Blog 2023 Malcolm Blair-Robinson

This saga will soon end with an outcome. It may very well be the government loses the fight. If it does it will be shot at from all sides.

This will be entirely its own fault for two reasons. The first is that it constantly raised the hopes of an angry people that it would put an end to the bonus gluttony. Second it delayed the re-structuring of the banks with the political expedient of  Banking commission, which has yet to report.

The Treasury has dug the government into a corner, from which escape will be difficult. 20% of all government tax revenue comes from financial services, which include banking. 50% of every large bonus paid comes back in higher rate income tax, giving the taxpayer half the spoils to spend on public services or cutting the deficit. This makes the bankers’ case strong and the economic argument against, weak. This is why Osborne is floundering ( and Clegg and Cable are fuming). Where it not for the fact that Alan Johnson is utterly clueless on economic matters, political times for the government would be a good deal tougher.

The argument and the anger is not, however, economic. It is about example, responsibility, restraint and sympathy. They are emotional not economic issues. The Confederate South argued that slavery was an essential pillar of its economy upon which it was dependent. This was true, but the revulsion against slavery had nothing to do with economics. The South could have freed its slaves in an orderly manner, restructured its economy to operate with free labour which was paid, rather than paid for labour which worked for free. If it had done that it would have gained its independence.

All that has to be done to resolve this is to make it clear to the banks with investment arms, which take 90% of the bonus pool, that they are on their own financially and there will be no bail outs  in another meltdown. In advance of re-structuring with the regular part of the banks ring fenced and secure, this element would be seized in a crisis by the State without compensation, allowing the investment banking departments to implode with losses many times our GDP and collectively if the contagion spread, many times the GDP of the world. Within that climate of risk, the banks could pay whatever bonuses they liked.

I doubt they would pay much. Finally the fact that 20% of all tax revenue comes from financial services is not a measure of their strength, but of the weakness of the industrial section of the economy, upon which both recovery and stabilty ultimately depend.

At key points before and after the election in May 2010, the constituent parts of the Coalition variously said:

There would be no increase in VAT

Child Allowance was safe with them

They would vote against an increase in tuition fees

Bank bonuses would be curbed

The banks must be broken up

There would be a fuel duty regulator to stabilise prices

Rarely can there have been so many failed undertakings in so short a time. That the government is not under attack from right, left and centre, is to do with the fact that Labour took critical time out to navel gaze, publish memoirs and elect a leader whom they did not want, who in turn has been off to a slow start, with has all his top team in shadow jobs over which they appear to have little grasp.

Thus Cameron, Clegg et al can bungle, posture and proclaim without delivery or deliver what they said they would abhor. This peculiar dysfunction at the heart of our democracy cannot go on for much longer. The Westminster village and its masters in Whitehall need to pull themselves together.

At a human level for a small community of innocents, going about their day in the Arizona sunshine in that bustling family atmosphere typical of a Saturday morning, the carnage at the grocery store can hardly be imagined worse. Among the dead is an eight year old girl. This makes a bad thing truly dreadful. The thoughts and prayers of a good deal of the world cascade upon the afflicted and their families. One does not have to be American to feel sympathy, shock and, in some measure, the force of this assault. Because this was not just a murderous attack upon innocent people going about their day. It was an attack upon democracy in the country which proclaims itself to be the best above all the other countries, which enjoy political freedom.

Moreover this was not an attack upon extremists by frightened moderates. It was an attack on political moderates by enraged extremists. Why? Many Americans are now tweeting that the angry rhetoric of the Tea Party and Sarah Palin are to blame for whipping up emotion and prejudice in the only civilised country where the citizens have a right to bear arms, which all too often they use upon each other. In Arizona the gun laws are especially relaxed.

It all runs much deeper than that. This is a disaster for America, for it exposes in the blood of innocents, even a child, that age old schism in the American psyche. Big government versus free people. State versus Union. Sometimes dormant, once as a fire engulfing the nation, this issue, which will not go away, is rising once more. To a foreign observer who has studied American history and politics for over half a century, especially the dynamics of the Civil War, it is evident in the manner in which the country speaks of itself. The federal government talks always of the United States. The people talk of America. The ideals of the one are incompatible with objectives of the other.

