Nov 26 2009
Too little competition, too little choice
Last night after a Newsnight interview the BBC asked me how long I thought we would live with very low interest rates. I had to explain that it was only the public sector that benefitted from the ultra low rates, thanks to the government money go round. They print the money to effectively buy the bonds from themselves on unrealistic rates of interest. They are likely to try to keep this running until the election. Interest charges for overdrafts and loans to business are high. Bank margins are very high on new business. Mortgages are no longer available at a half per cent over base. Our damaged banks are under a regulatory cosh to spend less and save more, so they see no need to be competitive on the price and availabilty of credit to the private sector.
This morning I awoke to another regulator telling me how much water companies could charge for the next five years. This item was followed by opinions on how bankers high pay should be controlled by a financial regulator. In my drowsiness I thought I had awoken to the Soviet inspired system. Then I realised it is still 2009 and it is the UK.
We are all suffering from the failure to run a strong competition policy in crucial areas. If successive governments had been brave enough to make water companies compete, by now we would have more cheaper better water. A competitive industry would charge less and offer more, just as telecoms and energy did when they were forced to accept competition. Instead we have a monopolists with an excuse. Our sewers may flood you because the Regulator did not leave the companies enough money for investment in their view. They will stop you watering your garden in the summer when its hot, but you can water all you like in this very wet autumn. They will put your bill up to the maximum the Regulator allows. It’s high time we allowed new competitors to use the main pipes and sell us a better service.
It’s an even worse story with the banks.The Competition authorities did not just fail to put enough competition in. They with the active encouragement or insistence of the government allowed takeover after takeover, creating a couple of mega banks that were too big to fail and have proved very epxensive to bail, given the cack handed way the government has decided to do it.
If we want enough good quality water at an affordable price we need water competition. As we need banks that will lend to sensible businesses and individuals at realistic interest rates we need banking competition to be greatly strengthened. The government has it in its power to do that. It should start splitting up RBS and Lloyds HBOS now. Yesterday I checked the mortgage rates against a backdrop of an official rate of interest of 0.5%. The best offer in the first big bank I went into was 3%, on up to just 60% of the value of the property. There was a large arrangement fee of almost £1000 to allow an apparent rate discount in the early months.
John Redwood has been the Member of Parliament for Wokingham since 1987. First attending Kent College, Canterbury, he graduated from Magdalen College...
Slightly of-topic, but I wonder how the unfortunate folk of Cumbria are feeling about Lord Stern’s proposal that they should give up meat and diary products because cows use too much water? If he was to try and sell his fatuous ideas in Cockermouth at the moment, I wouldn’t give much for his chances of getting out in one piece.
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Ross J Warren Reply:
November 27th, 2009 at 7:38 am
Sol 5° Sagittarius, Luna 5° Aries Dies Veneris
27 November 2009 e.v. 07:58
It has also to be added that Cows produce a large amount of Methane gas, a notorious green house gas.
Saying that its not for politicians to force diet change on the population IMHO.
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Here we are into much safer Conservative territory, and I think most of us hold very similar views. Even in industries that have had competition seemingly thrust on them, like the Electricity providers there is effectively no competition as the providers (billers in reality) seem to be operating a Kabul. The price of wholesale energy has fallen a very long way, yet only British Gas has dropped its prices, and they were for far to long the most over priced. My own situation as a career, is far to typical and we are in technical fuel poverty, paying 13% of our income for this necessity. The Socialists made a few noises at the start of the year and then went silent on this over pricing and have been silent ever since. They prefer to throw state money at the very poorest ,missing out the disabled BTW, and then grab a headline making out they are generous.
“In my drowsiness I thought I had awoken to the Soviet inspired system. Then I realised it is still 2009 and it is the UK. “
I think you were right even in your drowsy state John. Stalinist system is my assessment, with Blair being a classic example of the cult of personality.
Rather than our regulators insisting on competition they have it seems, far to often set the price, that the companies can get away with. So instead of a simple but honest monopoly we have a monopoly that pretends to be competition.
“The government has it in its power to do that. It should start splitting up RBS and Lloyds HBOS now.”
Frankly I would prefer this issue to wait until after the election, although I suppose the civil service could and most likely should be preparing the ground as we speak.
A Conservative government is highly desirable, and a Conservative administration of the public parts of the Banks will be far better for both the banks and the taxpayer, I believe. Brown has form, when it comes to giving away public assets at silly low prices. I recall that most of our privatisations went very well indeed.
24 years ago, I was paying £2.40 a week for water and general rates, that figure is now £27.00 pw and seems set to rise. In the meantime wages have, at the lower end stagnated, were as £5.00 per hour was a common starting wage, it is now around £6.00 for far to many people. Of course if water rates and council tax were the only additional costs the poorest would be a little better off, but we all know that prices have risen on most items, including food at a staggering rate as well. The poor are now way poorer than they were, even in the bad days of 1981-3.
