We are all cutters now. The sinner repenteth. Labour’s economics guru has joined the consensus. The Prime Minister has admitted that even a government run by him has to try to get spending more in line with revenues. Let’s enjoy the moment.

The Prime Minister wants to “cut costs, cut inefficiencies, cut unnecessary programmes and cut lower priority budgets”. He wants to sell off “unproductive assets”. He seeks “realistic pay settlements”. It is almost as if he has been reading my blog and articles over the last two years!

Let’s leave aside the rhetoric of the false distinctions – Conservatives are not in the business of cutting crucial front line services, and they are not wanting to stop the recovery. The truth is Mr Brown has signed up to spending reduction, as some of us have been urging for a long time.

The media should now be asking some more questions about what all this means. Let’s see if we can help them ask the right things:

What is a realistic pay settlement, when RPI inflation is negative, and CPI inflation below 2%? Would the public sector be willing, as many in the private sector are, to take low or no pay increase in order to keep more jobs? The PM should offer a lead on this now, today. He needs to get expectations down, to make the public sector more affordable, whilst protecting the lowest paid and the most important front line workers.

What is an unproductive asset? Surely we need to be selling productive assets as well, starting with all those banking assets. How big a programme of disposals can he come up with? Isn’t now a good time to sell, as the Bank is pumping up asset values like crazy with its quantitative easing programme.

Which costs does he think he can cut? Why doesn’t he start with a freeze on new advertising, new consultancy contracts, new glossy brochures and bogus consultations, and follow it up with a destock of paper clips, computer consumables, stationery and other office equipment?

Which inefficiencies has he suddenly discovered which he has tolerated up til now? Will he start to raise labour productivity by imposing a complete staff freeze on all posts, exempting front line service providers in core services like education and health?

Which unnecessary programmes is he running? Would he include in that all the panoply of unelected regional government, which wastes millions and would be best swept aside? Local people had the chance to see for themselves the farce of the Regional Grand Committee, where the views of majority had to be suppressed by undemocratic rules to keep the Labour show on the road. If the government can’t even stop the waste on unelected regional government, what are they going to stop?

Which does he think are the lower priority budgets? Could they include the budgets of the Surveillance society, which Conservatives have identified recently as ones to eliminate? If not those, then what does he have in mind?

We should expect a lot of nonsense about the Opposition wanting to stop the recovery in its tracks, and wanting to make deep cuts in core services. No mainstream political party wants to do either of those things. What we need now is a more level headed discussion, line by line, of what can be taken out of the public spending figures, before the debt gets completely out of control.

It is frustrating sitting at home watching the news when there are so many important issues to ask the government to explain, and so many areas where change and improvement is needed. Parliament should be in session to debate the next part of our mission in Afghanistan.

What will the government do to ensure a fair election result? When will the government turn from fighting to training Afghan troops and police so they can take on the security tasks? What more can be done in the meantime to ensure good equipment and better protection for our soldiers? It would be good to be able to ask the Prime Minister and the Foreign Secretary to explain.

The government is printing and borrowing huge sums of money. We need to have more explanation of when they will start to curb the deficit. How much debt do they want to run up.? How do they propose that we should pay the growing interest bill, and when do we have to start paying it all back? Isn’t there a danger that too much money is lent to the public sector, starving business of access to the money they need for investment and working capital?

The main political parties do all now seem to agree that at some point in the not too distant future choices have to be made and priorities established. When you are spending and borrowing too much, something has to give if you are not to end up bankrupt. The sooner we get on with making those decisions, the easier it will be to control the runaway spending.

Dear Shareholder,

I thought you would be pleased to know we are having a great sales conference this week. On Monday our new Communications Director warmed up the audience brilliantly, whilst yesterday I got them to their feet with spontaneous applause even before I’d finished.

Some of the market research still looks poor, but we don’t believe a word of it. We just keep buying the research to help keep up the spending and the borrowing in accordance with our recovery strategy. The Sales force loved some of the new spending ideas we launched. Who said we’d run out of ways to spend your money, or even worse run out of uses for all the borrowings? It’s true some of the things we’d proposed before, but this time with the printing presses running there’s no reason why we shouldn’t just spend it to get them. So if it’s home care, cancer care, tougher policing or a new car you are wanting, we’ll put it on the UK’s flexible friend, the borrowing requirement. That’ll do nicely Sir. No there’s no need to pay a thing this side of the Election.