The world must pray that a way is found to fuse the two. History shows that in this cause, blood spilled is blood wasted. The answers lie not in the sanction of death, but in the celebration of life.

The word is coming out that after talks with the bankers, the government is resigned that there is little they can do to stop the payments. It will be given the sop of a promise to lend more to small businesses and have to swallow the big payouts which are often disguised as salary increases as high as 50%.

The government has made a complete horlicks of this and will get into big trouble when the news breaks, especially from the Lib Dems. The way to deal with it, is and always was, to tell the banks pay what you like, but no state aid. If you go bust all your assets will be nationalised for £1, shareholders will be wiped out and directors will have full personal liability for the shambles. Quantitative easing will be used to refill depositor accounts. This does not have to be proclaimed form the rooftops. It can be said behind closed doors.

In the case of the taxpayer owned or part owned banks the answer will be no you cannot do this or if you do we will issue more taxpayer shares amounting to double the value of the payments, diluting shareholder equity significantly in the process. The message is blunt but quite straightforward. You took vast risks and ran you business into bankruptcy. You were rescued by the taxpayer. It is not business as before.

Had the government not set up a long winded commission to investigate the structure of banking which will almost certainly recommend enormous structural changes, separating traditional banking from speculative gambling, which has delayed this essential reform, it could have got on with that  job and gained much acclaim from the taxpayers keeping these gluttons afloat.

As it is the coalition will shuffle and and explain but nobody will listen. This comes on top of a string of policy faux pas, including the latest crisis over flu jabs. Only last week the Health Secretary told us an advertising campaign in the autumn was not needed.  Without it, the take up was only 40% of those eligible. Now there is a rush and vaccine is running out. In Scotland there was an advertising campaign and there they have no problem. If you put everything together, this Blog takes the view that this government is beginning to look incompetent and muddle headed. Dave and Nick need to get a grip before voters come to the same conclusion.

The fear of a double dip recession  is mis-placed, not because there will be one, but because, in the big picture, it does not matter if there is. What does matter very much is not getting the re-modelling of the economy properly completed. Without that there will be no lasting recovery. Moreover there will be another crisis.

A key pillar of the economic model and therefore the recovery is low inflation. This is more important than very low interest rates. The latter are two edged because they hit the spending power of savers.  By contrast low inflation encourages investment and enables efficiency savings to translate into reduced costs. This is very important for an export and manufacturing led recovery.

It therefore becomes an absolute priority for the MPC to act now. Further delay, splits and vacillation are no longer possible. Already RPI is edging to 5%. Once inflation gets above 4% it becomes impossible to control with interest rates, unless penal levels are applied, which would trigger a double dip anyway. The arguments of the do nothing now/quantitative easers are dangerous. So are the delay the cuts pleadings. There is a problem. It must be fixed. Fudging is not fixing.

Failure to act will put at risk all that has been achieved thus far and may well result in final levels of borrowing beyond the realistic capacity to repay. Ireland is already there. Default by another name is actively considered in Europe’s finacial corridors. The U.K’s ability to service its personal and national debt assumes economic growth in real terms. Rising costs, because inflation has taken off, will kill a manufacturing and export led recovery, increase unemployment and suck in cheaper goods from overseas. The whole  recovery plan will be wrecked.

The new U.S Congress is assembling, with Republicans once again in control of the House. This time, however something is different. This is more than a swing of the political pendulum in a two party electoral system. It is the re-awakening of an old divide in the interpretation of the U.S. Constitution.

It is about whether the Federal Union has the power to impose its will upon the populations of the States which make up its form, if they do not wish to go along with the plan. This was the basis of the argument that brought about the Civil War in 1861. Then the catalyst was slavery. America was the last civilised country to retain it. This time it is the Healthcare Plan;  America is the last civilised country not to have one.