I hope a Conservative government would do far more to force competition on the Water, Gas and Electricity providers, and after all we are the party of Markets and competitive trading.
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It is indeed odd that with all the other utilities now having to work in competition with the others, the water industry has managed to retain its monopoly.
However, with regulators allowing banking to be skewed to the sole benefit of the Government, it shows just how much the system can be manipulated by an Adminstration in crisis. Having a regulated competitive system doesn’t necessarily reap the rewards you would expect.
I know these are unusual times, but with the rest of the world coming out of recession, the unrealistic demands of Mr Brown and the Treasury are now being brought into the spotlight.
To tie in previous threads, does our host believe that there is enough competition between the parliamentary parties? Some say that all the main parties are making similar offerings, much like the major banks do with poor savings accounts.
It’s not a fair comparison at many levels, but perhaps if one big bank and one major political party were to break ranks, the whole system would be given a good shake.
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Has a single MP mentioned in public the leaked climate change e-mails from the University of East Anglia? If so I have missed it. Lord Lawson commented but who else? Why the silence? Apparently, they are more exorcised about these things in the US Congress. Are we to take it that all our so-called elected representatives are signed up to this man-made global warming story? Even you, John, have kept quiet – I wonder why?
Reply: I have not kept quiet, and do think there needs to be an enquiry into what happened.
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Mike Stallard Reply:
November 26th, 2009 at 4:49 pm
Roger Helmer has a blog. Just look at it!
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Ross J Warren Reply:
November 27th, 2009 at 8:30 am
Brian and Mike,
The leaking of those E-Mails is an absolute disgrace, and hints at (questionable deeds-ed). However sceptical we are about climate change being linked to Co2,
We should stay firmly inside the law. IMHO.
I have been pressing for the RMCS to be tasked with getting to the bottom of the whole Co2, and man made climate change debacle, with the clear brief to answer the question without bias. I believe very strongly that RMCS, would be the best institution, as they have both great science and these days, great security.
We really do need to know what is driving the rising temperatures that we have seen since the end of the mini-ice age. I do hope that laws will shortly be amended to protect private e-mails from the kind of abuse we have witnessed recently. Indeed privacy and the press is another of those issues that is likely to see me, getting rather grunmpy.
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waramess Reply:
November 27th, 2009 at 9:49 am
Yes, and what a (pity?ed) that The Telegaph used stolen discs to unveil the MP’s expenses scandle. Lets make sure we do everything legally and put to rest those minds more devious than our own
Ross J Warren Reply:
November 27th, 2009 at 11:18 am
(Fair enough editor I understand)
I agree waramess, we need to be squeeky clean in this respect.
Mike Stallard Reply:
November 27th, 2009 at 4:35 pm
RCMS? Who he?
Aren’t the EU going to force ISPs to keep all e mails for a couple of years in case their bureaucrats would like to flip through them? Terrorism or something…..
Ross J Warren Reply:
November 27th, 2009 at 5:43 pm
The Royal Military Collage of Science, hardly a terrorist organisation, but I do follow your point. This keeping of data is yet another manifestation of our current Stalinist government, I feel. Coming under surveillance is hardly fun, but I sleep sound knowing that I am a patriot, and 100% a democrat to boot.
Ross J Warren Reply:
November 27th, 2009 at 9:22 pm
The Royal Military Collage of Science, hardly a terrorist organisation, but I do follow your point. This keeping of data is yet another manifestation of our current Stalinist (like) government, I feel. Coming under surveillance is hardly fun, but I sleep sound knowing that I am a patriot, and 100% a democrat to boot.
Note: RMCS is now called The Defence Academy – College of Management and Technology (DA-CMT). Saying that it will always be RMCS to me and many who had the pleasure to work at it, or live near it. A great place to do cutting edge sciance. I ran my first computer programs there in 1972-73. Using a ICL mainframe computer. hardly more powerful than a few dozen calculators.
I had a quick look at a comparison site to see what a first time buyer might expect with a not insubstantial 20% deposit, the rates were mid 4% to low 6%.
Quite right the “low interest rates” are fantasy a la soviet tractor production stats (unless you have an existing contractual obligation).
One other element of a statist soviet type system if I may ~
“They will stop you watering your garden in the summer when its hot”
How would they possibly enforce that? By having your neighbours spy on you of course ~ Stasi much?
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Ian Jones Reply:
November 26th, 2009 at 3:10 pm
But existing borrowers are paying very little interest, its why reatil sales are up as a lot of borrowers are paying less that 20% of what they paid 18 months ago for their mortgage payments!
Once again the savers are screwed over to protect the asset holders.
