strengthening the banks” which entails putting taxpayers cash into some of the banks, so they can lend it back to the government at a loss.

The foreign exchange markets currently do not approve. Maybe they have read the detail of the Chancellor’s statement and do understand that this year’s borrowing is not £78 billion as advertised but a massive £157 billion or more than 10% of National Income. Maybe it is just the advertised promise that the government will borrow 8% of National Income next year that worries them. Maybe it is that and the weak performance of the UK economy, though Euroland and the US will not perform well either. Maybe it is thinking ahead to the losses about to be recorded by UK banks, including those that the government has invested in. Whatever it is, something has spooked the currency markets. Sterling hit $1.45, 131 yen and 1.03 Euros yesterday. The slide continues unabated.

So what should the government do about the runaway borrowing, the bond bubble and the collapse of the currency? It should

1. Signal that interest rates have fallen enough.
2. Cancel the regulatory requirement for banks to buy more government bonds – they need to lend more to the private sector instead to start to lift the recession
3. Relax regulatory capital requirements on the banks as they declare write offs and create more realistic balance sheets
4. Get a grip on the nationalised banks costs – they need to make some money to offset the losses
5. Indicate there will be no more share capital for banks – future support for banks will be based around short term loans against proper security
6. Look for ways to get its capital back from the banks it has put share money into – through asset sales, cash sweeps and refinancings
7. Cancel the VAT reduction, and replace it with cheaper better targetted recession busting tax reductions
8. All the usual advice about how to control public spending

Yesterday’s Sunday Times reported a City analyst saying that RBS may report losses of up to £28 billion for 2008 when it reports its full year figures.

If it does, or if reports a mere £20 billion of losses for last year, that means all the extra capital pumped in by UK taxpayers will have gone in just a few months of ownership. Many of the losses will be on foreign banks and overseas investments within the RBS group.

In the meantime we do know, now that RBS shares are trading around 42p, that the taxpayer has lost a small fortune on the shares – around £8 billion at current market prices.

When the government first started briefing that it was thinking of buying stakes in several major banks I urged them to carry out due diligence, to ensure the assets they were buying were realistically valued. Why on earth, I asked, should taxpayers have to take the hit after they bought in? Surely any sensible person buying into such banks would demand write offs before putting in so much money?

I was told the government was in a hurry and would not therefore do what any commercial purchaser would do. They could have applied a sensible discount to the asset value when constructing the deal, but even that proved too much for this feckless and naïve government. Their bail out of the banks was their ERM – and its impact will be far worse than the damage the ERM did to the British economy.

Taxpayers have thrown their money down the drain, putting it into banks that had not written down their assets sufficiently to warrant the new capital. Nor have they cut their costs enough. If a bank is losing such huge sums it cannot afford all the people it is currently employing, and cannot afford the giddy level of salaries and bonuses it is paying to the managers and directors. The government should have insisted on proper write offs and proper action to cut costs before purchasing any shares. Instead we are all losing a packet, without helping fix the banks, who carry on incurring costs as if the world was still the same as during the boom.

Now we need to know from the Regulator whether it will inisist on replacing the lost capital or not. A few weeks agao when the government and Regulator increased the banking panic by insisting on extra capital we were told it was essential they have a higher capital ratio – i.e. more share capital relative to their lending. Does that rule still apply to RBS, or will it be allowed now post any losses to have a lower ratio again? If it is allowed a lower ratio can we have some assurance these losses mark the end of the likely write offs? Will the government do some due diligence on the figures this time to make sure they are prudent?

If the Regulator is still insisting on the higher capital ratio, where is the money coming from? Are taxpayers to be made to put more in, as Mr Bean of the Bank of England hints? Or will they now get on with selling assets and cutting costs in a way which gets the bank’s balance sheet back into better trim?

What should they do? Demand a full independent audit of the assets. Agree realistic values. Agree with Regulator and the bank an appropriate capital structure for the revised position. Then get the bank to raise any extra capital it needs through cutting costs and retaining more profit, selling assets, or finding someone other than taxpayers to put up the money. Taxpayers have had enough.

