The meeting of the President and the Prime Minister at the G20 is a meeting of the new Masters of the Universe. Between them they wish to gear up the world economy with unprecedented levels of public borrowing on both sides of the Atlantic. They will privately chide the Europeans for not doing more of the same.

The President’s levered fund to buy toxic bank debt looks very like the old hedge fund model. The Prime Minister is stress testing UK public finances by adding as many wobbly financial institutions as possible to the nation’s balance sheet to see how much stretch it can take.

Both these men seem to have learned from the excesses of the private sector.They think the message is that it’s fun to borrow, and a good idea to gear yourself beyond the levels of normal prudence. They have obviously been dying to run a bank or three and to have a go running their very own hedge funds with public money.

Now the President favours a version of the pre-pack bankruptcy and newco for a couple of struggling car makers. Alternatively, he subscribes to the theory that if you merge one weak company with another weak company you create a strong one – just as Mr Brown thought if you merged an OK bank with a weak bank you would create a strong bank when he merged LLoyds and HBOS.

I fear they have learned the wrong lessons from the past. You cannot cure a crisis brought on by overborrowing, by borrowing more. You cannot create strong companies by merging weak one. We need a new more prudent model for finance – and that applies to governments as well as to banks and investment institutions.

It is amazing that some want to try to make the story “leaks” from the Commons fees office when MPs expenses are available for their annual viewing. Whilst leaking information is not a good way to behave for any employee, these are hardly state secrets that need to be held back. All this information is going to be made available to the public under Freedom of Information requests soon anyway. The important issue is not disclosure, but whether each and every claim is both legal under the rules, and defensible in the court of public opinion which will judge these things.

Each party leader moved quickly yesterday to demand reform of the system. They can all see that some of the individual items claimed by MPs are too easy to ridicule or to challenge, alongside the more fundamental questions over some MPs choice of second home and designation of primary residence.

Looking at the overall figures it is the staff and office costs that represent the most serious chunk of public spending, but these only seem to get scrutinised if the MP has chosen to employ a family member.

Is £93 million good value? No it’s not. Could it be less? Yes it could. Is it going to be? Probably not. Public sector reform under this government normally takes a long time and costs more. Are these costs out of line with the rest of the public sector? No they are not. Indeed, the salaries and expenses at the top of quangoland and local government make this all look like small beer. It’s just that people have heard of the perpetrators, and feel they have some chance of making them accountable becuase they have to stand for re-election, unlike the executive public sector bosses.

(In the interests of disclosure my total expenses including travel were £106,000 compared to the average of £146,000 and the highest of £187,334)

On Wednesday 11th we were told the Bank of England will create £2,000,000,000 to buy government bonds back from the people and institutions who had bought them. The reason given by the Monetary Policy Committee is that they need to create more money. This is the first of several such visits to the printing presses, with a target to create an extra £75 billion in the first instance.

We need to ask why? If you take the last three months figures for money supply and express them as an annual rate, the recent rate of money creation has been lively. The latest figures show notes and coin growing at 12.2% – that is literally printing money – and wider money including all our deposits in banks growing at 22.6%. Yes, 22.6%.

It is true that in August 2008 notes and coin was only growing at 2.7%, and a year ago wider money was growing in single figures. It is a pity the Chancellor was unwilling to come to the Commons to explain why he has given the MPC permission to go ahead with this experiment, and why he has been silent on how much money he wants to create. If 22.6% is not a fast enough growth rate, can he tell us what growth rate he does want? I guess, given the sums involved, he wants to boost the money growth rate above 30%, which would certainly be racy.

The hope of the scheme is that this extra money will be spent on home produced goods and services, bringing factories back into use and leading to more people having jobs. Unfortunately it can also go elsewhere. It can go into pushing up prices, it can be spent on more imported goods and services, it can linger in bank tills and book entries and go nowhere as the broken banks throw an extended fit of caution after their past excesses.

The government is doing it in the spirit of “we will do whatever it takes”, and this is just one of many initiatives. I think it is dangerous to be putting so much at risk in the banks and running such a huge borrowing requirement at the same time. The pound is taking another pounding on the back of the government’s risky gambles. It means we are getting poorer by the day, as our money buys us less and less from the world market. Expect more price increases in the shops as the lower pound works it way through.

I support action to get the economy moving again, and to help businesses through the recession. The danger is this government is juts plunging us all ever deeper into common debt. These are bills we will all be liable to repay in the years ahead.