As I pointed out to the Sales force, who were a bit down before I explained it all, this extra spending will help us trounce our main competitors. They keep going round telling people they have to pay for things they order, and telling them that one day they have to repay the borrowings. That’s madness in my book. It won’t catch on. The whole point of what we are doing is to suspend those boring old rules about paying your way and paying back your debts. We intend to liberate the whole country from the balance sheet approach. That shows a lack of imagination and heart. We intend to take the waiting out of wanting, and the paying out of ordering. The printing machines are working well, and the Bank of England, our money subsidiary, is running a lovely line in bloated balance sheets and seems happy. I know we had to blame the bankers for doing that in the private sector, but that was just to clear the way for us to expand our market share. We even managed to buy up some of the banks, you may remember, in pursuit of our growth plans.

I can’t see how we can lose. I think a once popular newspaper has got it wrong today. Our media outlets will continue with upbeat messages. If by any chance we did lose won’t it be great to be proved right, as Conco comes along and starts cancelling all those spending plans we have been putting on the never never, or putting in forward years when we haven’t a clue how to afford them. Surely the country will see through that Conco approach of trying to offer things they can afford, and will see how much better it is to declare it’s Christmas and print the money for Santa to do the business.

I’ve also promised a new way to chose the Board in elections, which should ensure we do even better than before. Poor old Conco, having to face that. It worked well with the European board appointments, where we ensured Conco never got the full number of Directors they would have received under the old system.

I hope you saw the wonderful pictures of my friend the CEO of Americo trying to associate himself with my charisma. I was happy to share a bit of my stardust with him, as saving the world can otherwise be a lonely task. He was especially keen to hold my wife’s hand. She calls me her hero.

Yours in anger at the unreasonable prudence of Conco

CEO

It’s good news for the Tories that Sun now want a Conservative government. The Conservatives have been surviving in the media with just one Conservative supporting paper, the Express, for all too long.

It’s also important to read of the kind of Conservatism the Sun wants. They say

“Britain needs a brave and wise Government to restore our self-respect, our natural entrepreneurship and the will of every family to improve its lot through its own efforts, without depending on handouts.

We need a Government that will cut the red tape strangling businesses, that will make affordable tax cuts to stimulate growth, that will reform wasteful public services. ”

That’s what I want, and what many of you want. I look forward to the Sun helping us make the case for a freer, more enterprising and succcessful Briitain. That does require less tax on enterprise, a dismantling of the surveillance society, and more encouragement for the many good men and women who want to make something of their own lives.

Well done, my Sun. We need your help in winning the battle against the b ulging bureaucracy.

Labour Ministers says it’s voters, not newspapers that decide elections. That is right. They also need to grasp that sometimes newspapers judge the mood of electors well, so they can sell more newspapers. That is what the Sun has just done.

Apparently the Bank and government do not have enough economists of their own – being down to their last thousand or so. Today to make up for the shortage they are inviting in more for a meeting to give them a hand with QE. Let’s try to help them.

Has QE led to more bank lending to the private sector, the original stated aim? No.
Nor will it all the time the banking Regulator is demanding the banks hold more cash and capital.

Has QE led to lower interest rates for private sector loans? No
Nor will it all the time the banks are constrained.

Has QE led to more money in the money supply? Yes.

Has QE got short term LIBOR down? (money market interest rates for banks) Yes, it has helped to do that.

Can the private sector borrow around LIBOR? No.

Has QE helped push down the value of the pound? Yes.

Is QE inflationary? Yes, because it has weakened the pound, and helped fuel commodity price speculation

Has QE allowed the government to borrow huge sums of money without difficulty? Yes.

Has QE kept down the interest rates on government borrowing? Yes.

Has QE led to rises in other asset prices? Yes.
As people have sold gilts so they have bid up the prices of shares and other investments, reinvesting their money.

Summary:

QE has been great for a government wishing to hog all the available cash in a pre election year without driving up its own borrowing rate too much. When we stop QE we will find out the true cost of government borrowing. It has done nothing to ease credit for the cash starved private sector. Banks offer very different deposit and loan rates for the private sector, divorced from the artificial money and government bond market rates. QE has helped push up share and bond prices which helps confidence in assets amongst investors.
QE is helping drive down the pound, which might in due course assist in correcting the balance of payments deficit. The absence of action to tackle the government deficit, coupled with the amount of money being created is bad for overall confidence and bad for the value of the currency.

What should they do?
For a recovery they need to stop QE , cut the deficit, and relax the banking capital requirements for the short term.

I wonder how many more times the media will buy the fight back headlines? I wonder how many Labour supporters really believe that if they just lie a bit more and a bit more often about the Tories they can win?