I pointed out in Parliamentary debates that the 3 banks with state shareholdings could lose the equivalent of the defence budget in a year. According to the Sunday Times RBS may have done most of that on its own within the first few months of state ownership!

On the economy we have heard from the President elect. Apparently the only thing wrong with the high spend high borrow strategy of George Bush is that he didn’t overspend and over borrow enough. We should expect more of the same when President Obama sits in the Oval Office.

On the alleged corruption within the Democratic party over the future of Mr Obama’s Senate seat in Chicago we hear loud and clear that whilst the police have interviewed Mr Obama he had nothing to do with whatever did happen.

Yet on the terrifying war in the Middle East that is daily claiming so many victims we hear the sound of silence. We are told that the USA can only have one President at a time. That is useful line when the wind is in the north.

The worry I have had about an Obama Presidency is twofold. Someone who was so good at persuading many that he is on their side will not find it easy to come off all the fences he has been elegantly astride. Being in power means taking sides and making decisions.Someone who put the case for change without specifying what changes will struggle in practise to differentiate what he is doing from what his predecessor was forced to do as he saw it by circumstance and by the mighty high spending Washington machine with all its vested interests.

With Mrs Clinton as Secretary of State it is difficult to believe there will be much change over Middle East policy. With Mr Obama himself wanting to intensify the war in Afghanistan it is difficult to believe there will be much change in policy. With the present Secretary for Defence staying in office it is difficult to believe there will be much change of policy. Yet surely, if change is needed, it is above all needed in the US approach to the Middle East?

Last night was doubly unusual for me. I had time to watch TV, and there was something on a Saturday night I was willing to watch. I tuned in to the story of the political awakening of John Adams, the 2nd President of the USA.

In their vivid and simplified documentary way the film makers captured the rising tensions in America against the bovine insensitivity of the British government. We saw John Adams, the honest and fair minded man, defend British redcoats against false charges of murder from an angry crowd that had taunted and assaulted them. We saw him turn down preferment from the clumsy colonial authorities, only to go on to advance radical proposals concenring the rights of man when even for him the autocratic inflexibility of the British government became too much to stand, let alone defend. He and his fellow delegates to the Convention fashioned the philosophy and the fine words of freedom that made the intellectual backbone of the new Republic. They shamed the gross incompetence of the British some 130 years after Parliament had had to make a stand for its rights against the Crown.The irony of Britain moving from home of liberty to colonial oppressor could not have been missed by the English gentlemen who made the Amrican revolution. I wondered if any Americans watching could see some of the irony now that America is viewed as the oppressor by some in countries where she uses her troops against the will of the locals. The cause of freedom requires tolerance to the differing views of others in most circumstances.

It made me think how much today we need to fashion a new coalition for liberty in our own country. The countless intrusions into our freedoms have often been criticised individually but when we look back over the last decade the total impact is large. Much damage has been done in the false name of security. More has been done by taking in vain the name of social justice, and still more in misguided ways to save the planet. The government has found causes it thinks are higher than liberty, and has then invented ways of seeking to further them that all result in the same dead and deadly end – more state power, more state control, more taxation, more rights and privileges for the governing and more duties and obligations for the rest of us.

When I go the local shops this morning I will doubtless see several people breaking the law, as many do now most of the time. Some will drive at 35 mph believing they do so safely in a 30 mph zone. Some will park on the double yellow lines in the side road close to the shop, seeing no harm as they will not bock the road. Doubtless some will fail to record cash payments for their businesses in their tax account file. Some businesses will be trading today in ways that doubtless violate some little known or unloved regulation. Some break laws because they cannot see the point of the laws, some break them inadvertently because there are so many to know about, and some break them because it makes their lives easier to break them. Recent research has unearthed just how many thousands of new criminal offences this government has introduced, finding new ways to ensnare the usually law abiding. If you invent enough complicated forms, difficult requirements and new rules for business and the general citizenry you will end up making criminals of most. To what purpose?