Today’s news that Nationwide will take over the deposits, staff, offices and good mortgages of the Dunfermline Building Society presumably requires substantial taxpayer payment or guarantee, just as the Bradford and Bingley one did. Once again I can find no mention of the sum of money to be handed to Nationwide as dowry to pay for the deposits minus what mortgages they are taking. The Bank of England website skates over that uncomfortable truth,and the Treasury website ignores the whole topic. Alex Salmond thinks there is a £1 billion Treasury payment to go with the assets and liabilities passing to Nationwide.

What we do know is the taxpayer is taking on the social housing loans, to be held in a “bridge bank” owned by the Bank of England on our behalf. And what we also know is the Labour supporters are on the airwaves already, telling us the Scottish government was not big enough and rich enough to “save” Dunfermline, which required the government of the UK to come in with the resource to sort it out.

We can expect a continuing spat between Mr Salmond, arguing it would have been cheaper to have subsidised the original entity, and the government, telling us the losses were potentially too large. They claim it will be cheaper to put the bad bits into Adminsitration and let Nationwide have the good bits with a dowry.

Once again the taxpayer – and the good institutions that stand behind the Compensation scheme – will pick up the bill, however big it may prove. Supporters and members of mutuals, ever willing to take the better interest rates or bonuses in the good days, will not of course be willing to put up the capital to pay the losses at their Society, now the management they chose has made such a mess. That is one of the weaknesses of the mutual model. Shareholders in banks have often been prepared to put in more share capital to pay their losses.

Most of us know there are limits to what we can afford. We manage our daily budgets with an eye on our income. We know that the taxman has the right to grab loads of money first. We know we have to pay the mortgage and whatever ransom payment the local Council and the utility companies demand. We concentrate on trying to balance the rest of the budget so we don’t end up with a large overdraft or credit card debt.

Ministers in this government think they can behave totally differently when it comes to spending the nation’s money. This week-end there has been no question about whether the taxpayer can afford to take on risks from yet another mortgage bank, just an attempt to spin that this time will be cheaper because it is “not a bail out”.

Meanwhile in their personal conduct some ministers show the same lack of respect for taxpayers money. It’s not just the questionable claims for their own living expenses, which attract so much attention. It is the whole army of extra “Parliamentary” assistants, case workers, secretaries and the like charged to the taxpayer, along with the massive expansion of the civil service and quangoland. The biggest increases in the costs of MPs have come from a big expansion in the numbers and pay bill of Parliamentary staff, and the new army of auditors and box tickers that have been employed to chronicle it all. It is all symptomatic of a governing party which thinks public money grows on trees, and they own the orchard. Or maybe now it’s just the result of their discovery that printing money takes the waiting out of wanting.

Parliament has become a perfect mirror to Labour’s public sector. More cost, less delivery.

On Wednesday I was asked to write an article on how we got into the current economic mess by the Daily telegraph. They told me they wanted it for Monday’s paper. On Friday after I had written it they changed their minds and said they did not want a piece about that after all. I thought I would share it with you here:

A couple of years ago many people thought all was well with the world. The economy was no longer an issue. Even some Conservatives would tell me they thought Gordon Brown had done a pretty good job, and that Bank of England “independence” was excellent. Endless repetition of the propaganda, ”We have abolished boom and bust”, lulled many into false security.

Two years on and how different it all looks. Even the government has given up repeating the boom and bust mantra, realising hubris came before a tumble. Gordon Brown did not make the Bank of England “independent”. He gutted and filleted it, taking away its duty to manage the government’s own debt, and removing the responsibility to supervise the banks.

He put his own people on the Monetary Policy Committee. He changed its target in 2003 so it kept interest rates down prior to the 2005 election. The MPC failed to hit the inflation target, allowing some prices to soar. It ignored the sharp rises in house and property prices, the fall in the pound and the commodity cycle.

We have lived through a colossal debt binge. The UK’s growth rate was flattered because the authorities helped turbo charge the debt. Our economy created hundreds of thousands of jobs for new migrants, because they opened our borders at the same time as opening the debt taps. We sucked in new people, hot money, and lots of financial business based on more and more leverage.

Monetary policy lurched from too hot to too cold. Just like a person in an unfamiliar shower, the authorities hurled the controls from hot to cold and now back to super hot again without waiting for the water temperature to settle down. They never found the happy mean.

Today the government wishes to blame the bankers. The Prime Minister tells us he wanted an international clampdown on too much credit, but unfortunately other world leaders did not share his foresight. This is difficult to believe, when we consider just how big a contribution the government made to excessive debt.