“It’s the eocnomy, stupid.” After twelve years in power the UK is lurching towards bankruptcy. After twelve years to abolish boom and bust we are at the bottom of the biggest bust since the 1930s. After twelve years to “invest” in the public services huge sums of money are being wasted on anything but better schools and hospitals. We have been sold out in the EU, demeaned in our relationship with the USA, and made to fight Middle Eastern wars without the proper military commitment and without credible war aims. More people are out of work and on low benefit based incomes. Yet many in Labour seem to think hiring a few more spin doctors and claiming the Tories want to wreck the place will see them through.

We are promised three new initiatives. Today we get (for the twentieth or is it thirtieth time of asking) control of bankers bonuses. In practise we don’t. Stephen Hester, the government’s own favourite and highest paid bank CEO, will still have his £9 million package after today, with taxpayers money supporting his bank. The government has come to realise there is no way to legislate to stop bankers being paid loads of money. The only way to stop excess remumeration is to make it clear government will not bail failed banks, and to ensure more competition in banking markets so banks are smaller.

Later this week we will have the Deficit Control Bill. They must think we were all born yesterday. If the governemnt wants to control the deficit all it has to do is spend less. Putting through a Bill to say sometime in the future they should get round to a lower deficit is absurd. I look forward to reading the sanctions that they intend to apply to Ministers who fail to do this. Also look carefully at the small print to see how the deficit will be calculated.

We willl be offered another NHS target, from a government which itself has concluded it has to move on from Health targets.

Meanwhile expect lots of red ink explaining the alleged wickedness of the Tory high command. Whilst most of the public worry about how any government is going to find enough items to cut out of the budget to get us back into good financial shape, the Labour government will claim that any million of reduction the Conservatives identify will threaten the life and strength of core public services. They will keep on telling people that Labour’s waste and borrowing are preventing a worse recession and will bring about recovery, when the evidence abounds that the current deficit and borrowing are starving the private sector of cash and credit and delaying and enfeebling the UK recovery compared with others around the world.

Conservatives want a recovery, and want good quality public services. The battle is about how you achieve this, not about the aims. The PM’s effort to equate Labour values with the nation’s values was false. Words under this government are expensive. They come with spin doctors and glossy brochures attached. This week is just more words. They’ve had twelve years to deliver. We can all see the results.

It was a dreadful night for the SDP, down at 23%. Frau Merkel’s CDU also lost votes and vote share, coming out with just one third of the votes. The Greens, and the radical left took away SDP votes. The Free Democrats scythed in to the CDI position. The parties who were not part of the governing coalition surged from 30% to 43% between them.

What were German electors trying to tell the two main parties? They were saying that their efforts to appear the same as each other and to govern together in a consensual coalition on the so called centre ground was the last thing voters wanted. They did not think it was good for Germany. The larger group of critics of the Grand coalition sided with those who want less government, lower taxes and more freedom. The smaller group sided with those who want more government and more centralised leadership and more green policy.

The most exciting thing in the election was the great success of Guido Westerwelle, the leader of the Free Democrats, in boosting his party’ s support. He was strong and interesting, with something different to say. He condemned the car scrappage scheme as an expensive nonsense. He called for a cut in the top rate of tax from 45% to 35% to make Germany more competitive and enterprising, and a cut in the lower tax rate from 14% to 10% to cut poverty and boost private spending. He said of the Grand coalition it was only grand at “raising taxes and accumulating debt. It has frittered away billions in tax money”

The Free democrats want to strengthen civil liberties, reduce state power and keep nuclear power stations. Much of what they say I find attractive, though doubtless we would disagree on the subject of the EU. Their views of Trade Unions have already been slapped down by Frau Merkel, as they were not conducive to sensible relations between government and Unions.

From Germany’s point of view I hope Frau Merkel adopts Herr Westerwelle’s programme. It could provide a shot in the arm to Germany’s private sector. From the point of view of the Uk trying to compete with them, I hope she carries on with her dull, ineffective, job destroying Eurocentric top down heavy handed nonsense, which will limit Germany’s capacity to raise her growth rate and awaken from her torpor. The last thing we need to add to our economic woes is a Germany with much lower taxes. I suspect Frau Merkel will decide to go with the subsidy and high spending consensus, making it difficult for her to also run with the Free Democrats more exciting tax ideas as she will see it. European governments usually choose policies which make their people poor and in chains. The eventual coalition may well be CDU/Free Democracts as most expect, but the Free Democrats programme will likely be much diulted.

Barack likes Sarah – enough to hold her hand
Barack likes Gordon – enough to slap him on the back and walk with him
Barack will meet with Gordon – to talk about their joint problem, the war in Afghanistan, on the eve of a request for more troops.

