I asked the Treasury to tell me if they were going to start underfundign the deficit, to aid a policy of printing more money. Yvette Cooper assures me not. She says:

“The Government intends to continue to finance the Central Government net cash requirement using the framework that was established in the 1995 debt Management Review. The Government aims to finance its net cash requirement plus maturing debt and any financing required for additional net foreign currency reserves through the issuance of debt.” Elsewhere she says they are not planning more use of short term debt.

The Office of National Statistics tells us today that we can add £1 to £1.5 trillion to the £700 billion national debt to allow for the banks coming into the pubic sector. That makes our national debt up to a collosal 150% of National Income on the official figures. We could add some more for pensions liabilities and other off balance sheet items.

So after all those months of being told the UK has low public borrowing around 40% of National Income, at last the government’s own statistics office tries to make an honest institution of the government with these much larger figures. I am not going to argue today over over the odd trillion of understatement, now they are coming up with some more realistic figures. I just want to know why it has taken so long,and why we had to put up with all those denials when I tried to set out the true figures in the Commons and elsewhere.

Bloggers have asked me what do I think of printing money (quantitative easing).

It can be necessary when an economy is in slump and there is no danger of a collapse of the currency or inflationary tendencies from doing it. It is dangerous if there are inflationary tendencies, and if the currency is vulnerable.

The recent views of the Monetary Policy Committee continue to alarm me. They should remember their job is to keep price increases down to 2% on the CPI. They have singularly failed to do that, with the CPI still showing 3% despite the general slump in activity. We are now in Slumpflation thanks to the government and them.

Monetary easing could be part of the answer to our current decline in activity. It needs to be accompanied by spending and borrowing less in the public sector. This is easy to do – all they need to do is spend a lot less on subsidies to wayward banks for starters. The future course of sterling matters a lot. Any further decline in the pound would be inflationary. Sterling now responds to news on RBS and the other nationalised or semi nationalised banks, because overseas holders can see the dangers of the UK state taking on too many debts and obligations from the banks.

The MPC should be writing to the Chancellor to point out not merely that monetary growth was too slow at the end of last year for comfort on activity, but also to point out that the sharp decline in sterling is a matter for concern and does prevent them lowering interest rates. Indeed they should not have lowered them as far as they already have. They could add that the government’s policy towards banking support is now one of the forces driving the pound down. In recent days similar fears about continental banks have adversely affected the Euro.

We need government action to control public spending, and to start to sort out the banks problems instead of just paying for the mistakes. We need higher indicative interest rates to encourage savers and debt repayment. Then we would have a safer background for monetary easing to get activity advancing again.

The likely exchange of letetrs with the MPC requesting permission to switch on the presses and the Chancellor likely to say “Yes” is a silly ritual designed to make you think the MPC is independent. If the MPC were truly independent they would tell the Chancellor a few home truths about the runaway borrowing and wasteful spending.

The MPC minutes mainly talk about activity, not inflation, despite their remit. They do acknowledge that the pound has lost one quarter of its value and this could affect inflation, but much of their discussion sounds like Gordon Brown telling us all it is a global rather than a UK problem. They conclude that the pound has fallen to rebalance the economy, and that it “could have been increased risk premia” – so that’s all right then!

They sign off by saying it was crucial “for the Chancellor to ensure that the government debt management policy would be consistent with the monetary policy actions of the Bank of England”. In this unintended side swipe at Brown’s “reforms” of the Bank they are pointing out that it is no use the MPC trying monetary easing if the government decides to sell huge quantities of its own debt! Well I never – why didn’t they think of that when they split up the Bank in 1997 and gave the power of issuing debt back to the Treasury?

In summary, I disagree with the present policy mix and think quantitative easing in these conditions would represent another worrying risk.

The BBC highlighting very high rail fares in the UK today is inclined to suggest the cause is the government’s policy of requiring more of the costs to be paid by passengers and less by taxpayers. It is one of Labour’s policies that I support. The true cause of high rail fares in the UK is the high cost way our railway is run. Fares are a rip off in many cases. They do need to be brought down. Pumping more taxpayer cash in is not the way to do it.

Britain’s railways are neither green nor good value for money. Indeed to some extent the bad policies that damage the environment are the same ones as make the railways too dear. Put simply, the UK runs too many unpopular trains that are more than half empty, too many heavy trains which require too much energy to speed them up and slow them down, and runs too many old and inefficient engines to haul them.