In the glory years the government was not more cautious than the banks. It was egging them on. The Treasury decided to finance ever more projects they could not afford, by ever dearer never never schemes. We had various types of Private Finance Initiative, and then moved on to Public Private Partnerships. The government flexed the national plastic, took out the biggest mortgage possible, drew down a personal loan and topped it all up with additional credit cards. That was all before the downturn and the reflationary packages.

It never warned the banks to lend less. It wanted to promote home ownership, so it encouraged banks to lend to people on lower incomes who might find paying the mortgage more difficult. It was a keen advocate of debt based major investment projects. The Chancellor, the Head of the cumbersome tripartite regulatory structure, never called the regulators in for a review. He did not ask them to require more bank capital and cash to cool things down a bit. Far from controlling the fire, the government was busily stoking it up.

The crisis that struck was easy to forecast. In the Economic Policy Review I helped write in the summer of 2007, we underlined the weakness of the financial regulatory system and said it would not be able to handle a crisis. I warned that monetary policy had lurched from too easy to tight. There was bound to be a crash.

Things got worse as the authorities displayed monumental incompetence in the face of gravely weakened banks. In the late summer of 2007 they kept the markets starved of cash as the wholesale money markets seized up. Banks like Northern Rock were bound to come to grief in such circumstances. Some of us told the authorities to loosen money so these banks could survive. Instead Chancellor and Governor lectured the banks on “moral hazard” and refused to ease the markets.

The run on the Rock was the result. A £25 billion limited term loan against security was all it needed to prevent the run on the Rock. Alternatively modest sums by modern standards supplied to the money markets may well have stabilised the mortgage banks at risk. Instead the authorities opted for disaster, and ended up guaranteeing all the deposits of the entire banking system. In addition they nationalised the Rock, putting the taxpayer at risk for much more than they needed, and ensuring big taxpayer losses from their new bank.

You might have thought that the Rock experience would have led them to take urgent and private action to sort out the other and larger banks in the system. Instead the authorities wasted the next year. They should have invited in each of the big banks in turn for a private review. They should have told them they wanted them to strengthen their balance sheets. They could have given them a period of months to do so. In 2007 all the main banks had options. They could have sold assets and subsidiaries to raise money. They could have made major issues of shares to raise new capital. They could have cut their bloated costs. They could still have securitised more of their loans, passing the risks to more patient holders.

Instead the authorities let matters drift, until the autumn of 2008. Then, inexplicably, they demanded more capital for each of the banks. They did so in public, creating a loss of confidence and facing banks with an impossible timetable to meet the new capital requirements. The catastrophic result was to put the taxpayer at risk for both RBS and HBOS. Worse still, the authorities helped broker the disastrous merger of Lloyds with HBOS, undermining a relatively strong bank needlessly, and putting the taxpayer behind Lloyds as well.

It would be difficult to imagine more blunders. It was almost as if they wanted to end up nationalising most of the banks. Barclays was spun against for daring to find private sector solutions to the new capital requirements. We are living through a nightmare.

Today the authorities are still making several major errors. They seem to believe the credit of the state is inexhaustible. They have been going around trying to find more liabilities to take on. “We will do whatever it takes” includes more borrowing to pay for the IMF, for eastern Europe, the developing world and for the ailing UK economy. They have chosen to ignore the warnings of those of us who think there are limits to how much a state can borrow at sensible interest rates. The little wobble in the government bond market last week should be a warning to them.

They seem to think that transferring problem loans and other bad investments from banks to the taxpayer will solve the problem. It doesn’t. It means the taxpayer has to pay the losses. You still need to manage each and every bad loan and dodgy investment, with a view to getting back what you can.

They seem to believe that the answer to excessive credit in the private sector, is to indulge in excessive credit in the public sector. Surely the lesson from 2003-7 is that borrowing too much cannot be sustained. Why therefore should we borrow more? Of course we need to look after people thrown out of work, but we cannot afford to subsidise the banks to keep them in bonuses.

They also seem to believe that spending more in the public sector is “reflationary”. It may not be as reflationary as they hope. If the extra spending is paid for by higher taxes, as with the 45p income tax increase, it means less spending in the private sector which offsets some of the extra public spending . If it leads to fewer people staying in the UK and running businesses here, that too reduces demand. If the extra spending is paid for by borrowing more, that cuts private spending. If they issue more National Savings the people who buy them cannot then spend that money. They might opt for the security of a savings bond instead of the pleasure of a new car.