As I watched the Adams story unfold I knew I would have been with the crowd in demanding liberty in 1770s Masachusetts. I today I am with all those of you who feel there are too many taxes, too many spy cameras, too many new rules, too many needless interventions in our daily lives. We need to rebuild our free society. As we emerge from the Credit Crunch the message should not be that we need more government, but we need wiser government. We do not need more red coats with better weapons, but someone in charge who knows the temper of the people and trusts them to be freer and to make of their own decisions.

When we get a change of government we do not want managerialists who think it is just a question of running the existing system better, but freedom lovers who ask which bits of the creaking machinery of state do we need to keep running, and which can we pension off.

Men and women in Brtain are no longer born free, and live in chains. We need to burst them, to trust people more and governments less. It was big government working with regulated big banks that got us into our current economic mess. It was big government running scared of terrorism that sought to protect us with guards and gates in ways which cannot work when we need to win hearts and minds. I just wish the architects of the current autocracy had watched and understood last night’s docusoap of freedom. They should see that there is relevance today in Britain from those events long ago on the wintry Eastern seaboard of a great country.

Locally yesterday’s spree looked like a one day wonder this afternoon. In Wokingham there were long queues in Woolworths to pay small sums for items that are now heavily discounted and well thumbed through, but not a lot else going on. In Bracknell the furniture sheds were short of paying customers and the electrical and DIY shops far from busy. The MFI store looked forlorn. The car parks were half empty, which looks poor by Saturday standards.

It is true, as some have remarked on this site, that the big cuts in mortgage rates and the fall in petrol prices is helping those with the larger mortgages. At the same time the big reductions in interest rates is hitting many retired people who looked to the interest on their savings to supplement their pensions. What the shops might gain from the former they are going to more than lose from the latter, especially as many of the younger families are worried about job security and feeling they have to repay some of the debts.

This year there are three trends hitting the stores simultaneously. Two have become common in recent years.

We have become a nation of binge shoppers, with a temptation to all try to shop on the same few days each year when we think the prices will be keenest and when we have a holiday.

More and more people want to shop at a time of their choosing from the comfort of their own home, in a way which allows them to find the most competitive price for a good. They are choosing the internet in increasing numbers.

The third complication specific to 2008/9 is the savage downturn in the economy, undermining confidence and forcing people to keep what cash they have.

The retailers and shopping centres have strategies to handle the first two. They have responded to the wish to go shopping on special days by catering for the large numbers, spending on advertising, and changing some of the prices to create some excitement.The main stores are increasingly concentrated in large modern shopping centres where there is adequate parking, and plenty of catering alongside so people can make a half day out of their trip and combine it with a grand coffee or lunch.

The retailers understand that modern shoppers want to drive to the shopping area, park easily, have plenty of choice within and between the shops,and be able to sit down and relax over a drink. A few will still return home to find the cheapest version of what they have seen on the web, and others, especially men, will prefer not to venture to the mall in the first place, but the overall package is a good one which the majority prefer to scrolling through dozens of web pages which may give an imperfect representation of what is on offer. Some of us prefer to see and even touch the goods before buying, and like the event that shopping has become. Many see shopping as day out, something to do with friends or relatives.

Both customers and retailers understand the bizarre price dance retailers now have to lead to entice and complete the transaction. Why buy the items just before Christmas, when you expect them to be 20% cheaper in the January sale? Why then not offer a discount before Christmas, to prevent all the business being delayed until January? The stores need to attract the business when there is some need to buy. People need to buy some things before Christmas for presents and for the full enjoyment of the holiday. People also take advantage of the long Christmas break from work to buy those bigger items or special purchases that require some time to understand the range and to choose the right one. Retailers need to be there with persuasive prices when people might be in the mood and have the opportunity to shop.

But what can a retailer do to survive when there is, thanks to the authorities conduct of monetary policy and banking regulation, a massive belt tightening going on? It’s the same general rule – have the right products available at the right price in the right place, as applies in normal conditions. It is also more difficult, because there are fewer retail pounds to be attracted, so there will be more losing retailers. The general advice to retailers is simple – hold less stock as you will be selling less, buy more cheaply so you can sell more cheaply, and hold relatively more of the cheaper ranges. Make your price promotions more frequent and more dramatic to try to get people into the store, and train staff to sell other itmes once you have attracted the public through a knock out central offer.