Once that debate opens the gate, in flood issues about big government, federal taxes and so on and so on. That is why the new House majority has ordered the reading of the Constitution on the Floor. This is to remind the country and the world that what is at stake is the very basis upon which, and for which, America was founded. This is  not just partisan jousting over this or that policy. It is about America’s soul. It is for this that the Tea Party was conceived  by angry people in the heart of the country’s vast dominion, not by self serving politicians in the corridors of its power. It is a declaration of the independence and sovereignty of the individual in the world’s most complete democracy.

I have before argued that the concept of the Federal United States is at its root an un-American concept, at variancewith the primacy of the individual in the American dream and the sovereignty of its individual States. Obama’s idol, Lincoln thought he had settled the matter with his conquest of the South in 1865. The world thought so too. This can no longer be said to be the case. In fact it never was the case. The next two years will show whether Obama is able, by outsmarting the Tea Party, to re-affirm the all powerful Union, or whether he will be the last President to exercise all that power unchallenged. History may show that although the Confederacy lost the war, in the fullness of time it won the argument.

It may serve, too, as a reminder to the U.S. that wars cannot solve issues of cultural divide. They can put them into hibernation, but like monsters of legend, they later awake. The Civil War was about so much more than slavery. Thus abolishing slavery, did not resolve the question at the heart of the argument. That question is now at the heart of the American political system. The hibernation is over.

Ed’s leadership is in trouble. This is very disappointing for this Blog. We thought him the best choice. Can he recover? Probably. What has gone wrong? That is more complex.

First of all I have always been opposed to David. His attachment to the cynical politics of New Labour with its lies, spin, dangerous foreign policy and flawed economics made him a very bad choice for the country. Unfortunately the majority of the members and M.Ps of the Labour Party wanted him as their leader. It was the trade union vote which tipped it by a narrow margin to Ed. The trouble is that Ed is not leading the TUC, he is leading a political party, most of which wanted his brother.

There is a sharp contrast between the two. David is the eloquent, energetic, geeky Mr Busy, who exudes confidence and enthusiasm. Ed is quiet, philosophical and deep. He appears leisurely. He understands what has gone wrong for Labour. Unhappily instead of laying out an energetic programme for reform and realignment, claiming back the working class heartland abandoned by New Labour, he has set up a two year review. As a back-drop perhaps; as the main theme , no. Thus the impression is of a laid back leader, whom nobody wanted, without a coherent economic policy at the moment of great economic challenge, in which all three of his senior colleagues, Johnson, Balls and Cooper are under performing in roles which appear not to suit them.

The focus of the political commentary has turned to the coalition and its tensions, which appears much more absorbing than the official Opposition muttering in the background.  All this could change. The government could slip on a banana skin. But it already has. Several in fact. Child benefit, free schools, tuition fees, EMA, Cablegate, dysfunctional airports, a country shut down by snow, is a combination which, say, Thatcher or Blair would have been making hay with and a good deal of it. Labour manages to sound shrill, tired and irrelevant.

Much hinges on the outcome of the Oldham East and Saddleworth by-election. If Labour holds the seat, especially with an increased majority (it can hardly get smaller), Ed will have bought time for himself, his team and his party. All must then come together with a coherent energy we do not yet see. If Labour loses it will be a serious setback, though not a disaster. If it is knocked into third place it will be both and more. Whatever happens there is work to be done. Leaders who appear to falter at the starting gun, rarely go on to win the race. Once the phrase fight back is heard on the media, you know there is trouble. I head it this morning on Today.

Grant Shapps, the housing Minister, has made  the courageous (politically) observation in an interview in The Observer that house price inflation is bad and we need stability in house prices, which should gradually reduce to represent a smaller percentage of income outlay. He thinks a roof should be seen as a necessity not as a measure of wealth and should be in reach of every ordinary working person.

This is music to the ears of this Blog which has promoted this view of the true value of housing, the preposterous inflation of which has crashed the economy. It is as irrational to measure wealth by ordinary housing  (as opposed to palaces for the rich) as it is do so by wives or goats or pebbles.

Unfortunately the damage done by ludicrous lending policies by banks and building societies over many years, but going out of control in the last ten, will take a generation to pay off. This is because the properties do not actually have this value for real, as any attempt to sell them off in quantity would reveal, but the loans taken out to pay these daft prices are very real indeed and will have to be paid. This will continue to put a brake on the spending powers of families and risks their running up more debt to make ends meet.