They need to control their deficit and to get much tougher with the banks. The state’s banks are cuckoos in the public spending nest. They need to be slimmed down and sorted out quickly, or else they will topple the public finances.

Listening to the Chancellor he apparently needs to be careful when bailing out an institution that just loses a few tens of millions, whereas he was remarkably careless when bailing out RBS, an institution that lost £24 billion last year.

Beneath all that spin, it sounds as if the taxpayer is still going to end up owning or guranteeing the bad loans and poor investments Dunfermline has made. The poor old taxpayer may have to to carry the can, so it is just spin and positioning. Attempts to make out they lost in US sub prime seem to be rebounding, as it looks as if the losses have come from British business made by a Scottish institution under the not very watchful eye of the British Regulator.

PS: It is unusual for third parties to be discussing in public what to do with a Building Society or other institution against the wishes of that institution and without talking to the Chairman of it first. The government needs to make sure that what it is saying and doing either has approval of the members of the Society or is covered by some regulatory power they intend to use. This would be best stated openly so the Institution itself understands what is going on and can then co-operate with the regulator.

The government will spin that there is no bail out for this Building Society. Yet we learn in the smaller print that taxpayers are likely to end up owning the bad debts and the dodgy assets, or at least guaranteeing the deposits. So it’s not dun bailing – it’s more bailing.

I guess they have chosen to spin it this way for three reasons. One, they must know the rest of us are fed up with bailing out rich bankers and badly run institutions. Two, this one is in Mr Brown’s backyard, so they don’t want it to look cosy. Three, this one is a Building Society, a mutual. Labour has been telling us the mutuals are great, unlike the Societies that went to market.

So it’s not dun lying then. They’ve been wrong about mutuals as well. We now can see that they failed to regulate the cash and capital of Scottish Building Societies, mutuals close to home, just as much as they failed to regulate the cash and capital of demutualised companies.

Last night the BBC invited me to debate the G20 with Derek Draper. Like the rest of Labour he seemed unable to grasp the point that they should have regulated the risk of the mortgage banks, at a time when they introduced all sorts of new mortgage regulations which failed to stop a single dodgy mortgage. Mr Draper’s inability to understand this basic point, just as Ministers fail to grasp it, meant most of the interview was wrecked. You cannot have an intelligent conversation with these people, because all they want to do is to miss the point and bash the Tories.

I have always wanted tough regulation of the mortgage and other banks to make sure they have enough cash and capital for the loans they have advanced – pity they didn’t do. Their failure to do so is going to cost taxpayers a massive sum, as yet another Scottish financial institution struggles to the Treasury and seems to think it has a divine right to taxpayers money when it’s in trouble. If they had regulated these banks properly, as previous governemnts did, they would not be needing taxpayer support or taxpayer buy up of the toxic debts. Tougher regulation of cash and capital was what we were calling for well before the crisis hit.

I have been chided for daring to write about this on my blog. You all understand only too well the Labour spin machine, and why this story suited the BBC.

It’s a nice irony that you have now all done what I did – written about something that is a non story – in larger numbers than write about most of my pieces on the economic collapse.

I was telephoned and Thursday and invited onto the Today programme for Saturday to discuss the successes and failures of the Govvernor of the Bank of England . I readily accepted and said I would adjust my Saturday morning to get to a studio.
On Friday evening they left a message to say I would no longer be requried.

So I listened this morning, to hear two others agreeing in a technical discussion about quantitative easing. Both said they thought printing money to buy government debt was a good idea. Both said they thought the Governor had made a mess of it, by his recent comments. The interviewer got frustrated that the interview was so technical, punctuated by “quantitative easing” “driving down long term interest rates” and “corporate and government bonds” instead of talking about the rates we have to pay to borrow from the banks, the absence of interest on our savings, printing money and the persistent inflation in the prices of food and other imports.

I guess the reason I was not invited on was they did not like my viewpoint. On the Thursday they wanted a long conversation to find out what I thought about the current position. So I will share it with you here, as it was kept off the airwaves.(This is a reconstruction rather than a transcript)

BBC Question: What do you think of the performance of this Governor and the Bank?
Answer: The Bank has failed in its two given tasks, to prevent the collapse of banks and to keep CPI price rises down to 2%. Never before has the Bank presided over the near collapse of five important banks, all rescued by large injections of public money. Inflation is still 60% above the target given, despite a severe downturn in activity and substantial unused plant, equipment and labour.