How tacky can you get? Why can’t our Prime Minister walk tall without needing The President’s reflected and fading glory? Why do they have to make the story the “special relationship” when the stories should be how are they going to get out of the economic mess they have created and what are they going to do about Afghanistan? If President and PM need to meet they will meet. If they don’t need to meet, so what.

We are presented with Janet and John politics. What we need are some answers to difficult questions. I asked the ones about the G20 yesterday. Today I ask about Afghanistan

How many troops does the General in charge think he needs?
What is the new mission post the election?
How long will it take to reform and train the Afghan police and military to undertake security actions?
Is there a military solution to the Taleban problem?
Can you solve the Taleban problem in just one country?
Why does the UK government think Afghanistan is a unique home for terrorist training?

Imagine if Mr Brown’s promised new law to control the public deficit were already in force.
A policeman arrives at Number 11 Downing Street..
“Excuse me, Sir, but I have reason to believe you are harbouring an overlarge budget deficit in here”
Chancellor (Mr Darling): “Certainly not. I know the law and I know my rights. That is just a necessary fiscal stimulus”.
Police: “But I also see a printing press out the back to print the money to pay for that excess deficit”
Chancellor: “No, Officer, that is just my Quantitative easing machine, part of our new monetary framework”
Police: “I see you are hiding a large number of off balance sheet liabilities to keep your apparent deficit down”
Chancellor: “No, Officer. We have different accounting rules to the private sector, and have always regarded borrowing for anything useful like new schools as off balance sheet through the PFI”
Police: “I think you are understating your deficit by delaying consolidating all the banks you own in your deficit and balance sheet figures. That leaves trillions off the accounts”
Chancellor: “We regard all those toxic liabilities as assets, Officer. They will come good one day you know”
Police: “I have a report that you have failed to account for £1.1 trillion of pension liabiliites, to keep the apparent deficit down”
Chancellor: “Again, the law about pension obligations only applies to the private sector. You should be careful, Officer, as your allegations include the Police pensions which I am sure you want to benefit from”
Police: “Don’t try and get clever with me. You cannot bend the law just because its effects may be unfortunate. Both you and I are under this law. And remember, it was not me who imposed it on us – it was you. We have to enforce laws whether they are good, bad or silly.
I have a complaint that your endogenous growth theory didn’t work, and that you are instead running some kind of growth scam”
Chancellor” No, Officer, You can’t uphold a complaint just because we’ve had a couple of bad years. ”
Police” I think you’d better come down to the station. I have a warrant here to search these premises for the books that tell us the true state of the nation’s finances. In the meantime you can help us with our enquiries”

Just when you thought they couldn’t come up with any more absurd posturing we are promised a Budget balancing Act for the next Parliament. Perhaps bloggers would like to write in with what sanctions they think should apply to Ministers who fail to hit the targets! A little guidance on how to do the sums in the accounts might also be needed for this lot.

If only a communique could put things right, we are now on course for sustained growth, well behaved banks and benign regulation. At the centre of the Summit Report were two propositions that make a lot of sense. The G20 will continue with stimulus measures to encourage recovery, whilst withdrawing them at the right pace to avoid inflation and other problems ahead. They envisage a seamless transition from extraordinary measures and public sector demand to normal policies and private sector demand. At the same time they will put in place a counter cyclical way of regulating banks, to allow more lending in the bad times and to rein them in the good times.

If only.

As so often, the question to ask is not do we share the aims, but what do we think of the actions to achieve them? Have they proposed a method to create this new successful economic world? I fear not.

High up the list of statements in the Preamble they write

“We pledge to avoid destabilising booms and busts in asset and credit prices and adopt macroeconomic policies consistent with price stability…”

Yet the UK and US policies of printing more pounds and dollars, coupled with other Central bank expansionary action in China, India and even to a lesser extent the ECB was creating a surge in share and commodity prices in the run up to their meeting. The UK policy of pushing the pound down by low interest rates, unhelpful comments from the Governor, printing more money and malign neglect of the currency is not trying to keep prices stable and is bound to push inflation up.

In their statements on regulation there is an important development. They now admit that “Major failures of regulation and supervision…..contributed significantly to the current crisis” That is great news. Leaders need to accept and understand their governments’ mistakes before they start to remedy them.