That the government now understands the problem, is the best news for quite some time. Many economists are way behind the curve on this and will need to catch up. Maybe they  should read my book  2010 A Blueprint for Change.  It looks as if the Minister already has. The whole issue is explored with vigour. In stock at Amazon. Hurry….

At the start of every new year top quality economic commentators predict which way the economic wind will blow. Some are correct, many are wrong. This Blog will not predict, but it will lay out what has to be done with a must do list, without which, wherever we go, will be in the wrong direction. This is predicated on the verity that to try and rebuild the economy to the old pattern will lead to another crisis. It also reflects on the political stomach needed to carry it through.

The list is circular. It does not matter where you start. Economic recovery, which lasts, requires all.

House Prices. These must not be allowed to rise. They must remain suppressed until earnings catch up to reflect a lower housing cost in the economy. The absolute maximum is: average house price = average wagex3. Greater competitiveness in labour and public service costs will be achieved at a ratio of 2.5. 

Borrowing.  At a personal level borrowing has to reduce and is already on a downward path. We have to become a country of permanent  net savers. Consumer booms financed by borrowing are an absolute no. Equally, government borrowing must be brought back under control. The policies are in place to achieve this, but they will have to be followed through. No U turns.

Taxation. A systemic budget deficit is a consequence of expenditure in excess of revenue. Increasing tax rates may not increase revenue, which is why Labour kept income tax too low for its spending plans. Within the current structure this ratio has to be made fit for purpose. The basic rate should be higher, but so should the personal allowance. More work is needed here, even with the current model. This Blog favours a new single rate model, which would be better, but making the current one mathematically sound would be good. Corporation Tax must be among the most competitive rates in the world to attract and retain inward investment necessary to rebuild our industrial capacity.

Inflation. This has to be tackled now. The wait and see policy of the Bank of England MPC has gone on too long.

Interest Rates. These must now start to edge up. They are too low and are beginning to skew the economy. Low interest rates hit savers and reduce their spending power. Moreover actual interest rates charged are getting out of step with the official rate, to the point where a credibility gap will develop over the Bank’s ability to  influence rates at all.

Quantitative Easing. Unless there is some further and major international crisis leaving no alternative to keep cash circulating is the system, the answer is no, no and no again.

Cuts and Public Support. Public support is essential to the survival of the coalition and its policies for reducing the deficit. There have been some howlers. It was crass to cut child benefit for single earning households at half the level of double earners. At a time of record youth unemployment cutting out the EMA was a clear mistake. Although the outcome for tuition fees is a good deal better than it is represented, the implementation and public relations were both shambolic. It is no good talking about fairness with unfair proposals. Much better presentation and attention to detail needed in Whitehall.

Export Drive. The economies of Asia and South America are doing a lot better than Europe and, for the moment, the U.S. We must redouble our efforts to secure all the opportunities these new markets present, especially as the Eurozone has failed to  deal with the practicalities of managing its currency, risking a widely predicted crisis in the spring.

Gap Between Rich and Poor. This grows wider. It inflates government expenditure because of social dprivation, unemployment and the excessive cost of housing. There is no effective plan to deal with this. There has to be one. Welfare Reform on its own will have little, if any, effect.

The Banks. This is, politically, the big ticket item, but economically it is critical. We used to have sound banks in this country. This is the case no longer. In the old term, we do not even have banks. We have an arm of the betting industry, which does lending on the side at extortionate rates on plastic cards and mostly on property, if secured. The consequence of this outcome of Big Bang, is an unstable banking system and government and personal borrowing at such levels as to prohibit an orderly economic recovery without inflicting much suffering on those most vulnerable and least well off, none of whom had a hand in the most spectacular economic shambles in all our long history.

This Banking Mess has to be Sorted. Failure will cost the recovery and guarantee another crisis. It will also be the end of the Tory Party in government for years to come. George Osborne will need guts for this. The stakes for all of us are very high. The stakes for George and his Party are very high indeed.