Not all of this should be placed on the shoulders of the Governor. As he has pointed out, the credit boom which led to too many price increases was partly created by the government’s decision to switch inflation targets to keep interest rates down prior to the 2005 election.

The Bank of England was stripped of its powers to supervise the banks day to day in 1997, which made it much more difficult for them to understand the degree of banking risk built up in the credit bubble and to take action to stop it.

BBC Question: Was the Governor right to intervene on fiscal policy as he did this week?
Answer. He was right about the substance of the issue. More spending and borrowing now would be wrong for the UK economy and could damage the government’s ability to raise money and lead to further weakening of the pound. It is a pity he has to do it in public, but it is a sign of how the system is not working well that he feels the need to. There are clearly tensions at the top, when these things should be sorted out in private.

It is clearly the BBC’s new tactic to waste my time telling them my thoughts only to discard them. Last week the BBC wanted me to make a film of my views on how to sort the banks out. I cleared my diary for the Friday afternoon, organised a local business who would help us set out the case in tele language, and laid on a windows and conservatory showroom as the film set with script based around breaking glass and difficult times in the building industry. They came, they filmed, they said it was great – and then they failed to show it!

I am all in favour of a Princess inheriting the Crown if she is the older child. This is a very good time to make this change, as it does not affect any current Prince or Princess likely to inherit. We have two generations of male heirs under either system

I am also all in favour of religious toleration, but this issue is much wider than that. It is a big constitutional issue which goes back to the Reformation foundations of the English and then the British state.

We need to hear from the Church of England on the issue of a Catholic monarch, as the Reformation settlement made the King or Queen Head of the Protestant Anglican Church.

Would the government intend to dis-establish the Church? Would a Catholic monarch agree to be Head of the Anglican Church? Would a Catholic monarch appoint another Anglican member of the royal family Head of the Church? What would happen to the style of religious services which the Head of State had to attend?

Would this re-open the Act of Settlement between England and Scotland. How would it affect the Scottish Church? As always, Lib Dems and Labour know they do not like the inherited tradition, but have nothing to offer by way of sensible replacement.

Today there are rumours of a Premier League Club in a debt crisis.

That’s not surprising. Just like the banks, some clubs pay their employees far too much money. They mortgage the hope value of future revenues and profits, whilst crippling themselves with crazy costs.

If someone wants a multi million pound wage packet they need to identify millions in revenues that they have added by their efforts. Guaranteed bonuses, high base wages and the like cannot be afforded if the business is suffering from bad loans or from lower advertising and TV revenues.

Sometime things need to be brought down to earth. I am all in favour of successful entrepreneurs making good returns, or employees earning big bonuses where they have added revenue and profit and share the success with their shareholders. What cannot be sustained is high base wages and guranteed bonuses out of all proportion to the earning power of the bank or football club.

So it happened yesterday. It was the first market warning, the first inkling of trouble. Is it the first shockwave in a larger earthquake, or will the authorities take heed and shift to stronger ground?

The failure to sell all their offering of long dated government stock – a 40 year IOU which we the taxpayers have to pay interest on for that whole time period and then repay the capital – comes as no surprise to readers of this blog. What else could you expect?

We had comfirmation yesterday that they have sold £145 billion of IOUs so far in 2008-9 financial year, as well as billions in National Savings. I think that reinforces the £157 billion figure for this year’s borrowing I have been using (lifted from government documents), rather than the £78 billion the media and Chancellor have been using. That is, by the way well over 10% of National Income!

The auction flop was either incompetence or naughtiness by the authorities. It all goes back to Gordon Brown’s wrecking of the financial architecture when he first arrived in 11 Downing Street. He took debt issue away from the Bank of England and gave it to the Treasury. More recently the Bank has been given the task of printing the fivers and buying up the government’s own debt to keep the market up. Clearly this week the left hand of the Treasury and the right hand of the Bank were uncoordinated, did not understand what each other was doing.

In one clumsy move the Bank and the Treasury wiped out all the “gains” they had made in the government debt market by buying up government bonds with printed money. Prices fell back to where they were before the government buying as news came out that they had not managed to sell all their offer. The Governor also did his bit to undermine prices by saying he might not spend all the £75 billion after all. That is monumental incompetence. Surely you can sell all a gilt issue if the government itself is a massive buyer of gilts?

The Treasury decided to offer a very long IOU. The Bank is not buying long ones. The Treasury presumably thought the Pension Funds, effectively made to buy long government debt by the Regulator and the Actuaries now so many funds are “mature” (closed to you and me), would welcome something that long. Despite the pressure to buy these lovely gilts, clearly pension fund managers are thinking twice about lending so much at so low a rate of interest to the government.