Generating some more business in the three last days before Christmas, and at the start of the post Christmas sales, is a help, as shops appear to have done this year. Buying that marzipan which many of you have commented on clearly helped after all! The months of January, February and March will prove tougher, unless a retailers paces his or her price promotions and offers, and finds a magic touch with the stock they buy. It will not always be the cheapest line that sells. There will be scaling down that can sometimes help premium ranges. Yesterday I saw a news item to say higher priced fancy foods were selling well, probably because people wanted a cheaper treat at home instead of going to the restaurant. That is where retail is a real skill or art, requiring deep understanding of purchasing trends in a very depressed market.

Today we sympathise with the plight of Woolworths workers, facing redundancy on a big scale. There will be no governemnt handout for them. There will be more store groups going under in these conditions, which remain the cruellest I can remember. Cost cutting and care with merchandising are essential for survival. Not all will make it.

The Japanese industrial output figures show a drop of 8%. That should come as no surprise.
Other economies will also produce dreadful figures for manufacturing output in the weeks ahead, as there is now a big shut down underway which will last well into the New Year.

People ask why the lower interest rates and the budget stimuli are not working. The answer is simple. It always takes time for them to work in normal circumstances. Interest rates need to be moved about a year ahead for them to work through. That is why this site was calling for halved interest rates over a year ago, to try to fend off the worst of the downturn.

But nothing will work well unless governments and banks work together on how to fix the banking system. Together they wrecked it, and together they have to fix it. In the UK all the time the Regulators decide to throttle the banks with higher capital ratios, they will be forcing more people out of jobs and more factories onto short time. The choice is theirs. As they have been doing for the last five years they are making the choice which maximises the agony.

I was pleased to learn this morning that there is now a final deadline to get our remaining troops out of Iraq. They have done a great job in difficult circumstances, made worse by political disagreement about the desirability and nature of the mission and by the lack of certain vital items of equipment.

The return of those troops just highlights the issue about how much longer troops are going to remain in Afghanistan, and why there isn’t a clearer political strategy for resolving the conflicts of that faction torn country. The arrival of President Obama clearly does not make for the change we want in that direction, as he like Gordon Brown seems committed to digging us in more deeply rather than finding the least inelegant way of exit.

Meanwhile the continuing crisis in Zimbabwe leaves open the moral issue of why do we invade certain Middle Eastern countries when we do not like their governemnts, to impose democracy, but do nothing elsewhere however gross the misconduct? Would it have been any different were Zimbabwe a large oil producer?

This morning we learn that the government has hit a target it set for itself, by sending back some prisoners to their home countries. One cheer for that. The Conservatives have shown that many were let out early, and a lot are still not returned to their homelands. We also need to remember that the government is only talking about visitors from outside the EU, ignoring all the crimes committed by contintentals who come here. It’s a pity they threw away proper contorl of our borders with the EU that previous governemnts had carefully preserved.

I think UK taxpayers have plenty to complain about when we learn how many of the people our Borders agency lets in abuse our hospitality by committing serious crimes. Do they do no checks on criminal records of people before letting them in? Surely they don’t suddenly become drug dealers, murderers or sex offenders when they arrive here, having led blameless lives before? Why can’t we have arrangements with overseas governemnts to send them back for punishment in their own country? Can we at least make sure that anyone committing a serious crime here is sent home and never allowed back again?

The government is being criticised for not having enough jail places. It could help itself by being a lot tougher on how many criminally inclined foreigners it lets in and then puts in prison, and by reaching agreement with overseas countries concerning their punishment.

It also raises the more general question of does prison work? Most people want two things from prisons. The first is to lock up criminals who represent a serious threat to the rest of us for long periods of time to protect us. The second is the try to ensure that prisoners let out of prison are less likely rather than more likely to reoffend.