The railway also uses people wastefully, as it does fuel. It runs on too many consultants, managers and non operational staff, living in its own overregulated high cost world. Compare the approach of the railways with that of the low cost no frills airlines, and you will see what I mean.

It would be a good idea to have a blitz on all those costs and requirements which make our railways high cost. We need more trains on popular routes at popular times – especially commuter routes during the morning and evening peak. Unfortunately with heavy trains, poor brakes and old signals it means we cannot run nearly enough trains on the generous amounts of track we have. Let’s buy cheaper lighter trains that can speed up and slow down much more rapidly, allowing many more trains an hour.

Fly over southern England at the morning peak and you see crowded main roads with traffic bumper to bumper, and largely empty railway lines with large gaps between trains for safety reasons owing to the type of train, and the traction and braking system. We need either to fill more of the seats at off peak times by price discounting, or to reduce the number of unpopular trains trundling around the country largely empty. The railways have some of the bets routes in to our city centres, but they simply are not used enough owing to the technology.

Since Labour nationalised Railtrack the costs of providing and maintaining the track have shot up. It has been a consultants field day. The business is most unresponsive to commercial opportunity. Take them a property project to improve a station and make some money from associated commercial development, and they will sit on it or fail to progress it for years. In Wokingham they stayed out of the property boom as they did elsewhere, failing to improve their own property from profits on commercial development on their extensive land holdings.

The nationalised railway in the long post war period failed to put in a simple spur line to Heathrow, the world’s busiest international airport, until the idea of private capital finally brought about such an obvious business move. The rail network was great for Victorian industry, and even managed to update itself for the early twentieth century business estates. The long years of nationalisation saw the railways fail to move with the times. Now much of industry is on newer business parks located by motorways, without spur lines and sidings, because the railway failed to market itself to business to carry goods.

We need a more commercial approach. The railways could have a relative advantage at taking more commuters and more goods traffic. If they did so successfully they could lower the fares, because they would have more revenue and less cost for each journey. They need lighter trains, cheaper trains, fewer consultants and better traction.

Last week the media’s attention was on the Treasury Committee’s cross examination of the failed bankers, men who have lost their job because they lost their shareholders and now taxpayers so much money. It was never going to be a very informative session. Their apologies will not pay any of the bills.

Meanwhile in the Commons chamber itself something far more important took place. The government sought approval for unlimited sums of money to be spent on propping up or nationalising any bank or related financial institution they choose.

We were given just 45 minutes of time to discuss this item, which was not nearly enough. I did speak, but under time pressure because other colleagues wished to talk as well. The Minister introducing it said very little in his introduction. It was a Money resolution, but he gave us no figures oat all of how much money might be involved or what we might be buying for it.

I pointed out to the House that if you added up all the loans, guarantees, share purchases and other financial provisions the government has made or promised in recent months to banks, it comes to around £1 trillion of cash and guarantees. (£1,000,000,000,000). It was the largest sum ever sought from Parliament. It is larger than the government’s version of total current liabilities of the UK government.

The Minister did not deny it could be £1 trillion. He did not leap to his feet with an official figure, or even suggest I was exaggerating when he came to sum up the debate. Once again I might have been too prudent in my calculation!

Worse still, the measure confirmed this government’s belief in nationalising very large banks. I reminded the House that we now preside over a large bank with a medium sized government attached. The government’s version of the state’s balance sheet has it that total state liabilities are under £1 trillion. The share purchases at RBS add a whopping £2 trillion to the liabilities on that balance sheet (and we hope they add to the assets a similar amount). RBS puts at risk more than three times the annual tax revenue of the state. As we saw last year, it can in a single year lose almost as much as the annual defence budget.

My colleagues Richard Shepherd and William Cash called a division on this spending. Only 7 of us voted against the open ended commitment the government sought. More than half of all MPs abstained, leaving the government to carry it with a minority of members.