So it was either incomeptence, or the Bank and Treasury had hatched a plot to have a little failure to warn the Prime Minister against more reckless borrowing. When in doubt, go for incompetence as the explanation.

Yesterday I met local FE College Heads. Top of their list of issues is the sudden cessation of money for their building plans, brought on by the incompetence of yet another government quango that “funds” them. Ministers cower behind their quango, denying responsibility and making sure the well paid CEO leaves, presumably with plenty of freshly printed fivers to see him over the next few months.

They asked me what a Conservative government would do about their bids for more money if elected next year. I told them that currently we have two parallel and totally different approaches to public spending.

On the one hand the business of government goes on as if things were still normal. FE Colleges, hospitals and schools compete against bureacrats, spin doctors and management consultants for limited sums of “new money” in a traditional budget round. The Colleges are currently losing. People argue over just tens of millions of pounds, as if they were significant to the public accounts.

On the other hand, the cuckoo banks now in the public sector ask for hundreds of billions. They are asked in turn if that will be enough. Hundreds of billions are showered on them in the form of loans, guarantees and new share capital. The government doesn’t argue over the odd ten milliion or even the odd hundred million. We have moved from considering tens of billions to now considering hundreds of billions.

The government seems to think bank money is different from other public spending. The sad truth is they are the same. They are all spending which taxpayers have to pay for, ultimately through taxes. If the cuckoo banks take more, other types of public spending will take less.

So what can the Conservatives afford? They can only tell you that when they have got in charge of the banks, and turned off the money taps to them. The sooner the banks are told to sort themselves out, the sooner we might have some money for more worthwhile purposes. At the moment the government’s answer is they cannot afford new building schemes for FE Colleges, and the ungrateful banks are reluctant to lend to some FE Colleges as well I was told. There’s the final irony for you.

As readers of this blog will know, you can only understand UK public finance in the age of public sector irresponsibility if you see it as two large banks with a medium sized government attached. The two bank cuckoos in the nest got there well before spring. They now determine the future of public spending and the prospects of the rest of the brood.

President Obama has triangulated with the masters of the universe from Wall Street. His Treasury Secretary this week proposed the world’s largest Hedge fund to be created with around one trillion dollars of largely public money. Yes, one trillion. Why not? It’s a large round number. You are nobody in public finance these days unless you talk trillions.

This Hedge fund will lever private capital raised from Wall Street with large sums of matching public capital, expanded by even more massive sums of public borrowing. In the FT worked example a private investor might put in $6, the taxpayer put in $6 and then the state guarantees borrowing of another $72. All this cash is used to buy up $84 of what used to be called toxic assets from banks, but are now to be called “legacy” assets to make it sound more worthwhile.

I thought it was this kind of massively leveraged hedge fund operation which had gone wrong for the Investment banks in the Credit bubble. I thought we were all trying to stop this type of thing, and have more sobre less leveraged financial activities, so the masters of the universe could no longer lend to everyone at cheap rates and earn mega bonuses on the back of it. I thought we had worked out that such activities led to a big balance of payments deficit and people unable to repay their borrowings.

Apparently, in Obama’s public sector world, having the world’s largest hedge fund trying to make money out of bankers’ past errors is a must have. He is trying to fix yesterday’s problems by adopting yesterday’s mistakes as public policy, doing it all over again with public money.

Let’s try again. There is no substitutue for working through all the toxic assets of the banks. They have to decide which to carry on with in the hope they will be repaid, and which to write off. They have to decide which investments will come good good, which can be sold, and which are now valueless. Switching them all to a taxpayer funded hedge fund does not solve the problem. It just lumbers the taxpayer with even more risk.

Wall Street’s immediate response was very favourable to the scheme, because they hoped it would mean the banks could dump all the rubbish on the taxpayer. Time will tell if this mega hedge fund gets off the ground on the scale imagined. There are still some interesting questions ahead, like which “assets” will the banks want to offload, and how much should the taxpayer pay for them? Then there is the little matter of how they are managed.

Yesterday the Governor said four very important things.

1. The change of inflation target from the RPI to the CPI was a government mistake, which led to a bigger credit bubble.
2. There are lags – we have not yet seen all the effects of much lower interest rates, and need to be patient.
3. The deficit is very large and should not be increased further.
4. He may not use all the money printing authority the government has given him.