I am not sure putting so many people inside for theft and other financial crimes makes a lot of sense. If people are too greedy, let the punishment fit the crime. Why not make them stay at work or make them get a job, so they pay full reparaitons to the victims of their crime and pay full charges for the police and court work involved in finding them and bringing them to justice? I have never understood why, if someone is burgled, they not only lose their possessions to the burglar but then have to help pay to keep him in idleness in what can be a seminary for crime called prison. That only makes sense if the burglar refuses to co-operate with any sensible programme of rehabilitation, and refuses to work and pay recompense.

There will be no new posting tomorrow, Christmas day. I have a turkey to cook and a good wine to drink.
Normal service will resume on Boxing Day for those who are not rushing off to the sales, and for all who have already broken or consumed their Christmas presents.

A happy Christmas to you all. Thanks for all your comments. It’s good to know there are so many strivers after the truth in this world of spin.

I am pleased that the Conservative party has come up with more ideas for tackling homelessness, and understand their media savvy in launching them at Christmas.

However, as I have to remind people at this time of year, the Christian story is not about homelessness as the media implies. The Bible is quite clear. There was a hotel shortage in Bethlehem on that important night, brought about by the government’s insistence that everyone returned to their town or city of origin to register for some great new ID system, to be followed of course by some new tax.

It is typical of evil governments down the years that they think nothing of the convenience of their citizens. Poor Mary had to travel around the time of her confinement, just to satisfy some power mad government that could not be bothered to register her in Nazareth where we assume Joseph had a home, but required her to go somewhere else. I am sure the last thing Joseph wanted with a pregnant Mary and all the extra bills fatherhood would bring was to down his carpenters tools and travel to Bethlehem just to register and pay a tax.

As it turns out this was just the start of the evil of this barbarous regime. Hearing of the birth, their combination of insecurity, malevolence and incompetence made them decide to put all new born boys to the sword, forcing Mary and Joseph to flee. Is it, I wonder, because of the Roman influence that this ancient government escapes with such a mild press, when we should be condemning its brutal actions?

Wouldn’t it be a good celebration of the spirit of Christmas if instead our present government pledged not to carry on with new costly and inconvenient ID schemes, or extra taxes? That would show just how different it was, and show it had understood the true Christmas story of how good triumphed over evil, with the escape of Jesus.

I read that some senior clergymen want to lose their seats in the Lords, and some Labour MPs think it would be another glorious chapter in their modernising of Britain to abolish an Established Church in England.

I wonder if by chance they have at last been reading some English history, and have stumbled over what a money spinner the Reformation was for Henry and Cromwell? It would be an interesting question who owns the assets stashed away by the Church Commissioners, and who should have title to them if we are to have revoltutionary change in the nature of the Church.

Whilst the Bishops might think it would be automatic that the money and buildings should pass with them in charge to a new and differently structured Anglican Church, the Labour left might have other ideas. They might argue that the Church and state have been so intermingled over the last 500 years, that some if not all of the money and buildings based in England should rest with the state for good causes, a new kind of Lottery giving Labour MPs more power to borrow and spend. Or they might decide to let competition flourish, and split the Endowment between competing religious leaders making a case that they could run a better Church which reached out more than the current Establishment manages.

The Archbishop miight find that opening up the issue of establishment takes the debate in ways he will find less comfortable. There might be no automatic right for him to lead the new Church, which would presumably wish to exercise its new found freedom in unpredictable ways. It would certainly mean an end to the present system of choosing the Bishops and Archbishops with an involvement for 10 Downing Street in the appointments. Who knows, people might even want an elected Archbishop, to create someone with more political and moral authority. Whatever method of choosing a religious leader which the new Church decided upon might result in a different bench of Bishops once it was properly up and running.

Sir John Gieve’s interview with Robert Peston was very worrying. There should be no instant history from the participants fighting the banking crisis, as the problem is not yet resolved. Anything they say could damage confidence further. They need to give us the figures and make the official statements they need to make, but they should not wander off into risky analysis and self justification. When it’s over, when they write their memoirs they can do that.