The Commons needs to sharpen its act on holding the government to account on spending. Each item under the banking packages should be given proper time for debate and a vote if MPs wish. The government would do better if these issues were scrutinised more. It is a disgrace that I am prevented from tabling many of the sensible questions we need to ask on the risks and costs of running RBS. Now the government itself says it is crawling all over the remuneration and bonuses of that bank, it is high time they agreed to answer some questions on it. After all, we now have more money at risk in RBS than in the state’s annual budget. It is high time we were able to hold them to account for it. We could rescue the banks more cheaply and at much less risk to taxpayers. I will carry on explaining to them how they could do just that, by acting as an intelligent Central banker to the banks instead of buying shares in them.

Yesterday was a defining day for the Obama Presidency. He fulfilled the two obvious predictions made on this site – just like George Bush he would spend and borrow more in response to the crisis, and just like George Bush he would send more troops to the Middle East to intensify America’s war there. Obama’s bank package is just another variant of Bush’s largesse to Wall Street.
Yesterday marks the day when he ceases to be in opposition to an unpopular Bush Presidency, and now has to take responsibility. His honeymoon has been short owing to circumstances.From now on people will look at the economy and ask if his policies are working, as he has made so much of his twin packages, one for further bank subsidy and the other to pass more money through state hands. From today the strategy in the war in Afghanistan will be his strategy, even though there is still vagueness about the long term aims of the conflict.
I am pleased he wants to sort out Guantanamo sometime, pleased with his wish to uphold more civil liberties somehow and pleased that sometime he intends to try diplomacy more. What we need is a clearer grip on public spending and borrowing, and a more certain touch at running the US money system to get us over the downturn. It would be a sad legacy for this President of promise, if the main change he sees through is to undermine the excellent work Presidents Clinton and Bush did in reducing welfare dependency.

State bail outs are usually bad news.

They are clearly bad news for taxpayers. We get lumbered with having to pay for businesses which have lost money and become too expensive for their shareholders and bankers to keep going.

The British experience demonstrates that they are often bad news for the very people a bail out is designed to help. In the 1970s UK government put huge sums into leading industries, only to make them some of the worst employers, endlessly sacking staff despite the hand outs. The nationalised coal, steel, and rail industries fired large numbers of people, whoever was in government and however much taxpayers money was tipped in.

The bailed out industries were not good news for their customers either. Far from enjoying cheap subsidised prices, they often faced big real increases in prices. Where bail out was allied to monopoly customers were clobbered.

In “Going for broke” I made the case against state subsidy of industry in the early 1980s, based on UK experiences in the 1970s. We won those arguments. A new generation of politicians, Labour as well as Conservative, started to repeat the new mantras – “Government is no good at backing winners” and “ Subsidy just delays sorting the bad business out, it doesn’t save the jobs”.

It is worrying that these crucial lessons seem to have been lost on both sides of the Atlantic. The US and the UK authorities seem to think these rules do not apply to banks, for some unspecified reason. Now the US is considering a second bail out of GM and Chrysler, just a few weeks after the first bail out. When will they learn?

It is not difficult to see why bails out rarely work. If senior management think cash comes from taxpayers, they devote their energy and time to wooing the state instead of wooing their customers and sorting out their businesses. If employees think the state will rescue their job it takes some of the pressure off to help the company find the new customers it needs to pay the wages. Above all it stops the energy and thought of how to change the business to make it successful.

What would happen, some ask, if the state does not step in and buy shares in banks and car companies? The answer is the radical restructuring needed takes place more quickly, perhaps reducing the total loss and pain brought on by subsidised delays to the process. Of course no main bank should be allowed to go under, as the Central bank is their lender of last resort. If they need last resort lending, it should be made available on promise of radical restructuring and slimming down, to get the bank back into commercial shape. If a car company needs money it can get it from its own bankers. If they are not obliging, then it needs to sell assets and find new equity backers. They will be there, even in these conditions, for a business plan which makes sense. Only the state finances dud business plans as a matter of course.

Ignore the RPI – it is just reflecting the huge cuts in interest rates. Although it is the rate that matters from the point of view of many contracts, for once we should examine Mr Brown’s chosen rate of the CPI.

It is obstinately still at 3%. The authorities should not be surprised. That is the price of falling sterling, which we will see reflected to some extent in rising prices, despite the general gloom and the discounting. For once CPI is giving a more meaningful impression of inflation than the RPI.

Council taxes are too high, and in many places are rising too quickly. I welcome today’s news that a Conservative government would give local electors the right to demand a referendum where they thought the Council Tax was too high and should be brought down. We need such a countervailing power. We need some way of standing up for the taxpayer. I also welcome the news that they want to scrap some bits of regional government at the same time: the more the better.