Meanwhile the inflation rate ROSE to 3.2%, 60% over the target set the MPC. This useless committee has now comprehensively failed. It held rates too high for too long, causing mayhem in the real economy. Now it has slashed rates too far, undermining sterling and causing a lot of imported inflation. They had a lot of help from the government’s boom and bust economic policy.

None of this should come as any surprise to readers of this site. I called here for much lower rates of interest well over a year ago, before the end of 2007, to stave off deep recession. For the last six months I have been calling for higher rates to avoid a sterling collapse.

I am pleased the Conservative party has taken up the advice to recreate a stronger Bank of England, capable of regulating the banks and the money markets and running a more sensible monetary policy. It is much needed. The Governor has done the cause of a stronger Bank much good by his sensible and honest comments yesterday, admitting past failures and proposing greater fiscal restraint.

The government yesterday published a document entitled “Rights and Responsibilities: developing our constitutional framework”. Only seven backbench Labour MPs stayed to hear about that. Those absent made a wise call, as the Statement was beyond parody.

I give you a flavour from the supporting document:

” A declaration or charter of rights and responsibllities expressed as common beliefs might build on the precedent provided by the French Declaration of the Rights of Man or the Universal Declaraiton of Human Rights, both of which make reference to responsibilities as well as rights. Such a declaration would be intended to have no legal effect in the courts. It would enable Parliament to set out a comnmon and explicit understanding of the values underpinning reciprocal rights and responsibilities, including the rights of individuals, the responsibilities of public authorities to respect rights and the mutual responsibilities we owe each other as members of society. It could reflect the consensus which emerges …..”

When I asked Mr Sraw if we could have the referendum they promised on Lisbon as one of our rights, the answer seemed to be No. Apparently there is no responsibility on governments to do what they promise. Nor did Mr Straw rule out every citizen being sent a copy of Gordon’s little red book of citizens responsibilities (Number One the Citizen must pay all requests to keep the government in the style to which it is accustomed)

The Prime Minister yesterday reported on the European meeting he had recently attended. Once again he used the occasion to lower his office, playing crude politics instead of answering the questions put. At a time of financial crisis the nation would appreciate engagement with serious points from all parts of the House and country rather than juvenile political tricks and ill informed propoganda.

The benches behind him were far from full. He ploughed on, lecturing Mr Cameron that he was isolated in Europe. The PM seemed isolated in the UK. All his grandstanding as a Euro statesman is ceating an ever bigger gulf between him and the electors,and between him and his own MPs. Once he had finished both his Statement and his prepared rant against the Leader of the Opposition, it became embarrassing to him that there were not nearly enough Labour MPs willing to ask him a question to keep the show going. The House had to continue with just Opposition questions until proceedings could be brought to a merciful end for a PM who was losing the plot.

He didn’t even try to answer my simple question of how much total UK state borrowing and guarantees now amounts to.

The two main poitns he made from his “summit” were his enthusiasm for more transparency, and his dislike of protectionism. He fails to explain why this transparency does not extend to an honest balance sheet for the UK as a whole. He has yet to tell us how a large devaluation and heavy subsidies for the banks relates to his crusade against protectionism.

He did honestly report his continued love of more regulation and more borrowing as the ways out of the crisis, which was itself brought on by overborrowing and wonkly regulation.

Yesterday on BBC TV I was confronted by a statement that Alan Duncan (Shadow Leader of the House)had called for the Housing allowance to be abolished and replaced by a large pay rise for MPs. Did I agree?

Of course I didn’t. I subsequently asked Alan Duncan if he had said that, and he assured me he had not proposed any pay rise in the current climate. He isn’t deaf to the public mood either.

So what should be done? Parliament is just the outward and visible manifestation of Labour’s unproductive, costly and badly run public sector generally. Reform of the public sector to serve the public better at less cost needs to start there, to provide a lead to the rest.

Here are some commonsense proposals to raise productivity, cut costs and improve efficiency:

1. Have fewer MPs. My productivity was slashed by around one quarter in the last boundary review for no good reason, when they took a large number of electors away from the seat. It is quite possible for MPs to represent 80,000 or 90,000 people instead of the 70,000 average at the moment.

2. Cut the MP staffing allowance to cover the costs of two rather than three full time well paid assistants and secretaries. That should be enough to do the job to a decent standard, and might remove some of the spin doctors and hangers on who manage to creep within the rules.