Sir John wanted to get over the fact that in his view the UK banking crisis in the week before the re-capitalisation was severe. I guess he wanted us to know this, so that no-one would try to argue they had over reacted or made the problems worse. At one point he wisely said he would not mention individual banks, but comment on the system as a whole. He subsequently broke his own sensible rule, and told us RBS and HBOS were especially in need of treatment. Both these banks are open for business and should expect decorum and support from their Central bank.

So what was the nature of this crisis that the authorities suddenly decided they needed to tackle? There are 4 possibilities.

1. There was a run on the deposits, the disaster which brought Northern Rock down.

There was no visible run, although the authorities’ leaks were far from helpful in maintaining confidence. It is difficult to believe it was a prospective run on retail deposits that led to the action.

2. The authorities suddenly discovered the loans these banks had made were far worse than they thought, so they became fearful for their solvency without more capital injections.

There is no evidence that the authorities suddenly became more alarmed by the banks assets. Indeed, when I asked in the House if they were carrying out proper due diligence before buying the shares, I was told they were not, implying they were not especially worried by the then value ascribed to the assets they were buying on our behalf. They did not insist on any immediate additional write downs.

3. Certain banks were unable to gain access to money market funds in sufficient quantities which would force them to contract rapidly, too rapidly for comfort.

Sir John implied it was partly this. Why then didn’t the authorities get on with supplying the ample liquidity to money markets they have subsequently supplied through the Bank? That can explain the need to make the loans and guarantees available through the package, but does not explain the need for more capital and the sudden request of the regulator for higher ratios of share capital to loans. That would only have been a sensible thing to do if they were worried about 2 above.

4. The share prices of leading banks were falling.

Yes, that is true. However, a falling share price does not bring a bank down. RBS is just as able to trade with its share price around 45p today, as it was with its share price many times higher before the crunch. A low share price does not stop a bank doing anything, unless it reflects a general loss of confidence by depositors and other providers of cash.

Whatever the rights and wrongs of these four points, two points should be incontrovertible. Firstly, any sensitive discussions between banks, the Bank, the Chancellor and the Regulator should take place in confidence and in private. Bankers do not have to be invited in dramatically over a week-end to the Treasury through the front door. We live in an age of conference calls, emails, webcasts, working in normal working hours, and there are side entrances. There are not many top banks, so each one could have been sorted out individually. It does make it worse for the authorities to show how worried they are in public.

Secondly, any action should be based on revised figures that are as accurate and well based as possible. Confidence building in banks requires the banks and the regulators to put out credible information in a timely way. It is no good denying things have changed from the heady days, nor does it make any sense to overdo the gloom by suddenly marking everything to a market which does not function. Working through this is about access to cash, and having the right amount of patience to minimise the losses on all the positions the banks have taken.

I do not believe they had just a week-end to save the world or the banks. Their actions increased the pressure to do something, and the leaks made action imperative, but that does not mean it was a good way to handle the situation. Nor do I believe they then in a single flash of the government cheque book solved the problem. The nationalised banks still have a cost level out of line with their earning potential, and probably more to write off. The sooner they recognise that reality and get on and sort it out the better. I see no reason why taxpayers should have to tip more money into these banks, when they are still employing too many people on high salaries and big bonuses, and still have a gap between what they charge and what it costs them.

As for Robert Peston, he was the recipient of information that should not have been released in that way. Some of the things he broke to the BBC audience looked like price sensitive information that should under the rules have been released to the Stock market as a formal announcement in the usual way, to be followed by all news outlets handling it at the same time. Whilst one can admire his journalist skills in getting hold of such a fount of stories, one is left to wonder who leaked the information, and for what possible reason? It is also curious that so far no Minister has made a big issue of the leaks in the way they did over immigration figures.

I suppose it is progress of sorts that the Bank of England now admits it got it wrong in 2003-6, when it allowed excess to build up in the banking system by keeping interest rates too low.