Why can’t more Councillors and Councils do this? Most of them if asked agree that many voters want a lower tax. I have been consulted this year by some Councillors on the detailed budget making of a local authority (not Wokingham). It has been a useful reminder of just how difficult a task it is for Councillors.

The first problem they need to tackle when budget making is the information they get sent. All the Councils I have know over many years receive budget papers in the same useless form. Officers start on the basis that everything being spent in the outgoing year is a given. They then compile a list of “unavoidable” commitments to add to last year’s total. On goes the revenue consequences of last year’s new projects, the need to make crucial repairs to capital assets which they otherwise have not provided for, pay rises agreed, automatic bonuses, the consequences of government circulars seeking more actions by Councils (whether they are statutory or advisory), and any other item they can kitchen sink. They usually claim Council inflation is much higher than CPI inflation, and put a large figure in for that as well.

This produces typically the “need” for a 6-10% increase in Council Tax for a so-called “standstill” budget. If Councillors accept this work of fiction, they are on the hook for a bruising and ultimately unsuccessful budget process. If Councillors counter by saying they want to do something new in one or two areas, that is extra making the Council Tax increase even higher. If they request a reduction in the proposed tax increase – and they usually do – officers then come forward with “cuts”. These are usually carefully chosen to cause maximum political pain. They typically propose surrogate tax increases – higher car parking charges, planning fees, congestion charges and the like, and insensitive reductions in service, often aimed at the most vulnerable.

In the bargaining that follows the worst of the “cuts” are avoided, the fat in the budget is left untouched and neither side are happy with the result. Opposition Councillors have a field day if the process is public or news leaks out, as they can condemn the incumbents for daring to look at the uninviting list of cuts and charges the officers have dreamt up to try to keep the budget high.

So what should Councillors do? They should do what they do with their own family and business budgets. In tight years all items of spending are under review. The aim is to cut out the least desirable items, not the most sensitive, and to deliver the same or more for less by spending more wisely. To do this the first round of budget papers should n ot present existing spending as a given, but should question why the Council is doing its more marginal things., and question how it can do everything needed more effectively. Councillors should ask amongst other things

1. How much is the budget for Consultants? Why can’t this work b e done in house by existing officers? Why are we often paying twice for the same thing?
2. How much is the Council spending on energy? Would spending on insulation, heating controls and better management of buildings use slash this budget in year? Can the energy contracts be renegotiated on more favourable terms?
3. How much is the Council spending on transport? Can the contracts be better managed? Can more transport be grouped to minimise journeys and maximise use?
4. What is the budget for “fact finding travel” and conferences? Is all this necessary?
5. What is the budget for PR? Why can’t Councillors do more of their own communication, without relying on officers who have to be careful not to be political in their messages with Council money?
6. How many surplus assets does the Council have? Can some of these be sold to cut debt?
7. How good is the Council’s cash management? Can they earn a better return on balances without putting it in an Icelandic bank?
8. How many layers of management does the Council have? Why can’t this be slimmed down through natural wastage?
9. Wouldn’t a staff freeze generally be a good idea to make manning more efficient? Couldn’t the Council cut the number of committees which need servicing, and concentrate on the big issues that matter.
10. Why is the Chief Executive’s office so large and expensive. Doesn’t economy begin at the top?

Councillors are part time, and face clever officers often determined to expand their empires. Leaders need to tell officers many of the present budget papers are not fit for purpose. They need to introduce commonsense budgets, as many of them run elsewhere.

Dame Stella is right today to complain that the government is using fear of terrorism as an excuse to take away liberties and create a police state. The only thing I take issue with in her statement is that the government is not using the fear of terrorism of the people so much as its own fear of terrorism.

We need a government which polices our borders better, but respects our traditions of innocence until proven guilty, trial by jury, no detention without charge or trial, and the right of most to go about their daily lives without government spying and intrusion.

Above all we want a government which targets its enforcement activities against violence on those who can be reasonably suspected of possible violence, not by placing everyone under surveillance. Guards and gates are expensive, clumsy and often do not work if there are dedicated groups who want to carry out acts of violence.

