Monday, September 17, 2007

++ LibDems Cable : "I Warned Brown 4 Years Ago" ++

The LibDems Vince Cable has just let rip at Gordon;

“The British economy may have been reasonably successful but it is also highly fallible. The house that Gordon Built may not be built on sand but it has certainly been built on a floodplain. It has yet to be fully tested against rising economic sea levels, though the events of the last week suggest that it may be very soon… This current boom does not depend on long term investment or on exports or on the cultivation of a more educated, skilled, labour force. It is powered by debt financed consumer spending, some reckless lending and the optimism generated by a house price boom. The water is now pouring through the defences after the near collapse of Northern Rock; a product of greed and reckless gambling by overpaid executives; lax, indulgent bank regulation; and a complacent government. I warned Gordon Brown of a looming debt crisis four years ago.”

++ Cameron Calls for Statement from Chancellor ++

Cameron blames “the increases in debt in the UK economy – personal, corporate, and Governmental – have added a new risk to economic stability” and cites Greenspan’s warning this morning; “Alan Greenspan himself, recently appointed by Gordon Brown as his economic adviser, made exactly this point this morning when he said that “Britain is more exposed” than the United States.”

Blame Gordon’s Banker

Derek Wanless is Gordon Brown’s most trusted banker. When Gordon wanted a plan for the NHS billions, he called in Derek Wanless. It was the 2002 Wanless report, the Health Trends Review, which provided the intellectual framework for the billions poured into the NHS. Gordon liked what he heard so much, he asked him to produce two further reports.

Sir Derek sits, like so many other of New Labour’s great and the good, on various government quangos; the Statistics Commission and the National Endowment for Science, Technology and the Arts.

More importantly he chairs Northern Rock’s Risk and Audit committees. If anyone should have known what was coming, it was Gordon’s favourite banker. He had to sign off on all strategic risk management issues. When Northern Rock realised the game was up, do you think it might have been Derek who was deputised to call his old political ally, Gordon Brown, for the bail-out?

"Don’t Panic" Chancellor

It is worth downloading this Sunday’s The World This Weekend to listen to how a finance minister should not behave during a financial panic. In the words of Fraser Nelson, the Chancellor is losing his grip, muddling his figures and rambling on irrelevantly about how a twenty five year-old David Cameron worked for Norman Lamont during the ERM crisis. Stuttering, he covered his ass by passing the buck to the Financial Services Authority – expect that to be a common refrain in the coming days.

Since Darling brought up the subject, Guido thinks this is Labour’s ERM equivalent moment, when this government loses whatever reputation it had for economic competence. It is going to be very hard for them to blame this instability on the Tories, perhaps they will blame it on Mervyn King at the Bank of England.

Darling has been on the phone to Benedict Brogan spinning furiously, complaining that everything is fine, that Cameron is playing politics. “He’s acting like a Tory backbencher, not the Leader of the Opposition. It’s completely opportunistic at a time when he ought to be reassuring people,” one “senior source” (with white hair) is quoted by Brogan. Playing politics, eh?

If anything the Tories have been slow to press home to the voters the reality of the “debt and mirrors” economics of Gordon Brown. Can you imagine this happening when Gordon was opposition shadow chancellor? Would he have gone around “reassuring people”? Would he hell. He would have said that it was the Chancellor’s fault and that it was the policies of the government that brought this on. He didn’t say on White Wednesday that exiting the ERM would lead to the longest period of unbroken economic growth in living memory. Gordon said it was a disaster. How should Osborne describe Britain’s biggest home lender of last year going bust?

Osborne might do well to point to moves like the loosening of bank reserve requirements which reduced the cushion of capital required of Northern Rock. Far worse still is Gordon’s dishonest manipulation of the MPC’s composite inflation target to justify the lower interest rates which have encouraged the property bubble. It is not as if there have not been enough warnings…

Sunday, September 16, 2007

Boom to Bust : A Political Bail-Out

On 12 September 2007 in a paper submitted to the Treasury Committee by Mervyn King, Governor of the Bank of England, he warned the City: “…the moral hazard inherent in the provision of ex post insurance to institutions that have engaged in risky or reckless lending is no abstract concept”. On September 13, 2007, the Bank of England, pushed by HM Treasury and with the acquiescence of the Financial Services Authority, bailed out mortgage lender Northern Rock. What caused this about turn?

Nobody in the City was surprised by Northern Rock’s difficulties, but many were surprised by Mervyn King’s overnight U-turn. His stated policy of avoiding moral hazard was prudent and generally accepted in the Square Mile as wise and right. Foolish risk takers should suffer when they get it wrong.