3. Reduce the large police presence in the Palace, so more police can be policing our constituents home areas where they would be welcome

4. Introduce a September session to hold the governent to account – not for more legislating, with Question times, debates on topical topics and opportunities to cross examine Ministers on their conduct.

5. Tell all candidates to Parliament before the next General Election that the MPs pension scheme will be closed to new members from the date of that election, to be replaced by a money purchase scheme along private sector lines.

6. Cut the budget for building works at the Palace, to try to stop all the clumsy new security and Visitor constructions that increasingly disfigure the place

7. Make Parliament sit until 10 pm on a Wednesday as well as on Monday and Tuesday, to give more time to examine important issues

8. Buy a block of flats in Westminster around the time of the next General Election when the market may be offering better value. Make these available to MPs who need overnight accommodation in London. They would not then be eligible for a housing allowance. Allow existing MPs a sensible phase out period for their current arrangements, as selling London properties in the current market will not prove easy.

When old maids bicycled to holy communion and men drank warm beer, the bank manager knew each of his customers. He knew whether they were honest, how stable their job was, and whether he could risk a loan to them. You could deposit money with the bank without having to show your passport and a gas bill. You could get a mortgage limited to a modest multiple of your salary if you had already saved for a deposit.

I like the modern world, and live for the future to be better. I love the anarchic democracy of the internet, the sleeker greener and faster cars, the sophisticated TVs and the organic products that the modern marketplace has created. I even like the ability to use some modern financial instruments to manage risk. In this one area of banking ,however, there was commonsense and magic in the old arrangements that we have lost at our peril.

We need a new generation of bank managers in the branches of our largely nationalised banks who take time to size up their customers and work out how much they are good for when it comes to lending. We need them to nurse many customers through this damaging downturn, correctly identifying those people and businesses who will be able to honour their debts in the fullness of time. They also need to be shrewd and tough enough to close down the problem loans where it is unlikely they will get the money back, before more is lost. It is difficult to make these judgements from head office, or by running a new computer programme based on clever mathematics. It’s the people, stupid, in the end.

What is true of the local branch should also be true of the nation’s Bank, the Bank of England. The Bank is the government’s way of running the money markets and banking the banks. Just as you or I go to RBS or Barclays for our current account, so the big banks bank with the Bank of England. Their bank manager is the Governor.

I think it was huge mistake to demand much more regulatory capital in a hurry last autumn, and to force three big banks to go to the government to get more share capital to meet this requirement. It meant the taxpayer was forced into buying banks shares at prices which now look very high. We have already lost a packet on the deals. Instead, if the banks needed financial help, their bank manager should have given it privately, behind closed doors, and on loan terms which forced those banks to sort themselves out.

I find it offensive that taxpayers often earning far less than the bankers are being asked to stump up huge sums from their taxes and future taxes to bail out high cost banks. Putting so much money into them without proper banking terms has allowed them to go on paying megabucks and mega pensions to chosen employees and leavers as if nothing had happened.

If the Governor had been asked to be their bank manager instead of the government becoming their owner, it could have been very different. As a tough and experienced bank manager he would have demanded a plan from them to get back into profit as quickly as possible, He would have asked them to raise more of the money they needed by selling some assets. He would have told them to cut the size and risk of the Investment banking arms immediately. Taxpayers should not be bailing out or standing behind casino banks.

He would respond robustly to the nonsense that these banks are so complex you just have to pay up or else. He would have told them to become less complex as quickly as possible. He would not have accepted the government argument that these banks were so large, posing a risk to the whole system, that they simply had to be given huge sums of new capital. He would have said to them that he had no intention of letting them go down. Nor would he featherbed their pay and bonuses, or put up with atrocious management of investments in dangerous financial instruments.

All is not lost. We still need the intelligent bank manager approach, both on the local High Street and at the Bank of England. Alistair Darling should stop acting as subsidiser of first resort to these badly run banks, and let the Governor – or Labour’s new bank quango chief -get with the job of making them shape up. Couldn’t their Chief Executive start by telling all the highly paid staff in the nationalised banks that they could keep their jobs only if they accepted senior civil service pay with no bonus, until they have got their banks out of the losses and onto a proper financial footing?

I don’t drink much warm beer myself, but my constituents would love to be able to carry out financial transactions again with bank managers who know their customers and who do not need to have a gas bill, passport and ten page form every time you want to do something. I would also be greatly relieved if I knew the national finances were being conducted with the taxpayer looked after. The present situation means too much risk and too much expense for taxpayers, and means delaying sorting out the problem banks.