Place suspects under surveillance, and uphold the freedoms of the rest of us. Learn to target. Most people are not potential terrorists, so don’t waste time checking them, and don’t waste money watching them as if they might be. If you watch the borders better, you can interview people who arrive who have a history of association and statements that causes concern, and can interview UK citizens who have been to places where terrorist training occurs. Those are two small groups most worthy of investigation.

Today we are back to playing the absurd media/government/Lib Dem game of threatening nationalisation if a bank share price goes down too far, only to see the share price go down because investors fear nationalisation.

Why can’t they all understand that a falling bank share price is no crisis unless they make it one. If the bank does not want to raise new share capital from the market any time soon, it can live with a low share price. If a bank has something to prove because it has just lost a lot of money it might have to live with a low share price until it can publish some figures showing it is back making profits. So what?

It doesn’t help to have instant pundits opining that if the price falls too far the company needs to be nationalised, and it does not help to have Ministers refusing to rule out nationalisation. Where are they planning to get all the money from to nationalise another bank? And why do they think a falling share price matters? If the bank has cash and capital, as they tell us the main regulated banks have, there is no problem. Leave the private sector ones alone.

Here on this site:

27th September 2008

“Nationalisation is the worst option….By all means strengthen deposit protection. By all means act behind the scenes to help a private sector solution, but do not promise to buy it or take it over”

November 4th 2008:
“It’s great news that another group want second thoughts on this deal.(LLoyds/HBOS) Let’s hope they can come up with a persuasive enough proposal for more shareholders to vote for it.
It would be better if the government vetoed the merger on competition grounds. They should stand behind any bank as lender of last resort, but should not be buying shares and acting as midwives to mergers which cut competition, choice,and pressure for more efficient banks.”

I have been asked to sum up the mood of the bloggers. I think it is quite like the mood of the students I met at Oxford last week as well.

There is a new seriousness. The many who found economics dull are now straining to understand what is happening and are hungry for more news and views. Most share a sense that we are living through unusually worrying and dangerous times.

Most who blog on this site accept that government and regulators are deeply implicated in the banking crisis. Many agree with me that the government cannot simply spend and borrow its way out of it. They want to see some commonsense and business expertise applied to sorting out broken banks. They want the government to target its spending better on people and projects that need public spending, whilst reining in the runaway state with its spy cameras, its thought police and its overweening arrogance.

Most are appalled by public profligacy and waste, by the gross unfairness of job losses and more rules for the private sector, and better expenses and bonuses for the public sector. People are hungry for change for the better, but know they have to live with another year or more of the current government. They fear for their jobs and their savings and have a sense of powerlessness.

So what can we all do? We have to take to the airwaves and the blogsphere, answer the endless surveys and pollsters enquiries, to persuade the politicians in power of our views. The government is uniquely unsure of itself, and vulnerable to polls and media advice. We need to be noisy in asserting a different reality to the government’s parallel universe. Bailing out big banks and spending more money in the public sector is the route to undermining state credit and the currency, not the way to prosperity.

When I heard the BBC tell me this morning that the CBI had called for £100 billion extra public spending in order to prevent a deeper recession I was ready to blog about the CBI’s economic illiteracy. When I read their Press Release I was interested to see the CBI said no such thing. They merely reported the obvious, that as the economy falls so public spending and borrowing will increase automatically, to pay more benefits to the unemployed against a background of declining tax revenues.

The CBI’s latest press release makes sense. It is a distinct improvement on their dangerous advocacy of the Exchange Rate Mechanism in the late 1980s, when I took a large Stock Exchange quoted company out of membership of the CBI in protest at their wrong headed stance. I remember their incomprehension that I felt so strongly about it as to cancel membership. I subsequently had to face taunts in government when I opposed our membership of the ERM that I should be supporting it as a DTI Minister faced with the strong representations of the CBI in favour.

Instead I can blog about the BBC’s sloppiness and their misunderstanding of how an economy works. Let’s try again. If you order another £100 billion of public spending on top of what is already happening, you need to increase taxes by £100 billion to pay for it. If the taxes fall directly on companies they will be worse off by at least the costs of collecting and spending the money. If the taxes fall on individuals, the companies will lose that part of their demand as people’s incomes are cut by higher taxes.