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Stuart Fairney Reply:
November 26th, 2009 at 5:52 pm
Well if you are an interest only borrower on a tracker then maybe the 20% figure is true, but I am not sure that would constitute “a lot” of borrowers. Those with repayment mortgages still have to repay the capital and that is a reasonable element of some mortgages.
I think maybe the retail sales are up partially as a result of delayed or mandatory purchases (like £600 to fix the roof of my car! ~ thank you German sports car manufacturer) , I am really not sure how much discretionary spending is going on.
I have to agree with you on the last point however, but if you think you are being screwed now, just wait until you see the interest/inflation gap in the next one, two, three years. That’s when the real value of savings and some investments (setting aside Sterling’s international depreciation!) will really start to decline. Ergo all the ‘cash for gold’ adverts ~ i.e. give us your valuable asset and we will give you fiat paper.
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Sorry, I meant “exercised”.
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What you arer describing (selling bonds & using the proceeds to keep up the value of the bonds) is a Ponzi scheme.
I do not think we have ever before had a government so dishonset as to make such actions the centrepiece of its programme.
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Michael Lewis Reply:
November 26th, 2009 at 6:09 pm
Correct, but its a transparent Ponzi scheme. Witness the foreign investors take their money off the table and leave the UK gilt market and dump our currency. I’m amazed by anyone that thinks UK gilts is a ’safe’ investment, along with UK real estate, its hard to think of a worse investment right now. Possibly some premier league football players with tasteful apartments in certain Gulf states might think of something ….
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waramess Reply:
November 27th, 2009 at 9:53 am
Clearly the Bank of England view Gilts as a safe bet because they seem to be the only buyer, and when they stop the clearing banks will be buyers in order to satisfy new Government liquidity rules.
There’s no room for anyone else
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Michael Lewis Reply:
November 27th, 2009 at 11:40 am
The Bank of England certainly don’t think Gilts are a safe bet – they are buying them through QE – hence the correct description by Neil of the Ponzi scheme.
The cost of water is alarming and unlike other household costs you cannot downsize to a cheaper alternative. The two elements of the bill – water and waste – are virtually identical and it effectively means being charged twice. The waste part is extremely arbitrary and seems a pure finger in the air calculation.
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alan jutson Reply:
November 26th, 2009 at 8:21 pm
A Sedgwick
If you can prove that your rainwater waste goes into a soakaway, you may get a reduction.
In addition suggest you investigate a water meter, it has halved our bills. (bigger the House, fewer people in it, bigger the savings)
Even my Daughter has reduced Bills with a water meter, living in a starter home.
We are unfortunately now paying for years of under investment in the water supply system.
You are being charged twice because what goes in one end, usually comes out of the other.
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The low interest rate is causing the housing market to stagnate. Why would anyone move when they are paying 1% on their mortgage, the banks are not going to let people move their mortgage at that rate. This is resulting in a shortage of sellers so driving up prices.
The super low interest rates and QE are totally distorting the economy, asset prices are out of kilter with the real economy.
We will be the new Japan with these policies.
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‘They are likely to try to keep this running until the election.’
I thought it was the MPC that set rates, entirely independent of political considerations.
In any case, it might be difficult to keep the official rate low if inflation goes above target, which on the current trend it is likely to do soon.
Why am I reading in the newspapers about inflation going up to 3% before the election, then magically coming down again afterwards? All our experiences in Britain suggest that inflation will carry on rising until something is done about it, ie tightening policy. We mustn’t give into this kind of wishful thinking, or we’ll have an inflationary boom followed shortly by another bust.
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You touch on the merest hint of what is to come. Brown and labour are already positioning for the election after next wherebye they can preach “The Tories are The Party of high interest rates”. As ever the Public, educated so badly under Labour installed systems, will buy into that mantra. Any gains and fiscal strength will be, once more, squandered under another totalitarian Labour regime.
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John,
You’re wasted in the Tory Party. You’ve already spotted the con trick which your leadership appears to have missed.
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chris southern Reply:
November 26th, 2009 at 4:01 pm
[John,
You’re wasted in the Tory Party. ]
Wasted on the back bench indeed.
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One of the things that I loathe about New Labour is not taking the blame for their very own incompetence. The latest wheeze is blaming the banks for the downturn instead of the Quangocats, the EU gravy train, the bloated state payroll and Mr Brown’s personal interventions which are causing chaos. The little girl who does the sums on Countdown is paid £100,000 a year…..
And that’s not all. When I was working as a Publicity Officer (truly) for Yorkshire Water, we were indeed “an independent company”. The trouble with water, as with the railways, as with electricity or gas, as with the telephones, is that you can have as many companies as you like. They all depend on the same pipes, cables or means of delivery. So who gets those?
Diversification, therefore, is going to be a sham with several companies competing for the same (government?) delivery service.