When will they also admit they got it wrong in 2006-7, when they kept interest rates too high, bringing the pack of cards tumbling down?

And when will they admit they are still getting it wrong, pushing huge quantities of money at ever lower interest rates into a system which is still broken, but which one day may ignite inflation again?

I would be far happier if they confessed to current sins than long gone ones. It is difficult to fathom how bad they can be and can remain, when they seem to get every important call about banks and markets wrong. If this were a private sector business the management would have been changed a long time ago. When are they planning to hit any of their targets and forecasts for the economy?

In the final analysis a subsidy is a subsidy. We are in that phase at the moment when governments are trying to dress it up. Let’s look at two such schemes – the German employment scheme and the putative UK R and D scheme.

I have been told that in Germany there is a current government scheme to keep skilled workforces together. Apparently an employer can announce that a large number of workers are no longer needed and send them home. The state will then pay between 60 and 67% of their wages, depending on their marital status, for as long as they are doing nothing. The theory is that the downturn will be temporary, and the worker will go back to their company when normal demand resumes.

Such a scheme is not necessarily a good idea for the company concerned. After all, they still have to pay a substantial amount to employ someone who no longer does any work for them. There can be no guarantee that “normal” demand will resume any time soon so they need them again. Nor can there be any certainty that the employee will come back to work for that employer. They may change their mind and resign many months into the enforced period of no work.

It can be an even worse deal for the German taxpayer. Big multinationals could decide to lay off more German workers rather than taking action elsewhere, if someone else paying two thirds of the wages is enough to sort out the cost problem. The scheme could become very expensive, as it is very expensive to cut the size of a German workforce so this could be attractive compared to the full costs of redundancy. It does nothing to resolve the underlying business problem that some German companies are facing. They have too few sales, and need to cut all their costs.

We read that the UK is thinking of an R and D subsidy scheme for certain car makers. The thinking here is that we wish to keep R and D in the UK auto sector here in the UK, and therefore taxpayers should pay to do so. This well intentioned proposal would also be fraught with difficulties when it comes to sorting out the detail.

Spending is spending. Accountants can have long arguments about which part of an auto company’s spending is R and D. How much of the Board’s costs is R and D, as they spend time talking about future products? How much of the CEO and the rest of the executive overhead, as they too are heavily involved? Is investigation of a complaint or a technical problem with the product R and D? Is market surveying and customer contact R and D? How much of the engineering overhead is truly future oriented?

There is no easy way of indentifying and ring fencing all R and D spend. Nor is it magic spending, clearly better than other spending. The government will discover, if it presses on with this, that a subsidy is a subsidy, by whatever name.You keep R and D here if we continue to produce good people who want to innovate and engineer new solutions, and they are affordable.

BUSINESS IS VERY SIMPLE. If the money you collect from your customers exceeds the money you spend delivering the product and service, it works. If the money from customers falls below the costs you are in trouble. Borrowing to pay the losses cannot solve the problem. It makes it worse, as you have to pay the interest as well. You end up losing more jobs, as BL proved in the 1970s.

Good Boards of Directors saw this downturn coming months ago and told their CEOs to cut costs to get ready for it. Good CEOs did so. Bad Boards looked firmly in the rear mirror, accepted the authorities view, and did not ask their CEOs to take evasive action. Bad CEOs failed to alert their Boards, and carried on spending as if there was no recession. They deserve to lose their jobs.

Companies in automotive manufacture have one major cost – bought in materials and components. When you hit a downturn it is vital to cut back strongly on the amount of raw material and component you are buying. You need to cut back by more than the anticipated drop in your sales, as you need less stock to maintain lower production. In this downturn there is the added bonus that the price of the raw materials has collapsed at the same time as you need less of them, so if your buying department is any good there will be a huge decrease in the cash cost of your supplies.