If the BBC’s idea of the CBI idea is that the £100 billion should be borrowed, then the taxpayer in the longer term will be even worse off, as the government will need to increase taxes some time to pay not just the £100 billion but also the interest on it. In the short term if the money lent to the government would otherwise have been lent to the private sector we are not better off. Indeed, borrowing from individuals and companies is a bit like increasing their taxes in its economic impact, as money they might other wise spend is taken by the government as a loan instead.

President Obama’s naïve “Keynsianism” is being well and truly
criticised in the USA. The BBC does not seem to understand why.

We are stuck in slumpflation. It is time for some commonsense amidst all this bank nationalisation madness. We need some hard truths for hard times.

This crisis began because the UK had borrowed far too much. You do not get out of a debt crisis by borrowing more. You get out of it by paying some off and taking your losses.

If you have a set of banks that have too many bad and doubtful debts, you do not get rid of them by transferring them to the taxpayer. If you transfer too many to the taxpayer, you bankrupt the state.

It is said that some banks are too big to go bust. Fine. Shrink them. If they want public assistance, make them sell assets, close down unruly books of trading positions, cut costs, weed out poor business. Lend them enough short term to keep them going, but leave them under pressure to cut costs and bring themselves down to a sensible size. Giving them access to limitless share capital just gives them the money to pay bonuses they do not deserve, to pay too many people too much money, to take unacceptable trading risks and to avoid hard choices which sometime they have to make.

Understand that the UK Parliament now has to supervise a large bank with a medium sized government attached. If they nationalise LLoyds as well as RBS the banks balance sheets will be more than twice the national income and more than five times the annual tax revenue. That’s taking a crazy risk.

The governing class now all tell us the banks took too much risk at the peak – though they as regulators allowed that and even encouraged it at the time. Why then is it now acceptable for the state to take so much risk, accepting the very instruments and loans which went wrong before? Have they learnt nothing? Remember we should not be discussing whether we set up a bad bank, when the state already owns three bad banks with plenty of bad and doubtful debts. How many more bad banks do they want?

Meanwhile even with all the taxpayer money going into the banks we have a deep recession. If at the same time as shrinking the bad banks we already own we have a sensible monetary policy we could turn the recession. Sorting the banks out instead of subsidising them would help restore confidence in the UK.

On current policy sterling is taking the strain, as the currency and international bond markets do now understand that the financial health of our banks is the same thing as the financial health of the state itself. This policy can best be called Slumpflation. Prices will go up thanks to sterling, despite very low levels of demand.

I’m fed up with slumpflation, and the banking and monetary madness which has brought it on us. Please don’t nationalise another bank. Please start to sort out the bad banks, and please run a monetary policy that finds the right balance between too much and too little.

The monetary authorities have been in the shower, tugging the control from cold to hot to cold to hot again. Set it for comfortable and stop fiddling with it. Let’s hope they haven’t broken it with their violent moves.

Alan Greenspan became a popular figure. Everytime there was the threat of a downturn or a suggestion the US should draw in its belt, he slashed interest rates, created more money and allowed the good times to go on rolling.

More recently he has become less popular. His successor, fighting to deflate the bubble his policies helped create, has attracted some support for the view that Mr Greenspan overdid the bubbles It was Mr Bernanke’s decision with colleagues to deflate the bubble and restore some balance in the US economy that helped create current conditions. In the UK the Bank of England followed a similar course with its interest rate strategy over the last ten years, preferring always to inflate the housing bubble than to correct the imbalances until they became so gross around three years ago.

When governments saw the results of their monetary authorities new austerity they moved from “teach them a lesson” to “let’s panic”. They now want the authorities to try to puff up a bubble again. In the UK the governemnt thinks one more puff will enable them to emerge from the electral hole of the opinion polls, and in the US Mr Obama, only used to being popular, thinks one more bubble could make him a hero just as Mr Greenspan used to be.

That’s why they want to support rather than mend the banks. That’s why they are committing unbelievable sums of money to underwriting business that has gone wrong, more large sums to “reflationary packages” and still more money to what they hope will be new lending. They are gambling the credit worthiness of the state on the hope that short term it will spark things back into life.