We are not talking chocolate or motor cars here which can truly compete.
Me, I don’t know what the answer is. I want to record, however, that the atmosphere of cooperation in Yorkshire Water was really impressive and based on a long history of proud service.
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The only way to go is up, and my guess is sooner rather than later.
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John,
how would competition work in the water industry? Doesn’t the infrastructure impose a monopoly on supply to the individual person?
The only solution I can think is for consumers in an area to be able to vote for the company that manages water supply – the company that offers to run the system for the cheapest bills would almost inevitably win the election.
Would value your thoughts on how you’d see competition working
Reply: Exisitng pipes as a common carrier, with a right for new companies to build new pipes if they wish or to supply through existing pipes.
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Mark Reply:
November 27th, 2009 at 7:12 pm
A shared ownership oil or gas pipeline may provide an interesting model. While there is one company that is in charge of the actual operation, the other companies usually supervise the engineering and financial audits and may also second key managers into the operating company. The advantage is that there are professional eyes on what the operating company is doing. There also tends to be a far greater interest in estimating the true input/output balances because these can trigger payments, so in the case of water, there might be rather stronger pressure (!) to repair leaky pipes.
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Competition in water already exist in the form of bottled water and electricity in buying a generator. That’s that problem solved then. I’ll get the kettle on.
How many water grids could have been paid for using the banks unauthorised overdraft? This is the real solution to the water problem along with compulsory underground rainwater storage for all new properties.
There is no competition between electricity companies. They are little more than billing companies with forty quid difference between them. The same would apply to water, which at the moment are no more than management companies receiving a fee for operating companies that take subsidies but make profits. Lets stop pretending that there would even be a service for most people if these companies where truly private. A bit like banks, really little more than golf club cliques leaning on the taxpayer.
At least the Soviet Union eventually collapsed. Have a kip John and dream about the Conservatives allowing every council and private individual to build and operate their own small nuclear reactor/desalination plant. About as likely as a Conservative government breaking up the banking system to allow competition. What you fail to mention is that competition is bad for profits. If you ran a sandwich shop why would you want any rivals?
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My water rates with Dwr Cymru (Welsh Water) have increased by an average of 7.6% per annum over the last 5 years. I did complain once, but didn’t get any specific reasons for the continual above inflation increases. They just claim to be “investing” in the infrastructure. I’ve noticed that a lot of the actual pipe replacement seems to be done by contractors.
They make a big thing of being a “non-profit organisation”, because I think they think people will see them as being like a charity. Everything comes in two languages. My wife speaks Welsh, but why can’t people just choose one or the other for their bill?
They also discourage people from installing a meter, even when savings would definitely be made.
These utility rises affect the lowest paid people living in rented housing the most. Electricity and gas rates from pre-payment meters are considerably higher than normal rates. The electricity meter goes down by about 40 or 50 pence a day, if no electricity is used. That equates to quite a considerable rent for the meter.
There could be a few votes in telling the companies they can’t get away with this.
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The competition authorities have been toothless for years. The banks have been allowed to grow huge, but so too have a handful of retailers. In the industry I work in one company is buying up all their competition and aside from the increase in incompetence are clearly abusing their monopolistic power in pricing such mundane items as filter elements.
There have to be limits to the market shares of companies, and not in the 25% to 30% kind of range. Much lower maximum shares nearer say 10% have to be imposed. But that requires state intervention. The opposite of free markets. How do we square that circle?
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Hmmm not content with Zac Goldsmith, I see another (person with unusual views-ed) has Mr Cameron’s ear, Blond!! Well you know what they say about Blondes.
http://www.dailymail.co.uk/news/article-1231248/Tories-new-guru-says-Britains-big-supermarkets-broken-big.html
When are you off to UKIP John can’t be long now.
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unrelated,
could you raise this mans case (Gary McKinnon) in parliament, or direct it to an appropriate person who can, id be very grateful.
Reply: I objected to the one sided extradition agreement that government negotiated with the US, and have along with other MPs taken this case up with Ministers.
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Unfortunately I fixed my interest rate about seven years ago. I did this in the firm belief that any sensible govt would have controlled the ‘boom’ that was being driven by property speculation. They didn’t … and here we are.
I put much of this credit crunch down to 9/11. The Fed were about to raise interest rates to deal with the Dot.Com bubble and then the Twin Towers were attacked. They kept interest low to prevent global economic collapse – well you can imagine … when the WORLD Trade Center, no less, is turned to rubble then “Huston we have a problem !” I recall very little change to our every day lives (save extra security everywhere) So what happened to the ripples from this disaster ? Well that’s what we’re going through now.
A transatlantic property bubble – which should have been addressed 9 years ago – was allowed to go on, nay deliberately stoked, in order to mitigate the effects of Bin Laden’s attack.
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