The bad news is they still do not seem to understand that it is low interest rates – and printing money – which causes price bubbles. They go on to say

“We have agreed to improve the regulation, functioning and transparency of commodity markets to address excessive commodity price volatility”

The simple reason commodity prices went through the roof in 2007 and early 2008 was excess credit and money. The reason they fell through the floor in the latter part of 2008 and early 2009 was too little money and credit. The reason they are surging today is the very easy money authorities have created in some parts of the economy. Investors and speculators fear renewed inflation on current policies and see commodities as a store of value that governments cannot devalue.

The need to accommodate the different views of the US and the EU on regulatory matters created a series of catch all pledges. New regulation of capital (necessary) is to be added to new protection “against market abuse” and the promotion of “higher quality standards”, leaving future architects of the detail free to draw up as many new rules as they like.

The key issue they do mention is banking capital. We had banking excesses on low capital in 2005-7 because the regulators failed to keep proper control of how much big banks could lend. The Communique says it realises this now. Unfortunately their answer is to soldier on with Basel II. Readers of this website will recall that Basel II rules were the ones which told Northern Rock on the eve of their collapse they had too much capital or too little lending! We are promised a new leverage ratio on top of the lax Basel rules. No-one has yet worked it out, so watch this space. It might be ready by 2012.

The Communique reads as you might expect from a large gathering of interests with different views, where the attention of the main players has moved on to Iran. There is nothing here to make one believe these Leaders have sorted out the existing problems let alone prevented another crisis. There is no engagement in the communique with the following vital issues:

1. How do the debtor countries get out of their deficits?
2. At what pace will the money printers get onto a sounder footing?
3. What are they going to do about the new asset price bubble emerging in some markets?
4. How do they switch demand from public to private sectors?
5. What is an appropriate level of capital for banks today, both to ensure enough confidence whilst at the same time allowing some more lending to the distressed private sector?
6. Can’t the UK see that it has public sector plenty and a private sector squeeze? How do they intend to make the financial system work for all parts of the economy today?
7. How are the saving countries like Germany, Japan and China going to expand their domestic demands?

A wellwisher has sent me an extract from a government website. It says the Government Economics Service employs over 1000 economists in 30 departments – and it is still recruiting more!

I remember having to stop the Welsh Health Service appointing new economists when I was the Secretary of State. I argued that we had plenty of economists in the Treasury, producing official economic forecasts, so we should just use those.

Clearly since then there has been a massive expansion of economists power in Whitehall. Pity it hasn’t produced better economic results. A suitable case for savings?

We need to be tough on bankers, tough on central bankers, and tough on the causes of bankers. The crisis was not just a set of banking mistakes. It was also a set of monetary policy and bank regulation mistakes.

At the G20 the easy way out is to blame commercial bankers and shadow bankers, to demand they pay themselves less (ever a popular cause), promise or threaten tougher regulations and go home with a political job well done. The media should not let the governing classes off so lightly.

Did lots of commercial bankers make a mess? Yes they did. They did lend too much and borrow too much for their businesses. How do you stop them doing that in the future? By controlling the amount they are allowed to lend for any given amount of capital and cash they hold. The US and the UK are right about that part of their response.

In the short term though, that poses a problem. We start from a position where banks were allowed –even encouraged – to be imprudent. Governments after all urged them to lend more to good causes, to people without homes, to governments themselves. Central banks set low interest rates, the green light for more lending. If we immediately make them prudent there will be a further contraction of credit and activity, which could weaken the banks further. It requires fine judgement to impose the right lending controls, and to show how they will get tougher as things improve. We need to change from pro cyclical to counter cyclical regulation – stoke the fires when we are cold, and quench them when things are too hot. The current authorities did it the other way round with disastrous results.

Did bankers pay themselves too much? Yes, some did. None of the proposals on the table suggests a way to stop individual bankers in the future being paid large sums. There is talk of some overall control on pay in total, and some talk that bonuses need to be based on longer term performance. What I cannot support is large banker salaries and bonuses that result in their banks seeking public subsidy to pay the resulting losses.

There are two answers to that. The first is, the state should not in future subsidise banks as they just have. By all means act as lender of last resort on tough terms to prevent a solvent bank going down, but do not offer share capital and subsidy on the taxpayer. Regulators should act long before a major bank is in danger of becomign insolvent. The second is, insist on more smaller banks, so no one bank is large enough to hold a country to ransom. The UK government can insist on RBS and Lloyds splitting themselves up in the UK so we can have more choice and smaller banks. Smaller banks will pay smaller salaries and be more attentive to their customers. They will work harder to offer value and service.