I have news for them. The way out of this mess is not another bubble, but working through all the past excess and winding it up, paying it off or netting it out with as little loss as possible. The private sector banks should take the hits, not the taxpayer. The Central banks should stand behind the banks that have a solvent future, and should force the pace of making the larger banks solvent in the long term by insisting they raise more of their own capital by asset sales, cost reductions and other marks of better management. We can neither afford to lose a major bank, nor afford to feather bed it with state capital. If in need the authorities should lend short term money against promises of better management and against what security they can find.

The loss of most of the £37 billion the UK government foolishly tipped into three banks here in just two months should be a warning to them. The rate of loss is too high. They should have blocked the LLoyds/HBOS deal, as advised here, so LLoyds was untainted by all this. They should have required substantial change at HBOS for any loans they asked for from the state to tide them over. They should have demanded that RBS wind up, sell or otherwise reduce the extent of its risks in the investment banking side of its activities. We have a large bank attached to a medium sized government. The bank is in danger of capsizing the public finances.

The pound has just halved against the yen, so the government proposes buying a huge number of new coaches and locos from Japan at a very high price with little UK manufacturing offset. When will they ever learn? The Unions are rightfully up in arms about it. The Opposition has to say it is the wrong deal at the wrong price, and point out the country cannot afford this kind of open ended expensive commitment stretching far into the future.

If we are ever going to be competitive at making machines now should be the time. We have unemployed people, cheap capital, and a collapsing currency. We need to plug the huge hole in our balance of payments. If they must order Japanese items, they must make it a condition of the contract that we make and buy more of the kit here in the UK under licence.

The trains in question are too heavy and too fuel inefficient. Green ideologues often tell us to go by train to save the planet. They actively promote more train travel, whilst condemning all other forms of mechanised movement. These trains represent too small an improvement on the heavy fuel inefficient ones currently using our network, and will prevent us hitting greener targets for trains for years to come. All forms of mechanised travel create CO2 emissions. Rail travel can be a bigger contributor than road travel, given the low loadings on many of our trains (30% seat use overall) , the poor efficiency of the engines, and the way we generate the electric power some of them use.

If the government were serious either about saving the planet or about saving our economy it will recognise this is a bad deal and decline the sign the detailed documents. These trains are too dear in every sense.

Not long after we get confirmation that all £20 billion taxpayers put into RBS has been lost in the write offs and trading losses at the end of last year, we hear that HBOS has lost £10 billion. There’s not much left then of the £37 billion we put in so recently to the three banks.

It shows the expensive folly of setting a price and promising the money in a hurry. They then had to wait some weeks before they could actually pay the money in, whilst the documents were drawn up and shareholders agreed. Why not announce the intention to put money in, and then use the following time to get a new valuation of the assets and agreement over a price that was better for taxpayers?

Better still, why not offer cash and short term loans against security but not buy equity? These three banks are too big for taxpayer comfort, and the losses are eye watering. Why didn’t the government realise this? Why didn’t it protect taxpayers more? Never has there been so little pleasure for the expenditure of so much public money. Now we all have to work harder to pay those debts off, as it is all borrowed money they have lost.

This is an amended post. The media first reported a loss of a mere £8.5 billion, but the small print reveals it is £10 billion. No wonder departments in the government now have become even more casual about their budgets when huge numbers swing around in bank loan books owned by the state. This banking crisis is creating an unreal world in public finance. Labour’s dream of limitless spending will turn into a nightmare of debt.

The Obama package to save the world is now under scrutiny to see if it can even save America. Adding too much public borrowing to protectionism is not a winning recipe for success.

I can see why Mr Obama thinks that if he is going to borrow and spend such huge sums, he should at least say that the money should be spent on American supplies and American labour. After all, he will reason, the point of the package is to revive the US economy, so it must make sense to spend the money on employing Americans. The USA has been importing too much. It would make little sense for the US state to borrow more and spend it on imported Chinese steel or Japanese cars.

Unfortunately things are not as simple as that. Drawing up a list of useful purchases where the US is more likely to win the contracts is one thing. Placing a ban on products and labour from overseas is another. If the USA moves from the former to the latter, other countries around the world may follow suit, making it more difficult for the USA to export its goods. There would be no winners from a trade war.

Sometime the world has to address the huge imbalances between countries that lies behind the current crisis. Of the five largest economies in the world at the start of the crisis, two, the USA and the UK were borrowing too much, spending too much and importing too much. Three, Japan, Germany and China were saving too much, exporting too much and lending too much. Part of the crisis lies in the painful process of seeking to adjust to a point where the three creditors import and spend more, and the two debtor countries borrow less and export more.