In 1995 Barings collapsed. The Bank of England did not bail it out. Imagine the outrage if a Tory government bailed out the Queen’s bankers, “Tory toffs looking after their own pin-striped aristocrats” would have been the charge. Central Banks should only intervene when their is systemic risk to the financial system, not to bail out shareholders when things go wrong. Northern Rock put too many eggs in the mortgage securitisation basket and offered mortgages at slim margins. That strategy is now shown to be risky and unsustainable. So why bail it out?

Northern Rock is not merely the victim of illiquidity in the money markets as Alastair Darling spins, investors knew something was wrong months ago, the share price tumbled long before the sub-prime crisis made the headlines. Nor can you argue that the collapse of the Northern Rock would cause systemic crisis. The mortgages would be administered, the householders would barely notice a change in ownership and it is inconceivable that other banks would suffer contagion.

The economic arguments against a bail out such as this have been impressively made by Mervyn King himself, the special circumstances argument is patently political spin. So isn’t it more likely that this is a political decision forced on the Bank of England by Gordon Brown and Alastair Darling to spare their blushes?
Northern Rock is a regional bank from Labour’s North-Eastern electoral heartlands. Labour supporting figures are on the board. Sir Derek Wanless, Gordon’s favourite banker, chairs the Risk and Audit committee. Sir Iain Gibson sits on both those committees and was appointed by Gordon to the Court of the Bank of England. As far back as the miners strike it has been seen as a “Labour” bank. In the eighties Conservative ministers were furious when striking miners were told not to worry about their mortgages by Northern Rock – removing a pressure on them to return to work. The Labour movement lauded them for it and for their giving of 5% of profits to North Eastern charitable projects.

Guido suspects that the Treasury pressurised Mervyn King, against his better judgement, to bail out Northern Rock for political reasons. Brown’s Britain is a bigger version of Northern Rock. Gordon’s macro-economic policies are Northern Rock’s borrowing policies writ large. Gordon has mortgaged spending through PFI, government debt has ballooned and the consumer economy is floating on debt secured against over-stretched property prices. It can’t go on for ever…

Thursday, September 6, 2007

Boom to Bust : Mortgage Pressures

“I will not allow house prices to get out of control and put at risk the sustainability of the recovery.”

Gordon Brown, 1997 Budget Statement.

The data for mortgage repayments as a proportion of post-tax income has just been published by the Bank of England. This shows how much of your salary goes towards keeping the roof over your head. With tax thresholds too low, property prices too high and interest rates rising the pain is starting to show, not just in devastating home repossessions, but in reduced disposable income for all. Whereas in the nineties less than a tenth of your take-home salary on average went to service the mortgage, it is now, after a decade of Brownite economic stewardship, nearly one seventh of your net income. Brown has not kept his 1997 promise…

Source : August 2007 Bank of England Inflation Report.

Thursday, August 23, 2007

Every Week 2,000 People Go Bust

Gordon likes to talk about stability and prudence, but rising indebtedness and rising interest rates have led to people going bust and losing everything at the rate of 2,000 a week. Individuals are losing homes and businesses at an astonishing rate – triple that seen during the 1991/92 recession. Hardly evidence of a strong economy…

Insolvencies England & Wales
Source : Department for Business, Enterprise and Regulatory Reform (BERR) Insolvency Service and Companies House Executive Agencies.

Monday, August 20, 2007

Gordon and House Prices

“I will not allow house prices to get out of control and put at risk the sustainability of the recovery.”
Gordon Brown, 1997 Budget Statement.

But Gordon did allow house prices to get out of control. Some of the housing market numbers are scary, the average house now costs 6 times average earnings – in London the figure is 10 times earnings. The historical long term figure is some 3 and half times earnings.

Is it any wonder that the average age of a first time buyer is 33 years old? Twentysomething families can’t afford a home of their own.

Yield models suggest* that house prices have to fall 40% to return to the long term average.

The simple truth is that in real terms it is now twice as expensive to buy a house as it was before Gordon promised he would “not allow house prices to get out of control”.

*Or rents could rise a corresponding amount.

Friday, August 17, 2007

Mortgage Repossessions Set to Explode

“We will not return to the old boom and bust.”

Gordon Brown, 11th Budget Statement, 21 March 2007

Housing market: Repossessions
Court actions for Recovery of Residential Housing and Land, England and Wales, from 1996

Source: Department for Constitutional Affairs & HM Courts Service


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New Foreign Secretary Philip Hammond has big ambitions in his first meeting with Benjamin Netanyahu today:

“I came to bring this conflict to an end.”



Christie Malry @fcablog

Ed Miliband does photo oops, not photo ops


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