My critics on this site complain that I am weak on bankers and tough on the public sector. Far from it. I am tough on both, as both made this crisis. My critics wish to exonerate the Bank of England for its wild ride of a monetary policy, lurching from boom to bust and now trying to lurch back to boom again. We need a better Bank. It needs to be less open to short term political influence, run by people who can judge the cycle better and who understand the lags between interest rate changes and changes in activity and prices. We need a better banking regulator, who understands the importance of setting sensible levels of required cash and capital, and realises that if things start to heat up too quickly we need to tighten, and if they are cooling too fast we need to loosen.

My critics ignore my pleas to be tougher on the bad banks. I campaigned against subsidy and share capital from taxpayers, telling them to lend them short term what they needed and order them to sort themselves out. I opposed the HBOS merger which the Board of Lloyds wanted – along with the government. I am now campaigning for a more competitive banking industry. I would not allow any further UK mergers by banks that already have a substantial high street presence.

The G20 is unlikely to come up with the regulatory changes that a healthy banking industry require. Posturing on bankers pay is not the answer. It will also be more humbug given the salaries and bonuses the UK government have approved for RBS and Lloyds. Any journalist hearing the UK government saying they support controls on pay should just ask them what they are paying Stephen Hester at RBS.

Last night’s “The love of Money” show was the BBC at its typical best – offering us low grade propaganda as portentous instant history. I sat through the whole sorry parade and kept calm. Revenge is best served cold.

Where do you begin? There were no voices allowed to say the regulators had made mistakes. No-one asked how come the money markets froze and the lender of last resort, the Bank of England, was unprepared to lend. No-one asked why if these banks were on the brink of collapse days and weeks could pass whilst the UK and US governments tried to cobble together packages without a run on a major bank. We were told this crisis came from nowhere, like a natural phenomenon. It was the perfect storm, the financial tsunami. Maybe greedy bankers were the explanation. Maybe it was just one of those things, designed to allow Gordon the save the world.

No-one questioned the Governor or the Prime Minister to find out how culpable they were. This all happened on their joint watch. Never have our banks fallen so low before. No-one asked why, if they thought the banks were on the verge of collapse, the regulators maintained their licences and kept on telling us they were all solvent. No-one asked if the banks were as now described by the Governor the taxpayers were made to pay such high prices to buy into them.

The one dissenting voice they reported was Fred Goodwin. He is not most people’s favourite character in this crisis, so his was an easy voice to gainsay. He said that RBS was not insolvent but illiquid. That also happens to be what the banking Regulator was saying at the same time. RBS would not have had difficult days late in 2008 if the Bank of England had made more liquidity available to the banking market as a whole or to RBS in particular. No credible person was allowed to make that case.

No-one went off to ask the FSA some tough questions about how they had let banks get to this state. No-one pointed the finger at the Governor for his boom and bust interest rate strategy. No-one queried the prime Minister’s role in changing the regulatory structure in the late 1990s, nor asked why so much mortgage regulation had been brought in to so little effect in the noughties.No-one challenged the government’s decision to back and encourage the Lloyds-HBOS merger.

The main thesis of this election leaflet of a programme was that Gordon brown -assisted by Baroness Vadera – had to step in and save the UK banks, and then go and tell the Americans how to do the same for their banks. Old fashioned bank nationalisation had become an exciting new export product. The programme makers did not listen to their own words. The package the Uk cobbled together provided £50 billion for new equity and £450 billion for new liquidity. It was the liquidity which made the immediate difference.

Nationalising the banks meant the taxpayer has to run huge risks and probably withstand large losses. The underlying reason this was forced on us was a massive monetary policy failure by the Bank and Treasury, aided by a huge regulatory failure to control the cash and capital of the banks properly, followed by bizarre decisions to starve the markets of money and the banks of lender of last resort cash when the crisis struck.

Gordon was picking up a mess of his government’s own making. He has not saved the world. The world’s financial system remains weakened by the excesses of the last decade and by the policy responses of the last two years.

It was a huge error to allow the spin doctors and private secretaries to make it known that the PM had been rebuffed in his request for a meeting with the President.We now have a storm in a teacup story, which allows everyone to dust off their thoughts on Lockerbie and Gordon’s electoral chances, two reasons why the President might not choose today to meet the PM.

The PM’s usually faultless spin dcotors should have played up “international statesman” making his own address to UN and going on to lecture the G20. Trying to be Barack’s buddy when the President is busy and probably none too pleased with his UK ally was never going to be a winning ticket.

Last year I wrote a lot about the big devaluation of the pound. Its value was slashed by around one fifth. Over this year it has something of a respite, but I have always felt it remained vulnerable, given the monetary and budgetary policy we are following. In recent days we have witnessed another slide.