Policies in the UK and the US to borrow more and spend more may delay this adjustment. In the UK the government’s attempts to offset the iron laws of economics have led to a sharp collapse in the pound, cutting the spending power of all of us and putting us off buying so many imported goods. This is offsetting some of the fiscal profligacy and thwarting the government’s hopes of avoiding a fall in living standards. If the US overdoes its attempts to borrow its way out of trouble, it too could run into difficulties requiring higher interest rates and a lower value for the dollar. The US reflationary package is dependent on the goodwill of the creditor nations continuing to hold US government bonds and adding to their holdings as new ones are issued in huge quantities.

The world needs agreement between lenders and borrowers. Adjustments need to be made by both groups of countries. The successful exporters and savers do need to spend more and save less. China has announced a reflationary package with that in mind. They do need to allow their currencies to appreciate, so imports are cheaper and more attractive to them. Some of this has happened with the sharp upward movement in the yen and the lesser upwards moves in the Chinese and German currencies. It is in the interests of the creditor countries to reflate, as their economies are being hit hard by the collapse in demand for their exports which have accounted for such an important part of their past economic activity. Germans need to buy more of their own manufactured cars and trucks, and the Chinese need to buy more of their own electricals and textile products, as the debtor nations can no longer afford to.

The US and UK authorities are taking very large risks by thinking both that they restore consumption levels to the unsustainable ones of the boom, and that they can at the same time underwrite their bloated banks and stand behind all their bad and doubtful loans. Their attempt to do so has not succeeded in avoid a severe downturn anyway, but it is delaying the adjustments needed to get back into some kind of balance on trade and in finance. Mr Brown seems to think the UK’s credit is unlimited and any kind of spending is a good idea. Mr Obama must be careful not to go the same route, as we need a solvent USA tackling the twin deficits he has inherited. The USA needs a period of borrowing less and exporting more.

Last night the Oxford Union debated the motion “ This House blames the bankers”.

Months ago in a moment of weakness I had agreed to speak against the motion. By yesterday, steeped in the theatre of the Westminster Show trials of bankers, and fresh from the hothouse atmosphere of the Commons smelling blood in the water surrounding the government’s own favourite bankers, I made my way through the driving snow and rain of this economic winter wondering why I hadn’t opted for a night off instead.

I looked on the cheerful side. I had not agreed to defend Dr Shipman’s approach to care for patients, or to defend the actions of the Australian fire razers. Even in the cauldron of censorship of current British politics there were far worse things that everyone must agree non bankers had done.

The debate itself was not what I expected. Geraint Anderson, the City columnist, laid in to his former City colleagues with a gusto, accusing them of serious crime as well as of bringing the financial house down. A communist don reminded us of the lack of power of Marxist analysis, condemning capitalism more generally for the very income inequalities which allowed him as well as the other guest speakers to earn more than the average, whilst Rachel Elnaugh of Red Letter days didn’t seem too impressed by bankers either.

On my side of the argument Ron Sandler, now head of Northern Rock, quietly reminded the House of the complexity, importance and diversity of the modern financial industry, asking why just the bankers, and did they mean bankers. He pointed out that many people got jobs and bought homes during the long period of growth. Dr Yaron Brook from the Ayn Rand Institute made an impressive speech explaining how the Federal Reserve Board and the UK monetary authorities were to blame, cataloguing their mistakes with interest rates and the volume of money and credit which they are meant to control. I also had a few words to say on the roles of the Regulators and governments.

To my surprise, after the debate, I was told the Motion had been defeated . Indeed it had been overwhelmingly defeated, by 131 votes to 51 votes, with a substantial number of abstentions. Well over half those present had voted No.

Many will say Oxford is not representative. There may have been other special factors at work. It is nonetheless interesting that an audience of bright young people who will have to get jobs in a difficult climate and help to pay off all the debts the government is taking out voted the way they did. It shows that outside the Westminster and media bubble blaming the bankers is not the automatic and easy way out that it is in the spin doctors scripts. The students, in a debating chamber known for its love of entertainment and funny quips, were eager for something serious and for some explanation of what had happened. They did not take the easy way out. Let’s hope the government listens.