The cost of labour is much smaller than the cost of parts and materials. Nonetheless you will need to take some action to curb it. The first thing to do is to stop all recruiting. Next, you ask all temps and short term contract labour to leave. Third, you offer voluntary redundancy packages to those who might wish to go. If you still need to cut costs more because your sales have collapsed, then you need to discuss with the workforce whether they would prefer to all go onto shorter time to keep the jobs, or whether they want to sustain the incomes of the many at the price of a compulsory redundancy programme for a minority. No sensible person likes doing all this, but one thing keeps you going when you have to do it – the knowledge that if you do not shed some jobs you could end up presiding over the loss of all the jobs if the business goes bust.

You may need bank bridging finance if you were slow to make the adjustments, but that can be no substitute for controlling the losses. You cannot ask future customers to pay more for the product to pay for the subsidy you gave to current customers. They will not be prepared to do that. State loans can be an excuse to put off the necessary adjustment. They are also a massive diversion of top management time from tackling the reality that costs have to be slashed to survive in dreadful conditions like the present.

I read in the Labour press this morning we all need to go out and shop til we drop – but showing suitable responsibility at the same time.

I ventured out this morning to buy a couple of newspapers and some fresh bread. I added seasonal marzipan to my basket so I could ice the Christmas cake later. Was that enough, I wondered, to meet the new patriotic requirement to be a cheery shopper? The marzipan was certainly dear enough to make a difference to the Sunday bill. It didn’t mean, however, that I needed to up the mortgage.

Therein lies the dilemma. The authorities visited this crunch on us, because they judged we were collectively borrowing too much and spending too much. They hiked the interest rates and later told the banks to lend less for the level of capital they held. Now they don’t like the results that come from jamming on the monetary brakes so spectacularly. They want us to be both prudent and to spend more. Given many families personal circumstances they can’t do that.

The spectre at the feast this Christmas is not just cash strapped banks reluctant to lend. It is many people worrying about whether they will get any overtime in the New Year, whether they will be on short time working, or whether they might lose their job altogether. Unemployment is the spectre stalking the land. If you fear loss of job you are not going to go out and buy big ticket items. You are going look carefully at the price of any inessential you would like to buy. You might buy some decorations and some Christmas lights, but preferably on the day the shop has cut their price by 25% to promote them. You won’t buy the new plasma TV, even when it is £300 off, because it’s still a large commitment. As for a new car, well you can forget it.

Companies are in an even worse plight. If people don’t spend enough in the shops, they feel it first at the factories making the goods. The stores soon turn off the suppliers. Companies cut out buying new cars for their staff, cut back on corporate hospitality, and review the prices they are paying to all who work for them on contract. You soon get into a recessionary psychology. Why buy it today? It might be cheaper tomorrow. Why buy it today? We might not be able to afford it tomorrow. Why buy it today? We can make the one we’ve got last longer.

After years of fulminating against the throw away society, after years of moral condemnation of the have it now pay later society that fuelled the boom, the government has come to the conclusion there is one thing worse than such a society. That’s a society where people are so careful with their things and their money that they throw others out of work with their parsimony. Did I do enough with my marzipan? No I didn’t. Should I do more? No, I don’t think so. What’s the point of buying food you cannot eat, only to throw it away, or buying things you do not need. Besides, many are saving up for the tax bill in January, as the government does want to spend so much for us.

HSBC, a typical large regulated bank, in 2007 had a balance sheet showing total liabilities of $2,354 billion. Shareholders had put up $5.9 billion in capital, and had accumulated total share capital and reserves of $128 billion. In other words, the bank was able to gear itself at around 20 times its shareholders capital. That left it comfortably within the Regulator’s limits on how far a bank can gear up its capital to lend and spend.

There is today another well known UK bank whose shareholders put up just £15 million, with total shareholders funds of £2.3 bn at end February 2008, which on December 4th 2008 had total liabilities of £259 billion. In other words it was able to gear itself more than 110 times its shareholders total capital.

That bank is the Bank of England. It is true the assets of the Bank of England are on the whole lower risk than those of commercial banks. It is also true that the government and state stand fully behind it. Last week was down a bit on the 4 December level. It does go to show, however, that they are not just thinking about quantitative easing. I wonder how much further they are prepared to go in expanding the Bank’s balance sheet?