The Governor and the Bank gave sterling a downwards push. Their Report explained why the pound had fallen in the past, without saying this was bad or suggesting that they would try to stop more of the same. The Governor terrorrised the currency markets wiith his threat to cut short term rates to the banks even more, and with his enthusiasm for more money printing.

Apparently the Bank is going to invite in more economists to tell them how well or badly QE is going, and to explain the pound. I have not yet had an invitation! So I will give them the answer here. The pound is falling because they are printing lots of them and do not seem to care about the value of the currency. The government’s finances do not encourage much confidence.

You don’t see so much of the fall if you look at the dollar. The US is almost as brutal with its currency as the UK is with the pound. If you look at the changes below you will see what is happening. The figures compare the pound’s level last friday morning with the level today:

Hong Kong Dollar 12.8 = £1 now 12.57 = £1
Norwegian krone 9.66 = £1 now 9.34 = £1
Swiss franc 1.7 = £1 now 1.66 = £1
Rand 12.22 =£1 now 11.98 = £1

Let me make it clear at the outset. I think it was great news that President Obama demonstrated that skin colour and background is no bar to the highest political office in the world. That is a good advert for American democracy. He is a fluent and stylish communicator with some new things to say.

Nor should your background as President protect you from the normal barrage of well meant advice, criticism, ideological disagreement and downright party hostility that characterises a healthy democracy.

I do believe that if a leader charts a good course, if he is seen to be addressing the problems that matter most and to be working to a better solution in most of them, then he will ride out the noises off and prosper. That I guess makes me an optimist. I also believe if a leader fails to tackle the big issues, or tackles them in a way which makes them worse, he will be rumbled and in due course fall at the ballot box. If you do not believe these things, you struggle to defend democracy itself.

The President has chosen to tackle a large number of issues at the same time, which makes it difficult for him to grasp all the necessary detail, to build the political coalitions each one requires for passage on the Hill and in the country, and to expend enough political capital on each to see them through. In some cases victory in one would make victory in another more difficult.

He wants to

1. Cut the USA’s carbon output
2. Lead an economic recovery
3. Push through a substantial and expensive health reform
4. Change America’s relations with Russia and China
5. Create peace in the Middle East

He is at his weakest on the economy. He came to office agreeing with most of Bush’s plan to spend and borrow more, along with bailing out the banks. He has not altered the Bush policy much, keeping to the Bush line on failing banks and failing car companies. He has spent some more – but Bush might well have done the same if he had stayed in office. He has borrowed some more, but Bush was good at borrowing too. The US economy will have a recovery of sorts from the ultra low interest rates and the substantial injections of cash. The problem of curbing the deficit remains work for another day. Indeed if he is successful wtih his health strategy the deficit will get substantially worse.

In the Middle East his decision to increase the troops and the fighting in Afghanistan is in tension with his wish to change perceptions of the USA and to become a collaborator rather than be the policeman of a particular view of how the Middle East should be governed. It is also another reason why the deficit will stay high. His words are soothing, but his actions are still warlike. As he changes the rhetoric towards Russia his critics will say he is being too soft and the Russians will take advantage. Let’s hope his critics are wrong, and he does harness Russian help over Iran and nuclear weapons, for that would be progress.

It is too early to say whether this will be a great Presidency, a mediocre Presidency or a great failure. It could be any of those. The words of change have to be matched by the actions of change. So far there is more change of rhetoric than of action. His best bet might be to settle on just one or two objectives for his first term and put his full weight behind those, claiming less change for the other areas.

It is popular apparently to complain that bankers are paid too much for doing “socially useless “activities. If they get a bonus for doing lots of them, it is even worse. The crisis, we are told, was “cooked up” in their dealing rooms.

Funny that. I thought we had banking regulators to make sure banks didn’t get carried away on a high created by other people’s money. Wasn’t the overextension of credit cooked up in the Regulator’s rules? Didn’t they act as master chef to the banking undercooks who burnt the food? They wrote the capital and cash recipes they all had to follow. The “huge transformation” that is needed now to rescue or enhance reputations surely is a transformation in how the regulators regulate the banks. Shouldn’t the Chief Regulator be asking how socially useful their activities have been in the last four years? Wouldn’t a touch of toughness as the boom built have been a good idea? Shouldn’t they have called for more cash and capital reserves long before 2007 dawned? Wouldn’t some respite now the banks are weak be an even better idea? Can we have more banks please, so they have to compete more on price and service? Can we have smaller banks, so each one poses less of a risk to the markets? Where were the Regulators when the mega mergers were taking place? Why did they allow them?

No-one wakes up on a Saturday morning and thinks, “Thank God the Regulators kept the banks in check”. If we have truly had a “near death experience” it was one that in the case of the large banks was approved and permitted by Regulators, some on bonuses. There is a lot to be said for making things “boring”. If we want banking to be less edge of the sseat today, the Regulators should allow banks to do more with their money than simply lend it back to the government.

Question – Should LLoyds keep HBOS? – No
Should Lloyds enter its bad assets into a government insurance scheme? – No
Should Lloyds remain as a single mega bank? No
Should the taxpayer subsidise LLoyds bank? No
Should Lloyds continue doing all it is currently doing? No

It is very easy working out what should happen next for Lloyds. The taxpayers representatives – yes that’s the Chancellor and Lord Myners – should tell them the taxpayer is not going to put up another penny, nor underwrite anything more. The taxpayer will use his leverage and 43% stake to demand that Lloyds creates three competing UK banking groups from its current range of assets and sells two of them onto new owners as quickly as possible. The Competition authorities should make clear they intend to use their powers to require pro competitive solutions if Lloyds cavils at this requirement from the biggest shareholder. LLoyds will also be required to sell its overseas assets, unless it can sell the taxpayers shares in the whole remaing group at a profit for taxpayers.

I look forward to the “ongoing dialogue” with Lloyds that I was promised in their last letter to me. Despite telling them of my answer and my wish to hear from them, the silence has been deafening! (see this blog 4th September 2009)

In the depths of the used car recession earlier this year I took the advice of some of you and bought myself a nearly new Jaguar XF. The good news was the price, heavily discounted by the market from the original new on the road list price for just a few thousand miles on the clock. You told me it was a gorgeous car and if I could afford one I should go for it.

I am trying to love it. I have learned to approach it from the front, where it looks stylish, and not from the rear. The rear is high backed, wide hipped, middle aged and rather like many other executive motors. I put out of my mind the lush classic lines of the S type which I traded in, which looked great and distinctive from any angle.

The problems begin as soon as I sit in the drivers seat. I know we are going to have another one of those endless rows about who does what and who is in charge, and that the car in its infuriating way will win.

It all starts to go wrong as I try to get the car out of second gear into third as we pull away. The salesman told me with the paddle gear shift I could drive it as a manual if that was my wish. Laugh on. The car refuses third. I try again. It refuses third. I try the third time, and it reluctantly humours me by shifting into third. We approach a bend. I slow down on the engine but do not need to change down. The car changes down. We begin the process of trying to get into third all over again.

If we make progress and start to cruise at a constant speed, the car switches off the dash display telling me what gear we are in. That would be fine if it let me choose, but sometimes it changes the gear silently so I don’t notice. If I then try to reassert control I am in ignorance about which gear we are in. I have to tell the car if I want to change, but it doesn’t have to tell me when it does change.

So I give up trying to choose the right gear, and accept the poor fuel efficiency that results from its wrong choices. I turn on the sat nav when we are parked and put in the destination. Know all car tells me we will travel the 40 miles in a stunning forty minutes. I guess it will take us at least 80 minutes, given the likely traffic and congestion. Car knows best. It takes us eighty five minutes. There is no apology. I set the screen for full screen map so I can see the road ahead when we are in traffic jams. Whislt I am busy looking out of the windscreen the car switches the sat nav map to half page, so you cannot see where you want to go when next you have a chance.

It starts to rain. I carefully choose the right speed of intermittent wipe for dull drizzle. I turn it on. The car is angry, and wipes the screen several times furiously at high speed regardless of my wishes.

Let me out. I want to drive this thing. I feel I have gone backwards. My diesel S type manual was beautiful, did 39 mpg, stayed in the gear I chose and let me read the map. They call this progress?

We are promised nasty words about the Conservatives and their new anti federal allies in the European Parliament from Mr Huhne.

These federalist Lib dems, who are always criticising Tories for not being friendly enough to fellow European democratic parties, then complain and make nasty comments about any party the Tories reach an anti federal agreement with. They caricature and libel members of these parties through selective quotes and misquotes. It was never part of the deal in the European Parliament that we all have to believe and defend all that all members of each party say – just agree with them on the big issue of whether the EU should do more or less.

Apparently in the EU Lib Dems only have to be nice about fellow traveller parties determined to take our democracy away and give more power to the Brussels autocracy. At least it goes to show David Cameron did not pull us out of the Christian Democrat grouping so that the European federalist mainstream would be nice about us! All you sceptics, maybe he did it because he agrees with us that Brussels has too much power and Nice, Amsterdam and Lisbon are wrong.